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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SHRI NARENDRA PRASAD SINHA
These three appeals are filed by the assessee against the orders of the National Faceless Appeal Centre (NFAC), Delhi, (in short ‘the CIT(A)’), dated 31.01.2024 for the Assessment Years 2017- 18 & 2018-19 and dated 07.02.2024 for the A.Y. 2020-21. As the issue involved in all three appeals are identical, they were heard together and are being disposed of vide this common order. to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 2 – for A.Y. 2017-18 as the lead case. The grounds taken by the assessee in this appeal are as under:
“(1) That on facts, in law, and on evidence on record, the learned National Faceless Appeal Centre (NFAC) has grievously confirming the disallowance made u/s BOP (2) (a) (1) of the Act. erred in of Rs.1,95,850/ (2) That on facts, in law, and on evidence on record, the learned National Faceless Appeal Centre (NFAC) has grievously erred in confirming the disallowance of Rs.29,01,898/ made u/s 80P (2) (d) of the Act. (3) That on facts, in law, and on evidence on record, it ought to have been held that the appellant 1s 80P (2) (a) (1), entitled to deduction u/s 80P (2) (a) (111),80P(2) (a) (iv) and 80P(2) (c) of the Act. (4) The appellant craves leave to add, alter, amend any ground of appeal.”
3. Ground No.1 pertains to disallowance of Rs.1,95,850/- under Section 80P(2)(a)(i) of the Income Tax Act, 1961 (in short ‘the Act’). The assessee is a cooperative credit society engaged in providing credit facility to its members. It had claimed deduction of Rs.1,95,850/- in respect of interest received from Bank of Baroda (on FDR) u/s. 80P(2)(a)(i) of the Act, which was disallowed by the AO. Shri Mehul Patel, Ld. AR appearing for the assessee submitted that the assessee was carrying on business of providing credit facilities to its members and, therefore, it was eligible for deduction u/s. 80P(2)(a)(i) of the Act. He further submitted that the surplus funds were invested in FDRs with Bank of Baroda and, therefore, the interest received on such FDRs was to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 3 – part of business activity of the society and should have been allowed as deduction u/s. 80P(2)(a)(i) of the Act. In the alternative, Ld. AR submitted that the pro-rata expenses incurred for earning this interest income should be allowed. In this regard, he has placed reliance on the decision of this Tribunal in the case of Shri Laxmi Co.operative Credit Society Ltd. vs. ITO in dated 19.07.2023.
4. Per contra, Shri N. J. Vyas, Ld. Sr. DR supported the orders of the AO and the Ld. CIT(A).
5. We have carefully considered the rival submissions. The provision of Section 80P(2)(a)(i) of the Act stipulates that the income derived by a cooperative society engaged in carrying business of banking or providing credit facilities to its members shall be allowed as deduction. The assessee is not engaged in banking business. Further, the interest earned by the assessee on the FDRs made with Bank of Baroda cannot be held as income derived from providing credit facilities to its members. Therefore, the AO had rightly treated this interest income as ineligible for deduction u/s. 80P(2)(a)(i) of the Act. The Hon’ble Gujarat High Court in the case of State Bank of India vs. CIT (72 taxmann.com 64) had categorically held that investing the surplus funds with State Bank of India was no part of business of providing credit to its members and that the character of the interest derived on FDRs with Banks was different from the income attributable to the business of the society of providing to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 4 – credit facilities to its members. We, therefore, do not find any merit in the ground as taken by the assessee. The interest of Rs.1,95,850/- derived by the assessee on FDR with Bank of Baroda was rightly disallowed u/s. 80P(2)(a)(i) of the Act. Therefore, the disallowance as upheld by the Ld. CIT(A) is confirmed.
As regarding alternate claim of the assessee to allow pro- rata expenses on earning this interest, it is found that in the case of Shri Laxmi Co. operative Credit Society Ltd. (supra), relied upon by the assessee, the matter was remanded back to the file of the AO to examine this claim. However, in the present case, the AO had already examined this contention of the assessee and given a categorical finding in the assessment order that the assessee was not eligible for proportionate interest expenditure as the assessee had not made any expenditure towards earning of this interest income from the above bank/institutions. In order to be eligible for any deduction in respect of earning of interest on FDRs, the assessee has to first establish that it had incurred certain expenditure for earning this income. No such evidence has been brought on record. Further, the assessee has also not controverted the findings as given by the AO. Under the circumstances, we do not find any merit in the claim of the assessee to allow proportionate expense.
In view of the above facts, the Ground No.1 as taken by the assessee is dismissed. to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 5 –
Ground No.2 pertains to disallowance of Rs.29,01,898/- u/s. 80P(2)(d) of the Act. The assessee had earned interest income of Rs.29,01,898/- from The Mehsana District Central Co-operative Bank Ltd. The AO held that the interest earned on the deposit with Cooperative Bank was not allowable as deduction u/s. 80P(2)(d) of the Act, following the decision of Hon’ble Karnataka High Court in the case of PCIT vs. Totagars Co- operative Sale Society (2017) 83 taxmann.com 140 (Kar). The AO held that the assessee had earned interest income from investment with cooperative bank and not a cooperative society and, therefore, it was not eligible for deduction u/s. 80P(2)(d) of the Act. The Ld. CIT(A) had upheld the order of the AO by relying upon the decision of Hon’ble Jurisdictional High Court in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. vs. ACIT, [2022] 140 taxmann.com 602 (Guj).
Shri Mehul Patel, the Ld. AR explained that the interest earned by the assessee was from The Mehsana District Central Co-operative Bank Ltd., which was first registered as a cooperative society and, thereafter, availed permission for carrying on banking activity. Therefore, the basic nature of Mehsana District Central Co-operative Bank Ltd. was a cooperative society which was engaged in the business of banking. The Ld. AR submitted that the interest income received from Mehsana District Central Co-operative Bank Ltd. was essentially in the nature of interest derived from investment with other cooperative society and was, therefore, eligible for to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 6 – deduction u/s. 80P(2)(d) of the Act. The Ld. AR has also drawn our attention to the decision of Hon’ble Gujarat High Court in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (supra), wherein it was initially held that the interest derived from surplus funds invested by assessee in nature of FDRs with other cooperative bank will not fall in the category to be entitled to claim of deduction u/s. 80P(2)(i) & 80P(2)(d) of the Act. He submitted that the Hon’ble Court had subsequently vide order dated 26.04.2024 modified that order and clarified that interest on FDRs with “other Banks” only will be ineligible for deduction u/s. 80P(2)(i) & 80P(2)(d) of the Act. The Ld. AR, therefore, submitted that as per amended order of Hon’ble Gujarat High Court, the interest derived from investment with other cooperative banks shall be eligible for deduction u/s. 80P(2)(d) of the Act. Accordingly, the assessee was eligible for deduction u/s. 80P(2)(d) of the Act in respect of interest derived on FDR with The Mehsana District Central Co-operative Bank Ltd.
Per contra, Shri N. J. Vyas, Ld. Sr. DR submitted that the The Mehsana District Central Co-operative Bank Ltd. which was commercially run bank cannot be considered as a cooperative society. Therefore, the AO had rightly disallowed the claim of the assessee made u/s. 80P(2)(d) of the Act in respect of interest on FDR with The Mehsana District Central Co-operative Bank Ltd. The Ld. Sr. DR strongly supported the orders of the AO and the Ld. CIT(A). to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 7 –
We have carefully considered the rival submissions. The deduction u/s. 80P(2)(d) of the Act is available in respect of interest or dividend derived by a cooperative society from its investment with any other cooperative society. The AO had disallowed the interest received by the assessee on FDRs with The Mehsana District Central Co-operative Bank Ltd. for the reason that it was a cooperative bank was not a cooperative society. This presumption itself is not found to be valid. The cooperative banks are first registered as a cooperative society and, thereafter, they are engaged in carrying on business of banking after obtaining necessary approval from the competent authorities. The cooperative banks are also registered under the respective State Cooperative Societies Act or the Multi-State Cooperative Societies Act, though they function specifically as financial institutions. In addition to their registration under cooperative laws, cooperative banks are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949, which governs their banking operations. Thus, the cooperative banks are registered as cooperative societies but are subject to additional regulations under the Banking Regulation Act, while non-banking cooperative societies are regulated only by the cooperative laws. Thus, the cooperative banks are essentially cooperative societies.
The moot question to be decided here is whether the investment made by the assessee, which is a cooperative society, with a cooperative bank, shall be considered as investment with to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 8 – other cooperative society in order to avail the deduction u/s 80P(2)(d) of the Act. This issue was examined by the Hon’ble Gujarat High Court in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (supra). Though this decision was in the context of reopening u/s 147 of the Act, the Hon’ble Court had also examined the provision of section 80P of the Act. The finding of Hon’ble High Court in para-19 of the order dated 04/01/2022 was as under:
“19.… However, in the given case, from plane reading of the reasons recorded for reopening the assessment, we find that the Assessing Officer has rightly formed opinion that the interest derived from the surplus funds invested by the assessee in the nature of FDRs other than the Cooperative Societies i.e. other Cooperative Banks and Nationalized Bank, will certainly not fall in the category to be entitled to claim the deductions under section 80P(2)(i) and section 80P(2)(d).”
Thus, the Hon’ble Court had initially held that the interest derived from surplus funds invested as FDRs in other than cooperative societies i.e. other cooperative banks and nationalized banks was not eligible for deduction u/s. 80P(2)(d) of the Act. However, vide subsequent order dated 26.04.2024, the above observation as given in Para 19 of the order has been modified and the word ‘cooperative’ has been omitted. Thus, as per the amended order, the interest derived on FDRs with other banks and nationalized banks only will not be entitled for deduction u/s. 80P(2)(d) of the Act. The oral order dated 26.04.2024 of the Hon’ble Court is reproduced below:
“1. This note for speaking to minutes is filed by learned advocate Mr. S.N. Divatia appearing for the original petitioners inviting our attention to the error crept in the to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 9 – paragraph no.19 of the order dated 04.01.2022 passed by the Coordinate Bench in the captioned petition. It is submitted that by typographical error the word 'Other Cooperative Banks' has been incorporated in paragraph no.19 by mistake, which is required to be corrected.
Having heard learned advocate Mr. S.N. Divatia for the petitioner and having perused the order and a note placed on record, in para no.19, words "other Cooperative Banks" after the words "other than the Cooperative Societies i.e." is modified and be read as "other Banks". The speaking to minutes is accordingly disposed of.” 3.
Thus, it is clear from the amended order of the Hon’ble jurisdictional High Court in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (supra), that the interest derived on FDRs with other cooperative banks will now be eligible for deduction u/s. 80P(2)(d) of the Act. In view of the amended order of the Jurisdictional High Court and also the fact that the cooperative banks are registered as cooperative societies, the disallowance of interest derived by the assessee from The Mehsana District Central Co-operative Bank Ltd. cannot be sustained. Therefore, the disallowance of Rs.29,01,898/- as made by the AO u/s. 80P(2)(d) of the Act is deleted. The ground taken by the assessee is allowed.
Ground No.3 taken by the assessee was an alternate ground and not pressed. Hence, this ground is dismissed.
In the result, appeal of the assessee is allowed in part.
The grounds taken by the assessee in & 527/Ahd/2024 are identical to the grounds raised in ITA to 527/Ahd/2024 [The Ladol Vivth Karyakari Sahkari Mandli Ltd. vs. ACIT] - 10 – No.525/Ahd/2024 except the quantum of disallowance. While the Ground No.1 regarding disallowance u/s.80P(2)(a)(i) of the Act is dismissed, the Ground No.2 regarding disallowance under Section 80P(2)(d) of the Act is allowed, in both the appeals. Accordingly, & 527/Ahd/2024 are also allowed in part.
In the result, all the three appeals of the assessee are allowed in part.