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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
The aforesaid appeal at the instance of the assessee is directed against the order dated 28th August 2014, passed by the learned Commissioner (Appeals)-26, Mumbai, for the assessment year 2010– 11.
The solitary issue arising for consideration in this appeal is in relation to disallowance of part of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961 (for short "the Act").
2 Dirbadevi Sahakar Patpedi Ltd.
Brief facts are, the assessee is a credit co–operative society. For the assessment year under consideration, the assessee filed its return of income on 26th September 2010, declaring total income of ` nil. During the assessment proceedings, the Assessing Officer after verifying the accounts of the assessee noticed that the assessee is collecting deposits by way of fixed deposit, saving deposits and recurring daily deposits. He found that as on 31st March 2010, the paid–up capital of the society was ` 88,76,300 and it has taken loans including deposits amounting to ` 10,14,47,893 and has given loans and advances of ` 9,53,85,330. The profit declared by the assessee during the relevant previous year was ` 30,09,477, which was claimed as deduction under section 80P(2)(a)(i). The Assessing Officer referring to the provisions of section 80P and more specifically section 80P(4) was of the view that the assessee is not a co–operative society but falls in the category of primary co–operative bank as provided under section 80P(4). The assessee, though, objected to the aforesaid view of the Assessing Officer, but the Assessing Officer rejecting the objections of the assessee held that assessee being a co–operative bank, the provisions of section 80P(4) will apply and the assessee would not be eligible for deduction under section 80P(2)(a)(i). Accordingly, he completed the assessment disallowing assessee’s claim of deduction under section 80P(2)(a)(i). Being aggrieved of the disallowance of deduction claimed under section 80P(2)(a)(i), assessee
3 Dirbadevi Sahakar Patpedi Ltd. challenged the assessment order by preferring an appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), after considering the submissions of the assessee vis–a–vis, the provisions contained under section 80P, as well as judicial precedents, though, in principle, accepted that the assessee is a co–operative credit society, distinct and separate from co–operative banks, hence, is eligible for deduction under section 80P(2)(a)(i) and provisions of section 80P(4) are not applicable, however, he held that the deduction under section 80P(2)(a)(i) is to be restricted to the income of the assessee from the business of banking or credit facilities to the members. He was of the view that interest income earned by the assessee from fixed deposits in bank which were required to be kept as statutory reserve fund as per Maharashtra Co–operative Societies Act, 1960, cannot be treated as business income of the assessee from its activities of business of banking or providing credit facilities to its members. He observed, investment in fixed deposits in different banks towards statutory reserve fund was out of the surplus funds which were not required to be utilised for assessee’s day–to–day business activities. Referring to a decision of the Hon'ble Supreme Court in Totgars Co–operative Sale Society Ltd., [2010] 229 CTR 209 (SC), the learned Commissioner (Appeals) finally held that interest received from fixed deposits since is 4 Dirbadevi Sahakar Patpedi Ltd. assessable under the head “Income From Other Sources”, the assessee cannot claim deduction under section 80P(2)(a)(i) in respect of such income.
Learned Authorised Representative submitted before us that there is no surplus reserve created by the assessee in its accounts so as to infer that the surplus funds available with the assessee which were not required for day–to–day business activities, were invested in fixed deposit. In this context, he drew our attention to the Balance Sheet as on 31st March 2010 of the society. Learned Authorised Representative submitted, there is no fund earmarked for members. It is assessee’s own funds which were invested in fixed deposits in the course of business. He, therefore, submitted that as the funds invested in fixed deposits were not earmarked for members and were assessee’s own funds out of business activities, the interest income earned by keeping them in fixed deposit is to be treated as business income and not income from other sources. In this context, he relied upon the following decisions:–
i) ITO v/s Sunder Patel Co–operative Credit Society Ltd., 2018–46–CCH–427 (Ahd.); and ii) Yashomandir Sahakari Patpedi Ltd., Mum./2014 dated 20.1.2016. 6. He submitted, the decision of the Hon'ble Supreme Court in Totgars Co–operative Sale Society Ltd. (supra), is factually
5 Dirbadevi Sahakar Patpedi Ltd. distinguishable as in that case, the Co–operative Society was utilising the funds of the members for investments in fixed deposits whereas in assessee’s case, its own funds were invested in fixed deposits. He, therefore, submitted that assessee’s claim of deduction under section 80P(2)(a)(i) should be allowed.
Learned Departmental Representative on the other hand relied upon the decision of the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon by the learned Authorised Representative. At the outset, we need to observe that as far as assessee’s eligibility to claim deduction under section 80P(2)(a)(i), as a Co–operative Credit Society is not in dispute as the Department has accepted the decision of the first appellate authority that the assessee being credit co–operative society and not a co–operative bank is eligible for deduction under section 80P(2)(a)(i). Keeping the aforesaid factual position in view, we proceeded to resolve the dispute in hand. As could be seen, the learned Commissioner (Appeals), though, in principle, accepted that the assessee is eligible for deduction under section 80P(2)(i)(a) but at the same time, he held that such deduction has to be restricted to its business income and not to the interest earned on fixed deposit which is to be assessed as income from other sources. On a perusal of the order of the first
6 Dirbadevi Sahakar Patpedi Ltd. appellate authority, it is evident that he was of the view that since the assessee has invested its surplus funds in fixed deposits to maintain statutory reserve as per the provisions of Maharashtra Co–operative Societies Act, 1960, the interest earned cannot be treated as business income. Thus, as could be seen, the learned Commissioner (Appeals) has accepted that the investments made in fixed deposits are out of assessee’s own surplus funds and secondly, the fixed deposits were made to maintain a statutory reserve fund as mandated under Maharashtra Co–operative Societies Act, 1960. Thus, the very fact that investments were made in fixed deposits as mandated by Maharashtra Co–operative Societies Act, 1960, itself proves that such investment in fixed deposit has a nexus with the business activities of the assessee. Moreover, it is not the case of the Department that the funds utilised for investment in fixed deposit is not assessee’s own funds. Thus, as could be seen, the so called surplus funds were nothing but generated from business activities of the assessee and do not belong to the members. That being the case, even assuming that such surplus funds not required for day–to–day business activities were set apart for investment in fixed deposit for earning interest income, in our view, would form part of business income as the decision to invest the surplus funds is a decision taken by a prudent businessman for not keeping his funds idle. Therefore, in our view, the learned Commissioner (Appeals) fell into error in holding that the income
7 Dirbadevi Sahakar Patpedi Ltd. earned on fixed deposit is to be treated as income from other sources and not business income of the assessee. Even otherwise also, the issue in dispute involved in the present appeal is covered by the decision of the co–ordinate bench of the Tribunal cited before us by the learned Authorised Representative. In the case of Sunder Patel Co–operative Credit Society Ltd., (supra), the Tribunal after taking note of the decision of the Hon'ble Supreme Court in Totagars Co– operative Sale Society Ltd. (supra), held that interest income is to be assessed as income from business and the assessee would be eligible to claim deduction under section 80P. Similarly, in the case of Yashomandir Sahakari Pathpedi Ltd. (supra), Mumbai Bench of the Tribunal expressed identical view while distinguishing the decision of the Hon'ble Supreme Court in Totgars Co–operative Sale Society Ltd. (supra). In this context, the Tribunal relied upon the decision of the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Co–operative Ltd., [2015] 230 Taxman 309 (Kar.). The observations of the co–ordinate bench are as under:–
“11.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. Taking into consideration the factual matrix and circumstances of the case, we are of the considered opinion that the decision rendered by the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-op Ltd.(2015) (230 Taxman 309) (Kar) squarely applies to the facts of the case on hand. In this cited case, the assessee claimed deduction under section 80P(2)(a)(i) of the Act on the interest earned from surplus funds deposited with banks to earn interest as being attributable to its business of providing credit facilities to its Members. In the case 8 Dirbadevi Sahakar Patpedi Ltd. on hand also, the surplus funds of the assessee’s business of providing credit facilities to its members, which were not due to the Members was invested in Central Govt. Bonds specified under section 70 of the MSC Act and in 11% Secured Redeemable Non- convertible Bonds issued by Maharashtra Co-op Development Corpn. Ltd. as per Circular dated 22/11/2002 issued by the Co- operative Commissioner and Registrar, Maharashtra State. These surplus funds are attributable to the assessee’s business of providing credit facilities to its members and, therefore, the resultant interest income invested in specified Government Securities and bonds would also, in our view, constitute business income. In this regard, it would be relevant to extract hereunder, the observations of the Hon’ble Karnataka High Court in its order (supra) at paras 8 to 10 thereof. “8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.
9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society was a liability and it was shown in the balance sheet on the liability side.
9 Dirbadevi Sahakar Patpedi Ltd. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State cooperative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order.” 11.3.2 Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra), we set aside the order of the Ld. CIT(A) and direct the Assessing Officer to grant the assessee deduction under section 80 P of the Act on this issue. Consequently, grounds raised at S.No.1 and 3 of the assessee’s appeal are allowed.”
As far as the decision of the Hon'ble Supreme Court in Totgars Co–operative Sale Society Ltd. (supra) relied upon by the learned Commissioner (Appeals), it needs to be mentioned as discussed in the decisions referred to above, the facts are completely different. In the case before the Hon'ble Supreme Court, the assessee co–operative society apart from providing credit facilities to its members was also in the business of marketing of agricultural produce grown by its 10 Dirbadevi Sahakar Patpedi Ltd. members. The sale consideration received from marketing agricultural produce of its members was retained in many cases and was invested in short term deposit. The sale considerations were payable to members from whom produces were bought. Thus, the funds retained by the assessee were a liability and was shown in the Balance Sheet in the liability side. Whereas in assessee’s case, firstly, there is no surplus fund available as demonstrated from the Balance Sheet and secondly, the investments made in the fixed deposit is assessee’s own funds and not a liability of the assessee re–payable to the members. Thus, the decision of the Hon'ble Supreme Court in Totgars Co– operative Sale Society Ltd. (supra) was wrongly applied by the learned Commissioner (Appeals) to the facts of the present case. In view of the aforesaid, we have no hesitation in holding that the interest income earned by the assessee on the fixed deposits kept with the banks is to be treated as business income of the assessee and the assessee would be eligible to claim deduction under section 80P(2)(a)(i) on such income. Therefore, allowing the grounds raised by the assessee, we set aside the order of the learned Commissioner (Appeals) on this issue. In view of our aforesaid decision, the alternative grounds raised by the assessee for allowing expenditure on the interest income has become infructuous, hence, not required to be adjudicated.
11 Dirbadevi Sahakar Patpedi Ltd. 10. In the result, assessee’s appeal stands partly allowed. Order pronounced in the open Court on 29.06.2016