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Facts
The assessee, a credit co-operative society, earned interest income from deposits in co-operative and other banks. The Assessing Officer (AO) assessed this interest income under 'Other Sources' and disallowed the deduction claimed under Section 80P of the Income Tax Act. The CIT(A) partly allowed the appeal, directing the AO to examine expenditure incurred for earning interest income under Section 57, but upheld the denial of 80P deduction.
Held
The Tribunal noted that the interest income in question was not received from members for providing credit facilities, but from surplus investments. Citing Supreme Court judgments, it was held that such interest income falls under 'other income' and not 'profits and gains of business' attributable to the society's core activity. The Tribunal directed the AO to verify if interest/dividend was received from investments with co-operative societies for potential deduction under Section 80P(2)(d).
Key Issues
Whether the interest income earned by the co-operative society from investments in banks is eligible for deduction under Section 80P(2)(a)(i) or 80P(2)(d) of the Income Tax Act.
Sections Cited
80P, 250, 143(3), 144B, 57, 234-A, 234-B, 234-C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C’’BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI KESHAV DUBEY
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 30.9.2024 vide DIN & Order No. ITBA/NFCA/S/250/2024-25/1069262800(1) dated 30.9.2024 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”) for the assessment year 2020-21.
The assessee has raised following grounds of appeal: 1. “The orders of the authorities below. in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A]/NFAC is not justified in upholding the order of the learned A.O., denying the deduction claimed by the appellant under the provision of section 80P of the Act in respect of the interest of Rs. 24,23,877/- earned by the appellant from investments M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 2 of 9 in co-operative banks and other banks and holding the same to be liable for assessment under the head "Other Sources" under the facts and in the circumstances of the appellant's case.
3. The learned CIT[A]/NFAC failed to appreciate that the interest income earned by the appellant on deposits in banks was part of the business of providing credit facilities to the members of the appellant and hence, the said interest was liable for assessment under the head "Business" and not under the head "Other Sources" and therefore, the deduction claimed by the appellant u/s 80P[2][a][i] of the Act ought to have been allowed towards the said interest under the facts and in the circumstances of the appellant's case.
4. Without prejudice to the above, the learned CIT[A]/NFAC ought to have appreciated at the interest was alternatively entitled to deduction u/s.80P(2)(d) of the Act, on the facts and circumstances of the case.
5. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-A, 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled.
For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
Brief facts of the case are that assessee is a Co-operative Society registered with the Registrar of Co-operative Societies Act engaged in the business of providing credit facility to its members. For the assessment year 2020-21 under appeal, the assessee filed its return of income on 22.12.2020 declaring a total income of Rs.2,61,196/- after claiming deduction u/s 80P(2)(a)(i) of the Act to the tune of Rs.44,12,848/-. Thereafter, the case of the assessee was taken up for complete scrutiny to examine the following issues: a) Deduction from total income (Chapter VIA) (Business ITR). b) High liabilities as compared to low income/receipts.
M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 3 of 9 3.1 Accordingly, notices u/s 143(2) of the Act as well as u/s 142(1) of the Act were issued calling for information/details as per the questionnaire. In response, the assessee has also made compliances by giving full information/details as called for by the ld. AO. Finally, a show cause notice along with draft assessment order dated 10.3.2022 was issued to the assessee proposing to deny the deduction claimed u/s 80P(2)(a)(i) of the Act to the extent of Rs.26,11,859/- by making the following three disallowances: a) Interest on deposit held in Co-operative banks -Rs.19,47,611/- b) Interest from bank accounts - Rs. 4,76,266/- c) Locker rent - Rs. 1,87,982/- Total - Rs.26,11,859/- 3.2 In response to the aforesaid show cause notice, the assessee filed detailed objection vide reply dated 19.3.2022 e-filed by relying upon various judicial pronouncements including the judgment of the Hon’ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. & Ors. Vs. CIT (431 ITR 1). It was submitted that the interest income of Rs.24,23,877/- earned from deposits held with Co-operative and other banks are made out of funds contributed by the members for the purpose of carrying on business which were not required immediately. Thus, it was contended that interest income earned from investment made was “operational income” attributable to business, which income is deductible u/s 80P(2)(a)(i) of the Act. In the alternative, the assessee had also requested the AO that deduction u/s 80P(2)(d) of the Act may be allowed on the interest income earned from Co-operative banks of Rs.19,47,611/-. In as much as Co-operative banks are nothing but co-operative society that possesses licenses from RBI. Thereupon, the AO concluded the assessment proceedings by passing order u/s 143(3) r.w.s. 144B of the Act dated 8.8.2022 by assessing on a total income of Rs.26,85,070/- by holding that interest from investing funds in a co-operative bank/commercial bank is not a part of M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 4 of 9 business of providing credit facilities to its members and cannot be considered as an operational income of the assessee. Consequently, the AO assessed the interest income under the head “income from other sources” for which deduction/s 80P of the Act was not allowed. The AO in his Assessment order has made the following addition/disallowances: a) Interest on deposits held in Co-operative banks -Rs.19,47,611/- b) Interest from bank accounts -Rs.4,76,266/- 3.3 Aggrieved by the assessment completed u/s 143(3) r.w.s. 144B of the Act, assessee preferred an appeal before the ld. CIT(A)/NFAC. The ld. CIT(A)/NFAC partly allowed the appeal by relying on the judgement in the case of Totagars Co-operative Sales Society & Mavilayi Service C-operative Bank and accordingly held that interest income from deposits kept with scheduled banks and co-operative banks are to be taxed under the head “income from other sources” and their nature of income cannot be changed to business income. Therefore, following the principle of consistency, the ld. CIT(A) held that assessee is not entitled for the benefit of deduction u/s 80P(2) of the Act in respect of interest income earned out of investments made with Nationalized and C-operative banks and accordingly, upheld the order of ld. AO. In so far as assessee’s claim that if interest income is to be assessed as income from other sources, the cost incurred for earning such interest income should be allowed as a deduction u/s 57 of the Act. In this regard, ld. CIT(A) directed the AO to examine whether the assessee has incurred any expenditure for earning interest income, which is assessed under the head “income from other sources”. If so, it was held that the same shall be allowed as deduction u/s 57 of the Act and accordingly partly allowed the appeal of the assessee. 3.4 Aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before this Tribunal. The solitary issue that is M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 5 of 9 raised whether ld. CIT(A) is justified in denying the deduction claimed by the assessee in respect of interest of Rs.24,23,877/- from investment in co-operative banks and other banks. 3.5 Before us, the ld. A.R. of the assessee reiterated the submissions made before the lower authorities and vehemently submitted that interest income of Rs.24,23,877/- earned from deposits held with Co-operative and other banks are made out of the funds contributed by members for the purpose of carrying on business which were not required immediately. It was also submitted by the ld. A.R. of the assessee that interest income earned from investments made was operational income attributable to business, which income is deductible u/s 80P(2)(a)(i) of the Act. In the alternative, the ld. A.R. of the assessee also prayed that deduction u/s 80P(2)(d) of the Act may be allowed on the interest income earned from Co-operative banks amounting to Rs.19,47,611/- in as much as co-operative banks are nothing but a co-operative society that possesses a license from RBI.
The ld. D.R. on the other hand relied on the order of the authorities below and submitted that co-operative societies and co- operative banks are two different and distinct identities and cannot be treated at par.
We have heard the rival submissions and perused the materials available on record. It is an undisputed fact that assessee is a credit co-operative society registered with the Registrar of Co-operative Society Act and engaged in the business of providing credit facility to its members. The AO concluded the assessment proceedings by disallowing the interest on deposits held in cooperative banks amounting to Rs. 19,47,611/- and Interest from bank accounts amounting to Rs.4,76,266/-by holding that interest from investing funds in a co-operative M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 6 of 9 bank/commercial bank is not a part of the business of providing credit facility to its members and cannot be considered as the operational income of the assessee and accordingly, ld. AO assessed the interest income under the head “income from other sources” for which deduction u/s 80P of the Act was not allowed.
Section 80P(2)(a)(i) allows deduction to a co-operative society 5.1 engaged in carrying on the business of banking or providing credit facilities to its members in respect of whole of the amount of profits and gains attributable to such activity. Hon'ble Supreme Court in its judgement dated 12 January 2021 in the case of The Mavilayi Service Coop. Bank Ltd. &Ors. vs. CIT. Civil Appeal Nos. 7343-7350 of 2019 (Supreme Court) categorically stated in para 35 that, - “Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co- operative movement as a whole”
In the instant case, the 'interest income' under question was not the interest received from the members of the assessee-society for providing credit facilities to them. What was sought to be taxed u/s. 56 is the interest income arising on the surplus invested in co- operative banks and financial institutions other than the 'co- operative societies'.
5.2 The marginal note to Section 80P which reads "Deduction in respect of income of cooperative societies" is important, in that it indicates the general "drift" of the provision as held by Hon'ble Apex Court in K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. (1981) 4 SCC 173 and The Mavilayi Service Coop. Bank Ltd. & Ors.
M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 7 of 9 vs. CIT. Civil Appeal Nos. 7343-7350 of 2019 dt. 12.01.2021 (Supreme Court). Secondly, section 80P(1), inter alia, states that where the gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities mentioned in section 80P(2) would be eligible for deduction [The Mavilayi Service Coop. Bank Ltd. &Ors. vs. CIT. Civil Appeal Nos. 7343-7350 of 2019dt. 12.01.2021 (Supreme Court)]. The word 'income' has been defined under section 2(24)(i) of the Act to include profits and gains of business. This sub-section is an inclusive provision. The Parliament has included specifically 'business profits' into the definition of the word 'income'. Therefore, one is required to give a precise meaning to the words' profits and gains of business' mentioned in section 80P(2). In the instant case, the assessee-society regularly invested funds not immediately required for business purposes. Interest on such investments, therefore, could not fall within the meaning of the expression' profits and gains of business' as held by Hon'ble Supreme Court in the case of Totgars, Cooperative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC). Such interest income could not be said to be attributable to the activities of the society, viz., carrying on the business of providing credit facilities to its members.
5.3 Hon'ble Supreme Court in the case of Totgars, Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka (supra) held in para 11 as under : “To say that the source of income is not relevant for deciding the applicability of section 80P would not be correct because one needs to give weightage to the words 'the whole of the amount of profits and gains of business' attributable to one of the M/s. Deepa Credit Co-operative Society Ltd., Mysuru Page 8 of 9 activities specified in section 80P(2)(a ). The words 'the whole of the amount of profits and gains of business emphasize that the income, in respect of which deduction is sought, must constitute the operational income and not the other income which accrues to the society. In the instant case, the evidence showed that the assessee- society earned interest on funds which were not required for business purposes at the given point of time. Therefore, on the facts and circumstances of the instant case, such interest income fell in the category of 'other income' which had rightly been taxed by the department under section 56.””
5.4 As regards the claim of deduction u/s. 80P(2)(d) of the IT Act, we direct the AO to verify whether interest / dividend is received by the assessee out of investment made with co-operative society. If the assessee earns interest / dividend income out of the investments with co-operative society as observed by Hon’ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. in Civil Appeal No. 10069 of 2016, order dated 14.09.2023, the same is entitled to deduction u/s. 80P(2)(d) of the IT Act, 1961.
Without prejudice to the above, we make it clear that if the interest earned by the assessee from the banks is considered under the head income from other sources, relief to be granted to the assessee u/s. 57 of the act in accordance with law.
Accordingly, the issue is restored to the file of Ld.AO for denovo consideration with the above observation.