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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri K. Narasimha Chary
Per Shri P.M. Jagtap, A.M..: This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-XIV, Kolkata dated 27.10.2014 and the solitary issue involved therein relates to the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee’s claim for deduction under section 80P of the Income Tax Act, 1961 in respect of interest income to the extent of Rs.76,73,388/-.
./2015 Assessment year: 2009-2010 Page 2 of 8
The assessee in the present case is a Cooperative Society, which is engaged in giving loans and credit facility to its members, who are the employees of the South Eastern Railways. The return of income for the year under consideration was filed by it on 18.09.2009 declaring total income at ‘NIL’ after claiming deduction under section 80P amounting to Rs.4,14,51,512/-. During the course of assessment proceedings, it was noticed by the Assessing Officer that the deduction under section 80P was claimed by the assessee even in respect of interest income earned from Bank. According to him, the said income was liable to be taxed under the head “income from other sources” and the assessee was not entitled to claim deduction under section 80P thereon. He, therefore, required the assessee to offer its explanation in the matter. In reply, it was submitted before the Assessing Officer that the primary objective of the assessee- Society is to provide loan and credit facility to its members from the available funds and whenever there is excess fund, the same is invested for short-term investments in the Banks and Financial Institutions. It was submitted that the funds are so invested only in case when there is no demand for any loan or credit in order to ensure that unutilized funds do not remain idle. It was submitted that whenever there is a demand for loan or credit facility from the members, the short-term investment made in Bank deposits is liquidated prematurely and the funds are made available for giving loan and credit facility to its members. It was contended that the assessee-Society thus attains its primary objective of providing loan and credit facility to its members and earning of interest from short-term investments made in Banks is only ancillary to such primary objective. It was contended that the interest earned by the assessee-Society on the short-term investments made in Bank deposits thus is eligible for deduction under section 80P. Without prejudice to this main argument and as an alternative, it was submitted by the assessee that if at all the interest income earned from Bank is to be treated as income from other sources, then expenses for earning such income in the form of interest paid to its members against such deposit should be allowed. The Assessing Officer did not find merit in the main contention ./2015 Assessment year: 2009-2010 Page 3 of 8 raised by the assessee-Society that the interest income earned on short- term deposits made with Bank was eligible for deduction under section 80P. He held that there was nothing brought on record by the assessee- Society to show that it was necessary to make investment in short-term deposits with Bank for the purpose of its business. He also held that the assessee could not establish satisfactorily that there was any statutory requirement for making such investment in order to carry out its business. He, therefore, disallowed the claim of the assessee for deduction under section 80P in respect of interest income earned on Bank deposits. He, however, allowed the alternative claim of the assessee that the interest paid by it to the members was allowable as deduction against such interest income on proportionate basis. Accordingly, after allowing such deduction to the extent of Rs.1,18,85,272/- from the interest and Rs.1,95,58,660/- earned on Bank deposits, the balance amount of Rs.76,73,388/- was brought to tax by the Assessing Officer in the hands of the assessee in the assessment completed under section 143(3) vide an order dated 14.12.2011.
Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) challenging the disallowance made by the Assessing Officer on account of its claim for deduction under section 80P in respect of interest income earned from Bank. The submissions made by the assessee in support of its case on this issue, however, were not found acceptable by the ld. CIT(Appeals) and he proceeded to confirm the disallowance made by the Assessing Officer under section 80P for the following reasons given in paragraph no. 6.1 to 6.4 & 7 of his impugned order:-
6.1. I have carefully considered the written submission of the Ld. A/R of the appellant society filed along with Auditor's report during the course of appellate proceedings. I am in agreement with the contention of the A.O that the claim of the appellant of proportionate administrative expenses is not allowable as the main objective of the assessee is to provide loan and credit facilities to its ./2015 Assessment year: 2009-2010 Page 4 of 8 members from its available funds and the entire staff and infrastructure facilities are used for that only and depositing money to the bank and keep it as Fixed deposit for a fixed period need not require any further work in addition to its normal work of the Office.
6.2 As regards the claim and deduction u/s. 80P is concerned, the following facts may be considered:
The relevant part of provisions of section 80P is as under: Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2/ there shall be deducted. in accordance with and subject to the provisions of this section/ the sums specified in sub-section (2/ in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely;- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members *(4) The provisions of the section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
* Inserted by the Finance Act, 2006 w.e.f. 1-4-2007.
In a recent decision in the case of Totgar's Co-operative Cooperative Sale Society Ltd. Vs ITO, Karnataka [2010] 322 ITR 283 (SC), where the facts were similar to the appellant, it has been held as under:
FACTS: The assessee was a co-operative credit society. Its business was to provide credit facilities to its members and to market their agricultural produce. During the relevant assessment years, it had surplus funds which it invested in short-term deposits with the banks and in the Government securities and earned interest thereon. According to the assessee, its activity constituted eligible activity under section 80P(2)(a)(i) end, hence, it was entitled to the benefit of deduction from its gross total income. It, therefore, claimed deduction under section 8OP(2)(a)(i) in respect of such interest income. The Tribunal held that such interest income would fall under the head “Income from other sources" under section 56 and not under section 2B ./2015 Assessment year: 2009-2010 Page 5 of 8 end, consequently, the assessee-Society would not be entitled to deduction under section 8OP(2)(a)(i). The High Court, by impugned judgment affirmed the decision of the Tribunal.
On appeal to the Supreme Court:- HELD: In the Instant case, the interest held 'not eligible for deduction under section 80P(2)(a)(I) was not the interest received from the members for providing credit facilities to them. What was sought to be taxed under section 56 was the interest income arising on the surplus invested in shod-term deposits and securities which Surplus was not required for business purposes. The assessee marketed the produce of its members whose sale proceeds at time were retained by it. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. Such interest income would come in the category of 'Income from other sources and hence, such interest income would be taxable under section 56 as rightly held by the Assessing officer. The head note to section 80P indicates that the said section deals with deductions in respect of income of co-operative societies. 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 in section BOP(2) would be eligible for deduction. The word 'income’ has been defined under section 2(24)(i) to include profits and gains. 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’. Such interest income could not be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. Therefore, looking to the facts and circumstances of the case, the Assessing Officer was right in taxing the interest income under section 56. To say that the source of income is not relevant for deciding the applicability of section BOP would not be correct because one needs to give weightage to the word 'the whole of the amount of profits and gains of ./2015 Assessment year: 2009-2010 Page 6 of 8 business, attributable to one of the 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.
6.3 From the above decision, it is abundantly clear that the surplus funds of the society kept with other banks is to be taxed as "income from other sources". Interest on such investments would not fall within the expression - profits and gains from business. Therefore, such interest income could not be said to be attributable to the activities of the society, namely carrying on the business of providing credit facilities to its members, thus not allowable as the deduction u/s.80P(2)(a)(i) of the I.T. Act.
6.4. It is also to be noted here that in course of the proceedings, the appellant could not satisfactorily explain before the A.O. that the statutory investments made with the banks were required for carrying on its business when there was no restrain in conduct of the said business of the Co- operative Society of keeping statutory deposits. The A.O. had detected during the scrutiny proceedings that the organization is a Co-operative society registered under the Multi-state Co-operative Societies Act. The Co-operative society is not registered and governed under the Banking Regulation Act, 1949 for the reason of which, the Co- operative society is not supposed to abide by the guidelines laid out from time to time by the RBI.
Respectfully following the decisions taken in the cases referred to above (supra) and in view of the above, I hold that the action of the A.O. of making addition of Rs.76,73,388/- as income from other source on account of Interest income from investment is reasonable and in accordance with law. Moreover, it is pertinent to mention here that it is settled principle of law that whenever a claim is placed before the AO by the appellant, the onus lies upon the assessee to satisfactorily prove the transactions by furnishing credible documentary evidences. But in the instant case, the appellant society has failed to discharge ./2015 Assessment year: 2009-2010 Page 7 of 8 such onus. I, therefore, confirm the addition made by the A.O”.
Aggrieved by the order of the ld. CIT(Appeals), the assessee has filed this appeal before the Tribunal.
We have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the ld. representatives of both the sides, the issue involved in this appeal of the assessee relating to its claim for deduction under section 80P in respect of interest income earned form Bank is squarely covered against the assessee by the decision of the Hon’ble Calcutta High Court in assessee’s own case for A.Y. 2002-03 and 2004-05 rendered vide its order dated 15.07.2016 passed in of 2007. By the said order, Hon’ble Calcutta High Court has decided the similar issue involved in assessee’s own case against the assessee in principle and remanded the matter to the Assessing Officer with the following directions:-
(a) To work out the interest earned under sections 63 and 64 of the Multi State Cooperative Societies Act, 2002 and to allow benefit under section 80P and (b) to ascertain the interest paid to the members for the purpose of earning interest from investments and allow deduction on account of such interest
As already noted, the Assessing Officer in the present case has already allowed deduction to the assessee on account of interest paid to the members for the purpose of earning interest from investments. Accordingly, we respectfully follow the decision of the Hon’ble Calcutta High Court in assessee’s own case for A.Y. 2003-04 & 2004-05 (supra) and uphold the impugned order of the ld. CIT(Appeals) confirming the action of the Assessing Officer in disallowing the claim of the assessee for deduction under section 80P in respect of interest earned on Bank deposits in principle. The matter, however, is remanded to the Assessing Officer for the limited purpose of working out the interest earned under ./2015 Assessment year: 2009-2010 Page 8 of 8 sections 63 and 64 of the Multi State Cooperative Societies Act, 2002 and to allow the benefit of deduction under section 80P to that extent.
In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open Court on December 14, 2016.