DHANORI SEVA SAHKARI MANDLI LTD,NA vs. ARIVS.INCOME TAX OFFICER WARD-2, NAVSARI

Brief facts of the case are that the assessee is a cooperative society engaged in the business of marketing of agricultural produce grown by its members, filed its return of income for A.Y. 2013-14 on 07/09/2013 declaring NIL income. In the computation of income, the assessee claimed various deductions under Section 80P of the Income Tax Act, 1961 (in short, the Act) of Rs. 6,61,452/-. The case was selected for scrutiny. During the assessment, the Assessing Officer noted that the assessee has earned interest income from various banks and depositors and from private bank and other cooperative societies. On show cause notice, the assessee was asked to give bifurcation of interest earned from private bank. The assessee has given bifurcation of such interest of Rs. 1,33,380/- earned from other private bank. On receiving such details, the Assessing Officer issued show cause notice as to why such interest income should not be brought to the tax under the head “income from other sources”. The assessee filed its reply on 03/02/2016. In the reply, the assessee stated that they are cooperative society governed by the provisions of Gujarat Cooperative Societies Act. Investments were permitted under Section 71 of Gujarat Societies Act r.w.s. 20 of Indian Trust Act. No objection was raised by auditor appointed by Registrar, Cooperative Society. The assessee claimed that interest earned on 2 Dhanori Seva Sahkari Mandli Ltd. Vs ITO depositing temporary surplus funds available with them in banks/ securities and for earning interest thereon is eligible for deduction under Section 80P(2)(a)(i) of the Act. To support such submission, the assessee relied on the decision of Hon'ble Uttrakhand High Court in CIT and Anr Vs Iqbalpur Co-operative Cane Development Union Ltd. 2009 TMI 34669 and Hon'ble Patna High Court in Bihar State Housing Cooperative Federation Ltd. Vs CIT 2009 TMI 34659. The assessee submits that all the income from banking business which is referable to Section 80P(2)(a)(i) would qualify for deduction. The reply of assessee was not accepted by the Assessing Officer. The Assessing Officer treated the interest income of Rs. 1,33,380/- as income from other sources by referring the decision of Hon'ble Apex Court in Totgars Co-op Sale Society Ltd Vs ITO (2010) 229 CTR 209 (SC). The Assessing Officer noted that the Hon'ble Apex Court in the said case held that a cooperative Society engaged in providing credit facility to its Members and marketing agricultural produce of its Members, the interest earned by investing surplus fund in short term deposit and government securities falls under the head “income from other sources”.

The Assessing Officer further noted that the assessee in its Profit & Loss Account debited Rs. 1,87,800/- as expenditure on account of income tax which is not allowable business expenses. The assessee was issued show cause notice as to why such expenses should not be brought to tax. The Dhanori Seva Sahkari Mandli Ltd. Vs ITO assessee in its reply dated 03/02/2016 submitted that they are filing revised computation of income by disallowing such income tax expenses in revised computation. The assessee also submitted that it was not intentional and even after deducting such income tax expenses to the Profit & Loss Account, there would not be any tax liability. The reply of assessee was not accepted by the Assessing Officer that income tax expenses cannot be set off against income from activities of assessee and thereby disallowed income tax expenses of Rs. 1,87,800/-.

Aggrieved by the addition in the assessment order, the assessee filed appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee filed detailed written submissions on both the issues. On the issue of treating the interest income as income from other sources, the assessee submitted that similar issue of interest income was allowed in their favour by the ld. CIT(A) in A.Y. 2010-11 and by the Tribunal in A.Y. 2012-13. The assessee also furnished copy of decision of Tribunal in ITA No. 309/Ahd/2016.

The ld. CIT(A) after considering the submission of assessee held that this issue is covered against the assessee by the decision of Hon'ble Jurisdictional High Court in State Bank of India (2016) 72 taxmann.com 64 (Guj) dated 25/04/2016 which was not brought to the notice of Tribunal. Thus, the decision of Tribunal is not helpful to the assessee and thereby upheld the action of Assessing Officer. On the issue of Dhanori Seva Sahkari Mandli Ltd. Vs ITO disallowance of income tax paid, the ld. CIT(A) held that the income tax is not allowable deduction and the Assessing Officer is correctly assessed the same. Further aggrieved, the assessee has filed present appeal before the Tribunal.

I have heard the submissions of the learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the revenue. The ld. AR of the assessee submits that the assessee is a cooperative society mainly engaged in marketing of agricultural produce grown by its members. The assessee also earned certain interest income from cooperative banks. Income of assessee is eligible for deduction under various sub-clauses of Section 80P(2) of the Act. So far as interest income of Rs. 1,33,380/- earned from nationalized banks is concerned, the assessee earned profit of Rs. 1,29,256/- from various trading activities which was added back to the income of assessee. If the disallowance made at the assessment stage and profit earned on various activities are again added back to the income of assessee, the gross total income of assessee would increase to Rs. 11,11,888/- (Rs. 8,49,252 + 1,33,380 + 1,29,256). Against the gross total income of Rs. 11,11,888/-, the income eligible for deduction under various sub-clauses of Section 80P(2) comes to Rs. 28,46,385/- which is evident from the revised computation of total income as filed on record at page No. 27 of paper book. So without prejudice to the Dhanori Seva Sahkari Mandli Ltd. Vs ITO allowability of deduction under Section 80P(2)(a)(i), the item which are disallowed by Assessing Officer at the assessment stage, will have no effect on taxable income as the assesse is having huge gross income being allowed as deduction under Section 80P(2)(d) of the Act. Hence, any addition to the income would not have any effect on the net taxable income of assessee.

On the disallowance of income tax expenses, the ld. AR of the assessee submits that the assessee by way of revised computation filed before the Assessing Officer, has demonstrated that by disallowing such expenses, it will increase the income of assessee which is eligible for deduction under Section 80P of the Act. The ld. AR of the assessee submits that there is no dispute relating to eligibility of deduction under Section 80P(2), the only dispute is with regard to interest income and profit from other activities. Such disallowance of interest expenses will not result into increase of taxable income. On the basis of such submission, the ld. AR of the assessee prayed for deleting this addition as well.

On the other hand, the ld. Sr. DR for the revenue submits that the income tax expenses are not the allowable expenses so it cannot be allowed as deduction. Similarly, the issue of interest income earned from nationalized bank is also covered by the decision of Hon'ble Jurisdictional High Court in State Bank of India (supra) as relied and referred by the ld. CIT(A). The ld. Sr.DR for the revenue submits that all the submissions Dhanori Seva Sahkari Mandli Ltd. Vs ITO of assessee was considered by the ld. CIT(A). The ld. Sr.DR submits that it is not the question before the Tribunal that the deduction of assessee are much more than the disallowance, the real dispute is that whether the assessee is eligible for deduction of interest expenses or the treatment of interest income earned from nationalized banks is deductible under Section 80P(2)(a)(ia) of the Act or to be treated as income from other sources. The ld. CIT(A) has passed a well-reasoned order, which should be upheld.

I have considered the submissions of both the parties and have gone through the orders of the lower authorities carefully. Ground No. 1 relates to disallowance under section 80P. I find that issue of deduction of interest income earned on deposits with the nationalized bank is covered against the assessee by the decision of Hon’ble Jurisdictional High Court in State Bank of India Vs CIT (supra), held that in case of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, what is deductible under section 80P is the whole of the amount of profits and gains of business attributable to any one or more such activities. The Supreme Court in Totgars Co-operative Sale Society v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC) has, while giving a precise meaning to the words 'profits and gains of business' mentioned in section 80P(2), observed that the assessee in that case regularly invested funds not immediately Dhanori Seva Sahkari Mandli Ltd. Vs ITO required for business purposes and was of the view that interest on such investments, therefore, cannot fall within the meaning of the expression 'profits and gains of business'. It was held that 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 or marketing of the agricultural produce to its members. The court further held that the words 'the whole of the amount of profits and gains of business' emphasise 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. The court observed that in that particular case, the evidence showed that the assessee-society earned interest on funds which were not required for business purpose at the given point of time. Therefore, in the facts and circumstances of the case, the court was of the view that such interest income falls in the category of 'Other income' which had rightly been taxed by the department under section 56.

Considering the aforesaid decision of Hon’ble Jurisdiction High Court, which is binding on this Tribunal, therefore, I do not find any reasons to interfere with the finding of the lower authority, which I conform. In the result, this ground of appeal