THE MANTOLA COOPERATIVE THRIFT & CREDIT SOCIETY LTD.,NEW DELHI vs. ITO, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘H’, NEW DELHI

BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER

I.T.A.No. Assessment Year 483/Del/2013 2004-05 484/Del/2014 2005-06 485/Del/2013 2006-07 486/Del/2013 2007-08 2828/Del/2015 2008-09 487/Del.2013 2009-10 177/Del/2014 2010-11 2829/Del/2015 2011-12

The Mantola Cooperative Vs. ITO, Ward 38(4), Thrift & Credit Society Ltd., New Delhi 541, Mantola Pahar Ganj, New Delhi GIR / PAN :AAAJT1976A (Appellant) (Respondent)

Appellant by :Shri Ajay Vohra, Sr. Adv. Shri Gaurav Jain, Adv. Shri Sahil Mehta, Adv. Respondent by : Shri M K Jain, Sr. DR

Date of hearing: 21.04.2016 Date of Pronouncement: 30.06.2016

ORDER PER BENCH: The assessee is a co-operative society registered under the Delhi co-operative societies act, engaged in the business of dealing with its members whereby it mobilises thrift money credited / mobilized from its

2 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 members and provide credit facility to them. For assessment year 2008-09, the assessee had filed its return of income declaring gross total income under the head ‘Business and Profession’ at Rs.1,44,04060/-, and claimed deduction under section 80P (2)(a) (i) of the income tax act 1961 for the entire income thereby declaring total income at NIL. Assessment was completed by the Ld. AO under section 143 (3) whereby he treated the interest on FDR with banks as income from other sources, not eligible for deduction under section 80P(2) (a)(i). On an appeal before ld. CIT(A), the deduction under section 80p (2) (A) (i) was allowed, which was reversed by this Tribunal subsequently.

“11.at this stage, Ld. counsel for the appellant-SEC has pointed out that the Commissioner of income tax (appeals) had decided the issue in their section 57 (3) that is availability of expenditure having exes with earning of the said income was not examined. This ground/argument was an alternative. Ld. counsel for the revenue submits that this question may be remitted to the Ld. Commissioner of income tax (appeal) as he had not decided the said question having allowed the appeal in entirety holding that the entire interest was exempt under this section 80P. We appreciate

3 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 the stand taken by the Ld. counsel for the revenue and accordingly the matter is remitted on the said aspect to the Commissioner of income tax (appeals) for decision. 12.similarly, with regard to the claim of deduction under section 80 P (2) (i), we find that there was no discussion on finding by the Commissioner of income tax (appeals), though this ground/issue was raised. This has happened because the Commissioner of income tax (appeals), as noted above, had granted exemption to the entire income earned by the appellant-SEC under section 80P(2)(i)(a). Learning counsel for the respondent- revenue submits that this issue would be examined by the Commissioner of income tax (appeal) on merits. We take this same statement on record.” 2.1 Accordingly as per the directions of the Hon’ble Delhi High Court that 2 issues, which were earlier not adjudicated upon by the Ld. CIT (A), are as under:

A. Whether the assessee is eligible for deduction under section 80 P (2) (D) relating to income derived from investment in other co-operative societies. B. The availability of deduction of expenses under section 57 regarding income from other sources. 2.2 Be that as it may, on the basis of the order of the Hon’ble Delhi High Court, for assessment year 2008- 09, assessments relating to other assessment years were opened, under section 148 of the act, where there has been either an intimation under section 143 (1) or no order has been passed. In the meanwhile the Ld. CIT (A) decided the issue in other assessment years

4 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014

wide respective orders, the details of which are as under:-

Assessment Year Date of order passed by Ld.CIT (A) 2004-05 30.11.2012 2005-06 13/11/2012 2006-07 13/11/2012 2007-08 13/11/2012 2008-09 15/02/2015 2009-10 13/11/2012 2010-11 18/10/2013

2.3 It has been further submitted that reopening of the assessment has been made under section 148 of the Act for assessment years 2004-05 to 2007-08. For assessment year 2008-09, the appeals before us have been initiated by the assessee against the consequential order passed by the Ld.CIT (A) on the directions of Hon’ble Delhi High Court. The issue that arises out of these appeals from the orders of Ld. CIT (A) for assessment years 2004-05 to 2007-08 and 2009-10 to 2010-11 are common except for the figures being different for these assessment years, which are as under. For the sake of convenience the grounds raised by the assessee for assessment year 2004-05 in ITA No. 483/Del/2013 have been reproduced herein below.

ITA no. 483/Del/13

“1. That on the facts and circumstances of the case, the CIT(A) erred in law in not holding that the reassessment order dated 30.12.2011 passed by the

5 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 assessing officer under section 147/143(3) of the Income-tax Act, 1961 ("the Act") was without jurisdiction, bad in law and void ab initio.

1.1 That on the facts and circumstances of the case, the CIT(A) erred in law in not holding that the statutory pre-conditions prescribed under section 147 of the Act for assumption of jurisdiction by the AO, having not been satisfied, initiation of reassessment as well as the impugned reassessment order was impermissible in law.

2.1. That on the facts and circumstances of the case, the CIT(A) erred in law in upholding the conclusion of the assessing officer that (a) the appellant was not engaged in "business of banking" and (b) that the aforesaid interest income was assessable under the head "income from other sources" and not as "business income".

2.2. That on the facts and circumstances of the case and in law, the CTT(A) erred in upholding disallowance made by the AO, by simply following the appellate order dated 30.11.2012 passed by this Hon'ble Tribunal for assessment year 2008-09, without appreciating that the said order was distinguishable on facts and in law and that the doctrine of res judicata is not applicable on income tax matters.

2.3 That on the facts and circumstances of the case, the CJT(A) erred in not dealing with the submissions of the appellant that the decision in the case of Totgar's Cooperative Sale Society: 322 ITR

6 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 383, was distinguishable on facts and that the ratio decidendi of the said decision had no application to the facts of the present case, as was held in several decisions rendered by different High Courts subsequent to the decision in Totgar's case. 3. That, without prejudice, on the facts and circumstances of the case, the CIT(A) erred in law in failing to appreciate that the aforesaid interest income of Rs.97,28,027 constituted of interest of Rs.63, 74,470 received from commercial banks and interest of Rs.33,53,557 received from co-operative banks.

3.1 That, without prejudice, on the facts and circumstances of the case, the CJT(A) erred in law in not restricting disallowance under section 80P to interest income of Rs.63,74,470, being the amount of interest received from commercial banks, in view of the provisions of Section 80P(2)( d) of the Act, under which interest received from cooperative banks was admittedly allowable.

2.4 The grounds raised by the assessee for assessment year 2008-09 is against the consequential

7 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 order passed by the lower net CIT (A) pursuant to the order of Hon’ble Delhi High Court in assessee’s own case which are as under:

ITA No. 2828/Del/15

8 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 related to the funds that were subsequently invested in the Banks and the inters income was earned thereon.” 2.5 As the issue involved in all these assessment years are common having identical facts, we are inclined to dispose of these appeals by way of a common order.

“6. No doubt, the term “attributable” is much wider than the term “derived from”, but the question still remains, whether the interest income earned from the FDR’s out of surplus funds, which were not to be made available and given as credit to the members, can be treated as income attributable to providing credit facilities to members. We need not day dilate on the said question as the issue was considered and stands answered by the Supreme Court in the case of Totgars’ cooperative sale society Ltd VS.ITO (2010) 322 ITR 283/188 Taxman 282. In the said case, the assessee a cooperative credit society, had provided credit facilities to its members and was also marketing

9 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 agricultural produce of its members. It had surplus funds, which were invested in short-term deposits and securities, like in the present case where the surplus funds were invested in FDR’s for an average period of 500 days. The Supreme Court examined the issue whether the interest income from the said surplus funds was eligible for exemption under section 80 P (2) (A) (I) as income attributable to profit and gains of business. It was observed that interest receipt from members for providing credit facilities to them was exempt. Further anything attributable to the said income would also be covered under section 80p. It was highlighted that exemption is partial and not complete, that is the whole income of the co- operative society does not get exemption. In the facts of the said case, it was observed that the deduction being in respect of certain incomes, the interest income earned out of surplus fund, would not qualify for deduction as it was assessable under the head income from other sources 8. The present case is surplus funds, which were not required for carrying on business of providing credit facilities to members. Half of the funds mobilised/collected from the members could be used for providing credit to the members. The balance amount had to be retained and used for specified purposes, other than providing credit facilities to members. This amount was deposited in FDR’s for an average period of 500 days. By- laws of the appellate co-operative Society prescribed that 50% of the amount mobilised/collected would not be given on credit to the members. These constituted surplus funds as has been held by the assessing officer and by the tribunal. It is on these funds that the interest was earned. The interest earned from the aforesaid funds as held by Supreme Court in toad Totgars’ Co-operative Sale Society Ltd (supra), would fall under section 56 and would be taxable under the head income from other sources.”

10 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 3.1 Accordingly ground No. 2 and 4 for assessment year 2004-05 to assessment year 2007-08 and assessment year 2009-10 to assessment year 2010-11 in the assessee’s appeal stands dismissed.

11 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 He submitted that the entire interest, earned on advances made to the members and interest from bank FDR’s are from investments with co-operative bank/societies, investments with commercial banks, and interest paid on deposit to members. He submitted that the assessee’s business is twofold:-

(i) it is into promotion of savings by inculcating saving habits among its members will stop this amounts carrying on banking business to not for the general public but exclusively for the members (ii) extending credit facility to the members.

4.2 The ld.AR submitted that section 80P(2)(d) provides benefit of deduction under section 80P for those co-operative societies, which has surplus funds even unrelated to its main business activity, which are invested with other co-operative societies. He submitted that clause (d) applies to all co-operative societies whether or not their main businesses is banking and credit facilities to the members. He submits that the assessing officer has himself admitted that the interest earned on deposits with other co- operative society is eligible for deduction under section 80P(2)(d), however while computing the disallowance the Ld. AO did not consider the fact that bank interest also include interest earned on deposit with other co- operative banks.

12 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 4.3 He thus concluded by submitting that the assessee is eligible for deduction of entire interest earned under section 80P(2)(d).

“(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investment with any other co-operative society, the whole of such income” 6.1 The above provision clearly mentions that any income of a co-operative society derived from investment with the co-operative society forms part of gross total income and is available for deduction under section 80P(2)(d) of the Act. This proviso clearly establishes that he interest income earned by a Cooperative society form its investments with any other cooperative society only is entitled for exemption and any interest received from other investments say with Scheduled Banks or other such persons, cannot be claimed to be exempt since the same cannot be attributed to its business activity, i.e. its business activity of providing credit facilities to its members. In the present case, the assessee- society invested funds not immediately required for its business purposes as per its own submission during the course of

13 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 assessment proceedings. Interest on such investments, therefore, cannot fall within the meaning of the expression “profits and gains of business”. Such interest income cannot be said also to be attributable to the activity of the society, namely carrying on the business of providing credit facilities to its members. When the assessee society provides credit facilities to its members and it earns interest there from, is eligible for deduction u/s 80-P(2)(a)(i), which has been allowed by the A.O. himself. 6.2 On a plain reading of the clause (d) sub-section (2) of Section 80-P, it can be stated that the intention of the Legislator is to encourage the idea of Co- operative Societies to help its own members as well as other such Co-operative Societies to grow economically, through credit facilities New Delhi investments, etc. The whole idea of Cooperative movement is based on economic upliftment of certain core areas like agriculture, milk produce cottage industries and similarly placed groups, so to speak, so that the combined resources of such groups are pooled in to strengthen their economic conditions and help them grow in the respective activities. The underlying principle herein is not to earn profits by treating its activity as a commercial venture, but to boost the cause of cooperative movement. Eh intent and purpose of section 80P(2)(a)(i) of the Act is to grant deduction to income which has a direct and proximate

14 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 nexus to the activity of banking or providing credit facility carried on by a cooperative society with the members. If both the terms “banking business” and “providing credit facilities” are read together, the intention of the Legislature becomes clear and that is to provide benefit of deduction to a cooperative society which actually provides credit / finance to its members in furtherance of the cooperative movement and not for the purpose of profit making. 6.3 Ld. A.R. placed reliance on various judgments of Hon'ble High Court and coordinate bench of this Tribunal, in respect of allowability of interest income earned from surplus funds invested in FDRs made with commercial/cooperative bank and interest earned from investments made with cooperative societies / banks. 7. We have perused the orders passed by the authorities below and the judgment relied upon by the assessee. The ld.AR has placed his reliance on the order dated 03.05.2011 passed by jurisdictional High Court in case of CIT vs. National Agricultural Co- operative Marketing Federation of India Ltd., in ITA no. 839/2009 & 1037/2010. The Hon’ble High Court held that the assessee was eligible to the deduction u/s.80P(2) (d) in respect of the interest earned from investments made by a society in other cooperative banks.

15 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014

7.1 It is pertinent to note that during the concerned years under consideration the assessee had deposits with co-operative banks and commercial banks, as provided in the chart submitted before us. It is observed that the gross income earned by the assessee comprises of 3 components which are as under:

i) interest income earned from investment with co-operative banks ii) interest income earned from investment with commercial banks and, iii) interest paid on deposits to members.

Assessme Gross Interest Interest Interest nt year interests income income paid on income earned earned deposit to earned (Rs.) from from members investmen investment (Rs.) ts with s with cooperativ commercial e banks / banks (Rs.) societies (Rs.) 2004-05 357,52,619 33,53,557 63,78,065 232,07,117 2005-06 372,72,426 24,54,715 60,44,560 214,15,500 2006-07 376,70,091 14,30,704 67,86,403 199,15,686 2007-08 358,95,646 28,88,694 37,81,186 200,16,014 2008-09 461,96,615 1,-2,301 142,09,162 248,56,264 2009-10 505,50,726 98,175 167,65,320 288,98,915 1010-11 526,41,687 77,79,354 134,00,129 325,78,394

16 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 investments with Co-operative Banks / Societies, the assessee has neither been able to establish before us nor before the authorities below that interest has been earned exclusively from investment with other cooperative banks. 8.1 Accordingly ground No. 3 for assessment year 2004-05 to 2007-08, 2009-10, 2010-11 and ground No. 1 for assessment year 2008-09 stands dismissed.. 9. The next issue relates to the allowability of deduction of expenses under section 57 of the act incurred by the assessee in relation to earning of interest income. 9.1 The ld. AO disallowed the expenditure on the ground that there was no direct correlation between the expenditure incurred and the interest income earned on deposits made with banks by the appellant. This disallowance was confirmed by the Ld.CIT (A). 9.2 Aggrieved by the order of the lower net CIT (A) the assessee is in appeal before us now. 9.3 The ld.AR submitted that assessee is a thrift and credit Society engaged in the dual business, one of which is accepting deposits from person fixed deposits, recurring deposits and saving deposits and investing the same in interest earning securities/deposits. The other business is that of providing credit facilities to its members. Ld. A.R. submitted that the funds taken as deposits from members are used either for earning interest income from investments or earning interest

17 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 income from credit facilities to the members it is only the members of the Society can avail the banking facility and/or avail credit facilities. He submitted that if a member comes forward with the deposit, the societies bound to accept the same and give him the interest, irrespective of whether the funds are required for giving credit to the members or not. Accordingly, the interest cost incurred by the assessee is partly towards money kept in the bank FDR’s and partly attributable to providing credit facility to its members. He thus submitted that the bifurcations of interest expenses between the two activities, has been done on a rational manner. 10 The ld.AR submitted that the assessee is entitled to deduction in respect of the cost of the funds being interest paid on deposits received from the members and proportionate administrative and other expenses attributable to the cost of the funds under section 57 with respect to the residual interest income which is taxable under section 56 of the act for the reason that: i) it is the funds mobilised through deposits and capital subscription, which is being deposited with banks/co-operative societies as term deposits

ii) as the inception of receiving the funds from the members it is known that part of the total funds will be utilised for credit facilities and balance would be kept in the interest earning instruments. Thus it is submitted that in case the income from FD is treated

18 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014 as income from other sources under section 56, then all the costs/expenses related to raising these deposits along with interest expenses are attributable proportionately to the income earned on these fixed deposits eligible for deduction under the section.

iii) It has been submitted that the above analogy is drawn and materia with the income computed for deduction under section 80P(2)(d) on net basis.

10.1 It has been submitted by the Ld. A.R. that the interest paid has been bifurcated in the ratio of deployment of funds in credit facility to member and funds deployed in FDR. He submitted that’s to complete the fund deployed in a particular segment, the monthly average outstanding has been taken. He thus submitted that the assessee on the same basis has allocated the overhead expense among the two activities. 11. We have perused the orders passed by the authorities below and the judgment relied upon by the assessee. It is not in dispute that the source of such income was due to the investment of surplus funds which the assessee did not require for its business activities. It is logical that when Revenue is permitted to assess the interest income u/s.56 of the Act, by treating the income earned by way of interest as income from other sources, the assessee should be entitled for proportionate expenses incurred in

19 I.T.A.Nos.483-487/Del/2013 I.T.A.Nos.2828,2829/Del/2015 I.T.A.No. 177/Del/2014

mobilizing the deposits placed with banks/ cooperative societies. What can be taxed is only the net income earned after deducting the expenditure attributable to such earning. We accordingly direct the Ld. TPO to allow the allocation of expenses as per the method of calculation arrived by the assessee. 12 In the result the appeals filed by the assessee stands partly allowed. Order pronounced in open court on 30th June, 2016.

Sd./- Sd./- (S. V. MEHROTRA) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 30.06.2016 Sp. Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi. 5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy. By Order (ITAT, New Delhi)

S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author 15/6 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement Sr. PS/PS 7 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order