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Income Tax Appellate Tribunal, KOLKATA ‘A(SMC
Before: Shri P.M. Jagtap
This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals), Asansol dated 22.08.2014 and I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 2 of 9 the same is being disposed of along with the Cross Objection filed by the assessee being C.O. No. 102/KOL/2014.
2. The solitary issue involved in the appeal of the Revenue relates to the deletion by the ld. CIT(Appeals) of the addition of Rs.35,37,804/- made by the Assessing Officer by disallowing the claim of the assessee for deduction under section 80P(2) on account of interest income by treating the same as income from other sources.
The assessee in the present case is a Cooperative Society, which is engaged in banking business. During the course of re-assessment proceedings under section 147 read with section 148, the assessee was required by the Assessing Officer to explain as to why interest income of Rs.1,10,44,088/- earned from investment and other deposits should not be considered as income from other sources not eligible for deduction under section 80P(2). In reply, the following submissions were made by the assessee in writing:- “(i) That In the above case Hon'ble Supreme Court has decided that interest from surplus and invested in shares, short term deposit will be treated as income from other sources and taxable under section 56 and benefit of section 80P(2) of the I.T. Act is not available.
(ii) That above society's business referred in above Supreme Court judgment was marketing of agricultural produce of its members and giving credit to its members. But it was not carrying banking business.
(iii) That the entire income of the assessee from is income from banking business and is exempt under section 80P(2) as the above ratio of judgment of Hon'ble supreme court is not applicable as the above co-operative society was a marketing and credit society and not banking.
(iv) That in the case of the assessee, the assessee is a co- operative bank a nd its only business is banking there can
I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 3 of 9 never be any income from other sources defined by banking regulation act 1949 as definition of banking given in the act.
(v) In support of the above, the assessee relied upon the decision of Supreme Court in the case Karnataka State Co- operative Apex Bank, [251 ITR 194], Mehsana District Central Co-operative Bank Ltd. vs. ITO and another of Hon'ble High Court H.P. in which it was held that interest earned by a co-operative bank on fixed deposits with another co-operative bank in complier of state Co-operative Society Act is income from banking business which is allowable U/s 80P of the I.T. Act. (vi) That the following details are given below for your kind perusal: Interest Rs.110,44,088.39 income from investment Income Rs. 31,58,574.80 Rs.142,02,663.19 from other receipts Interest 37460093 x Rs.2,59,03,007.00 paid on 243780454 deposits for ______________________ making 352547423 above investment Loss from Rs.1,17,00,344.00 investment from deposits and other investment Besides above, more than 50% of the administrative and other expenses are incurred for operating, collecting and operation of S.B. a/c., current a/c, RD a/c and other term deposits.
(vii) That details of interest earned for loans and investment and interest paid on borrowing and deposits is attached herewith: Interest on Rs.468,01,046.00 loan
I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 4 of 9 Interest on Rs.110,44,088.00 investment Total interest Rs.5,78,45,134.00 income Less: Interest Rs.80,56,444.00 on borrowings Interest on Rs.374,60,093.00 deposits Total interest Rs.4,55,16,537.00 expenditure Surplus Rs.1,23,28,597.00 interest income The above submissions made by the assessee were not found to be fully acceptable by the Assessing Officer. According to him, the total investment made by the assessee as on 31.03.2005 was Rs.20.77 crores as against the maximum statutory reserve required to be created by the assessee as on that date at Rs.14.10 crores. He, therefore, held that the surplus investment of Rs.6.67 crores made by the assessee was not required to be made for the purpose of its banking business and the interest earned thereon was not eligible for deduction under section 80P being in the nature of income from other sources. He accordingly worked out such interest on proportionate basis at Rs.35,37,804/- and disallowed the claim of the assessee for deduction under section 80P to that extent in the assessment completed under section 143(3)/147 vide an order dated 13.02.2013.
4. Against the order passed by the Assessing Officer under section 143(3)/147, an appeal was preferred by the assessee before the ld. CIT(Appeals) and after considering the submissions made by the assessee and the various judicial pronouncements cited in support, the ld. CIT(Appeals) deleted the addition made by the Assessing Officer by way of disallowance of assessee’s claim for deduction under section 80P to the extent of Rs.35,37,804/- for the following reasons given in paragraph nos. 9 & 10 of his impugned order:-
I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 5 of 9 “9. Before proceeding further the extracts of decision in of ITAT "C" Bench, Kolkata is reproduced below(aspects not connected with the case are struck off and relevant aspects are given in bold):
The assessee, a Co-Operative Society, in the relevant assessment year, was engaged in the banking activities providing credit facilities to its members. It had filed its return of income showing total income at "NIL" after claiming deduction u/s. 80P of the Income Tax Act. The Assessing Officer examined the issue as to whether the income derived from interest on Government Securities and from banks could be said to be income derived by the assessee from the business of banking within the meaning of section 80P to qualify for exemption. He observed that the Co-operative Bank was legally obliged to place certain Government Securities with SBI/RBI and these securities could not be withdrawn by the said bank without any special circumstances. After considering the decisions of Hon'ble Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. vs. ACIT [1996] 218 ITR 438 (SC) and in the case of CIT vs. Karnataka State Co-Operative Apex Bank [2001] 251 ITR 194 (SC) and also after considering the provisions of Section 24 of the Banking Regulation Act, the Assessing Officer came to the conclusion that as per Section 24 of the said Act the maximum limit had been fixed at 40% of the total demand and time liabilities and, therefore, the net profit earned by investing the amount, which is in excess of 40% was not eligible for deduction u/ s. 80P. He also observed that total investment required to be made in SLR and non-SLR is within the ambit of Section 24 of Banking Regulation Act. After considering the details of investment made by the assessee, he determined the income at Rs.1,55,46,560/-. Before Ld. CIT(A), assessee had only assailed the finding in regard to taxable income determined at Rs.l,55,46,560/ - out of interest relatable to excess investment of Rs.1,55,46,560/-. Before Ld. CIT(A), it was further pointed out that nowhere Assessing Officer had defined SLR and non-SLR nor he had given a break-up of this investment. Therefore, the very premise that assessee bank had maintained in cash, gold or unencumbered approved securities an amount more than 40% of its total demand and time liabilities itself was factually incorrect. Further, it was pointed out that even in the circumstances, where the investment in SLR exceeded 40% out of the demand and time liabilities, the deduction u/s. 80P(2)(a)(i) of the Income Tax Act could not be denied in respect of that part of net interest which was attributable to investments otherwise than in conformity with Section 24 of the Banking Regulation Act. The assessee relied on the following decisions to submit that assessee bank was entitled to claim deduction u/s. 80P(2)(A)(a)(i) in respect of income earned from utilization of its voluntary reserves other than statutory reserves provided that the income derived by the I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 6 of 9 assessee from the investment of its voluntary reserves was utilised by it in the course of ordinary banking business :-
(i) Mehsana District Central Co-operative Bank Ltd. vs.- I.T.O. [2001]251 ITR 522 (SC); (ii) Gujarat State Co-operative Bank Ltd. vs. CIT [2001] 251 ITR 522 (SC); (iii) Burdwan Central Co-operative Bank Ltd.; (iv) Farukhabad Gramin Bank; (v) Durgapur Steel Peoples' Co-operative Bank Ltd.; (vi) Paschim Banga Gramin Bank.
Ld. CIT(A) deleted the addition by observing as under :-
"As per the BR Act, a co-operative bank was obliged to maintain in cash, gold or unencumbered approved securities an amount which should not be at the close of the business of any day less than 25% or such other percentage not exceeding 40% of total of its demand and time liabilities. The AO combined both the investments (in statutory and non-statutory reserves which he mentioned as SLR and non-SLR in the impugned order) to compute the percentage. In fact, the investment in the statutory reserves was very much within the limits laid down in the BR Act. It has to be emphasised that such limits are not fixed in tile BR Act or the circulars of the RBI in respect of anyone particular day. The exact stipulations to be complied by the co- operative banks with regard to the cash and statutory reserves are as under:
Cash Reserve Ratio(CRR): In terms of section 18 of the Banking Regulation Act (B. R. Act) 1949 (As applicable to co-operative societies) every co-operative bank is required to maintain on a daily basis cash reserve, the amount of which shall not be less than 3% of its demand and time liabilities (DTL) as obtaining on the last Friday of the second preceding fortnight.
Statutory Liquidity Ratio (SLR): In terms of section 24(2AXa) of the Banking Regulation Act (BR Act) 1949 (As applicable to co-operative societies) every co-operative bank is required to maintain on a daily basis liquid assets, the amount of which shall not be less that 25% or such other percentage not exceeding 40%(as may be notified), of its demand and time Liabilities as obtaining on the last Friday of the second preceding fortnight. "
3. Ld. Departmental Representative relied on the order of Ld. CIT(A) and on the decision of Hon'ble Supreme Court in the case of Totgars' Cooperative Sale Society Ltd. vs. ITO, Karnataka [2010] 188 Taxman
I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 7 of 9 282 (SC) wherein it was held that interest earned on funds which were not required for business purposes, at the given point of time, was not eligible for deduction u/s. 80P, as such, interest income fell in the category of other income taxable u/s. 56 of the Income Tax Act. However, in the present case Assessing Officer has not given any such finding but has proceeded on the premise that total investment exceeded 40% limit laid down u/s. 24 of the "Banking Regulation Act.
We have considered the submissions of both the parties and have perused the records of the case. The Assessing Officer had proceeded on the premise that total investment required to be made in SLR and non-SLR was within the ambit of Section 24 of the Banking Regulation Act. However, it was not disputed that the investments were made in the normal course of banking business and therefore, in view of the decision of Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. (supra), the assessee was entitled for deduction u/s. 80P wherein it was held as under :-
(i) That interest on investments from statutory reserves was eligible for deduction under Section 80P(2)(a)(i). Whether income derived by the assessee co-operative bank from the investment of its voluntary reserves other than statutory reserves is exempt under section 80P(2)(a)(i) depended upon whether the voluntary reserves were utilized in the course of its ordinary banking business In view of the decision of Honble Supreme Court (supra), we do not find any reason to interfere with the order of Ld. CIT(A) and confirm the same.
The above order of Hon. ITAT r.w order in Mehsana District Central Co-operative Bank Ltd. vs. I.T.O.[2001] 251 ITR 522 (SC) provides clarity on two aspects. They are - a. The income from even non-statutory reserves is income from business since the funds were utilised in ordinary course of business, b. That income from banking business is eligible for deduction under section 80P.
In view of the above, I direct Assessing Officer to delete the addition of Rs.35,37,804/- made in the Assessment Order. This decision is after considering the fact that unlike in the case of Bankura District Central Co-operative Bank, here the Assessing Officer has given a computation of SLR and non-SLR amounts, but the facts otherwise, as stated above in a and b, nullifies the benefit of the finding”.
Aggrieved by the order of the ld. CIT(Appeals), the Revenue has preferred this appeal before the Tribunal.
I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 8 of 9
I have heard the arguments of both the sides and also perused the relevant material available on record. As submitted by the ld. counsel for the assessee, the decision of the Hon’ble Supreme Court in the case of Totgar’s Cooperative Credit Society Limited [322 ITR 283] is not applicable in the present case as the assessee in the said case was engaged in the business of providing credit facilities to its members as well as providing markets for the agricultural products of its members, while the assessee in the present case is engaged in banking business. He has relied on the decision of the Hon’ble Supreme Court in the case of Mehsana District Central Cooperative Bank Limited, wherein it was held that whether income derived by the assessee Cooperative Bank from investment of its voluntary reserves other than statutory reserves is exempt under section 80P(2)(a)(i) depends upon whether the voluntary reserves were utilized by the Society in the course of its ordinary banking business.
The ld. counsel for the assessee has contended that the relevant investment in the present case was made by the assessee from refund generated from banking business and the said investment was also made by the assessee in the course of its ordinary banking business. However, as rightly pointed out by the ld. D.R., there is no finding given either by the Assessing Officer or even by the ld. CIT(Appeals) on this aspect of the matter. Even relevant balance-sheet and profit & loss account of the assessee is not placed on record before me to verify this aspect. In my opinion, this aspect, which is crucial to decide the issue involved in the present appeal, requires verification and since the ld. counsel for the assessee has also not raised any objection in this regard, I set aside the impugned order of the ld. CIT(Appeals) and restore the matter to the file of the Assessing Officer for deciding the same afresh after verifying the claim of the assessee that the investment in question over and above the I.T.A. No. 1885/KOL./2014 Assessment year: 2005-2006 & C.O. No.102/KOL/2014 (in Assessment Year: 2005-2006 Page 9 of 9 statutory requirement was not only made by the assessee from the funds generated from its banking business but was also made in the normal course of its banking business. 7. The Cross Objection filed by the assessee is only in support of the impugned order of the ld. CIT(Appeals) and as agreed even by the ld. counsel for the assessee, the same is liable to be dismissed as infructuous.