THE W.B STATE CO-OP AGRI AND RURAL DEVELOPMENT BANK LIMITED. ,KOLKATA vs. DCIT, CIR-54,KOLKATA, KOLKATA

Present for: Appellant by : Shri Palas Chattopadhya, AR Respondent by : Shri Rakesh Kumar Das, Addl. CIT, DR Date of Hearing : 05.06.2024 Date of Pronouncement : 03.09.2024 O R D E R

PER RAKESH MISHRA, ACCOUNTANT MEMBER:

“1. That on the facts and in the circumstances of the case the Ld. CIT(A), NFAC is wrong, unjust and has erred in law in confirming the action of Ld Assessing Officer in holding that interest income of Rs.2,83,02,934/- earned by the appellant co- operative society on FDR(s) with the Schedule banks and interest on Personal The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 Loan to members of Rs. 21,98,448/- and interest on HBL to staff of Rs. 1,76,490/- are not an income derived by it from its business activities and is in the nature of receipts from other sources and thereby upholding working of Income from business by the Ld AO. 1.1. The Ld. CIT(A), NFAC is also wrong and has erred in law in confirming disallowance of deduction of Rs. 3,06,77,872/- by the Ld AO under section 80P(2)(a)(i) of the I.T. Act, 1961. 1.2 The Ld CIT(A), NFAC is also wrong and has erred in law in confirming disallowance of deduction of Rs. 11,57,981/- being the Other Business related Income viz Commission, Miscellaneous and Sundries by the Ld AO under section 80P(2)(a)(i) of the I. T. Act, 1961.

2. The Ld. CIT(A) NFAC was not made any comments against the action of the Ld. AO in respects of wholly unjustified in addition of Overdue Interest amounting to Rs.17,76,82,947/- which is against the Prudential Norms in respect of non- performing assets, interest is not recognized on accrual basis but is booked as income only when actually received. Therefore, the addition made by the Ld. AO should be deleted.

2. That the learned Commissioner of income tax (Appeals) has erred both on facts and in law in not providing sufficient opportunity of being heard to the assessee co-operative Society to represent the case virtually.

3. That the learned Commissioner of Income Tax (Appeals) NFAC and Ld. AO both has erred in relying on the decision of Totgars' Cooperative Sale Society Ltd. v. ITO [322 ITR 283 (SC)] in which the decision in TOTAGARS CO-OPERATIVE LTD.(supra) rendered by the Hon'ble Supreme Court is clearly distinguishable on facts as the Appellant society was a cooperative agricultural society and also found that the facts in the case of M/s. JAFRI MOMIN VlKASH COOPERATIVE SOCIETY LTD. of High Court of Gujarat and very recent judgement of Jurisdictional High Court in the case of Principal Commissioner of Income Tax Vs Gunja Samabay Krishi Unnayan ... Citation : 2023 Latest Case law 122 Cal/2 would squarely apply to the case in respect of interest earned from deposits with Bank, though in the said order, the Calcutta High Court has specifically decided in favour of the Assessee. 4.The Ld. ClT(A) NFAC was not made any comments against the action of the Ld. AO in respects of wholly unjustified in not granting cost of corresponding expenses against the interest received from bank and Personal Loan in his own motion and the action of the AO is wholly bad & illegal and the appellant being fully entitled for such expenses and in view of the facts and circumstances it may kindly be granted accordingly.

5. That the appellant craves leave to amend, alter modify, substitute, add to, abridge and/or rescind any or all of the above grounds.”

The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 of the Act. The Assessing Officer relied upon the decision in the case of The Totgars' Co-operative Sale Society Ltd. vs. ITO 322 ITR 283 (SC) in which it has been held that interest earned by the appellant cooperative society on surplus funds invested in short-term deposits with banks and in government securities is not eligible for deduction under section 80P. In response to the query in this regard, the Ld. AR of the assessee submitted that during the relevant year, NABARD had granted loan of Rs.100 crore and Rs.56.34 crore which in turn was lent to the members in several instalments. The assessee borrowed wholesale and lent on retail basis. It claimed that there is always some floating fund which has a cost, i.e. the interest payable to NABARD. It was also stated that repayments from the borrowers were received in hundreds of instalments while the repayment to the lender viz. NABARD took place only twice a year, i.e. on 31st January and 31st July. The society has to accumulate funds to pay the instalments on the scheduled dates. The interest income so derived or the capital, if not immediately required to be lent to members and for payment of instalments falling due after some period, cannot be kept idle and it deposits this amount in banks to earn interest; the said income so derived has the attributes of the profits and gains of the business of providing credit facilities to members only, it was so argued before the Ld. AO. Further, the society was not carrying on any separate business for earning of the interest. The contention of the assessee was analysed but the Assessing Officer was of the view that in the instant case, the assessee society regularly invests funds, not immediately required for business purposes, and interest on such investments, therefore, cannot fall within the meaning of the expression ‘profits and gains of business’. Such interest income cannot be said to be attributable to the activities of the society, namely carrying on the business of providing credit facilities to its members. He held that when the assessee provides credit facilities to members, it earns interest income but the interest held as ineligible for The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 deduction under section 80P(2)(d) of the Act is not in respect of interest received from members. Further, the deduction under section 80P of the Act is allowable on interest and dividend derived by the cooperative society from its investment with any other cooperative society. This was to foster the cooperative spirit in the country. The Assessing Officer was of the view that the assessee could have kept idle funds with the state cooperative banks or any other cooperative bank to earn interest deductible under section 80P and since the assessee failed to do so, such interest income is not allowable as deduction under section 80P(2)(d) of the Act. As expenses on other income had been claimed to the tune of Rs. 30,65,000/- as attributable to earning other income in the computation of income, which has been allowed, hence no more expenses were allowable as attributable to earning interest on its deposit with other banks. Therefore, he held that a sum of Rs. 2,83,02,934/- was not allowable as eligible for deduction under section 80P(2)(d) of the Act and is to be charged under the head ‘income from other sources’. Similarly interest of Rs.21,98,448/- received on personal loans and another amount of Rs. 1,76,490/- shown as interest on House Building Loan (HBL), being outside the line of business of the assessee, were also chargeable as income from other sources and therefore a sum of Rs.23,74,938/- was also included as other interest. The assessee had received commission of Rs. 97,706/- on non-life UIIC to the tune of Rs. 59,635/- and miscellaneous receipts to the tune of Rs.2,47,506/-, none of which were directly relatable to the principal business activities of the assessee and formed part of ineligible income for the purpose of deduction under section 80P(2)(d) of the Act. Another sum of Rs. 7,53,134/- shown under the head ‘sundries’ was also treated as ineligible for the purpose of deduction under section 80P(2)(d) of the Act. Thus, aggregate sum of Rs. 11,57,981/- was also treated as ‘other income’ and a sum of Rs.

The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 3,18,35,853/- was treated as ineligible for consideration while computing deduction under section 80P of the Act.

8. Before us also, similar arguments as made before the Ld. AO and the Ld. CIT(A) were made by the Ld. AR which have been considered while the Ld. DR defended the order of the Ld. CIT(A).

10. In respect of the additional grounds raised by the assessee the ld. DR did not object to the admission of the additional ground.

11. The Id. AR has prayed before the Tribunal that in case the aforesaid incomes if treated under the head income from other sources then the corresponding expenditure should be allowed against these incomes. It is a well settled law that the net income should be brought to tax after deducting the expenses incurred to earn that income. Hence, in the interest of justice and fair play, we The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 restore this matter to the file of AO for fresh adjudication in accordance with law. Accordingly, this additional ground raised by the assessee is allowed for statistical purposes.

12. Now we take up the appeal of the revenue in ITA No. 1108/Kol/2009. In the grounds of appeal raised the revenue has stated that the income arising out of maintenance charges should be charged under the head ‘income from house property’ instead of ‘income from other sources’. It is pertinent to not that the Id. CIT(A) has already directed in his order that the AO should charge the above staled income under the head ‘income from house property’. However, it was further made clear in the order of CIT(A) that in case the house property income has been clubbed with the income from other sources, the same should be excluded from the income from other source and same should be brought to tax income from house property. This ground of objection of revenue was consequential in nature and does not require any fresh adjudication. Therefore the direction issued by the Id. CIT(A) to the AO is correct as evidenced from the order of the Id. CIT(A). Accordingly, the appeal of the revenue is allowed for statistical purposes.

9. However, the additional ground relating to the corresponding expenditure to the aforesaid income to be allowed against the income to be assessed under the head “income from other sources” was allowed and the Tribunal held that the net income should be brought to tax after deducting the expenses incurred to earn that income. Therefore, the claim of deduction under section 80P was rejected and decided against the assessee. However, the income was to be assessed after deducting the expenses in accordance with law. Hence subsequent to the order of the Tribunal the ld. Assessing Officer passed another order on 30.12.2016, in which expenses incurred for earning interest on fixed deposits and short-term investments with Banks amounting to Rs.8,26,200/-, corresponding expenses to interest income of Rs.55,08,000/- as against the assessee’s claim of Rs.54,50,166/- were allowed and the claim of corresponding expenses to other heads was rejected.

10. Aggrieved, the assessee went in appeal before the ld. CIT(Appeals) and also submitted the additional ground of appeal. The ld. CIT(Appeals) upheld the expenses as allowed by the ld. Assessing Officer incurred for earning interest income and rejected the other claims primarily on the ground that no separate The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 books of account were maintained with regard to the income under dispute with a comment that such claims of the appellant have already analysed under para 6 of his order, whereas no expenses were incurred for earning of such income. However, no comment was made in respect of deduction under section 80P(2)(a)(i) related to the business of banking as also lending to its members. Aggrieved with the order of ld. CIT(Appeals), the assessee is now in appeal before the ITAT.

Since the issue relating to the deduction u/s 80P on the interest from the Banks and Co-operative banks has been decided against the assessee in the appeal for AY 2006-07, hence following the order of AY 2006-07 in the assessee’s own case, the order of the Ld. CIT(A) is upheld and Ground Nos. 1, 1.1 and 3 are dismissed. As regards interest on personal loans and interest on HBL to staff, it may also be mentioned that in the case of Bihar Rajya Sahakari Bhoomi Vikas Cooperative Bank Limited -vs- CIT reported in 186 taxman 54 (Patna), it has been held that income earned by a Cooperative Bank by way of interest on P.F. amounts of employees and rent from house property could not be treated as income attributable to the banking business and hence would not qualify for deduction. Since it was not the business of the assessee to lend money to employees and being a Cooperative Society, its business is to lend money to its members and since the employees do not fall under the category of members, therefore, the claim of allowing deduction under section 80P(2)(a)(i) for interest on HBL to staff and on personal loans is also rejected. Similarly, The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 on the same reasons, as income from commission, miscellaneous income and sundry income also do not relate to the business activities of the assessee, the same do not qualify for deduction under section 80P(2)(d) of the Act or 80P(2)(a)(i) of the Act and Ground No. 1.2 relating to disallowance of deduction for Rs. 11,57,981 is also rejected and the addition is confirmed. Thus Ground Nos. 1, 1.1, 1.2, and 3 are rejected. The total disallowance made by the Ld. AO at Rs. 3,18,35,853/- is hereby confirmed.

11. Ground No. 2 (the 2nd Ground No. 2) is regarding the Ld. CIT(A) not providing sufficient opportunity of being heard to the assessee to represent the case virtually. The Ld. CIT(A) has considered the contentions of the assessee and decided the appeal, therefore, as the assessee has not been able to make out a case of lack of opportunity, Ground No. 2 of the appeal is also rejected.

is allowed.

13. Ground No. 5 is general in nature and does not require any separate adjudication.

14. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 3rd September, 2024.