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Income Tax Appellate Tribunal, DIVISION BENCH ‘B’, CHANDIGARH
Before: MS.DIVA SINGH & MS.ANNAPURNA GUPTA
IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘B’, CHANDIGARH BEFORE MS.DIVA SINGH, JUDICIAL MEMBER AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA Nos.905 to 908/Chd/2017 (Assessment Years :2009-10 to 2012-13) The Tiara Co-operative Agricultural Vs. The Income Tax Officer, Service Society Limited, Dharamshala.
Village &PO Tiara
Tehsil & District Kangra. PAN:AACFT6845N (Appellant) (Respondent)
Appellant by : Shri Gagan Singh Guleria, Adv. Respondent by : Smt.Chanderkanta, Addl.CIT Date of hearing : 03.04.2018 Date of Pronouncement : 01.05.2018
ORDER PER BENCH:
All the above appeals have been filed by the same
assessee against the separate orders of Ld. Commissioner of
Income Tax (Appeals), Palampur, H.P. (hereinafter referred
to as (‘Ld.CIT(Appeals’) all dated 8.3.2017 & relating to
assessment years 2009-10, 2010-11, 2011-12 and 2012-13
respectively.
It was common ground that the issue involved in all
the appeals was identical. All the appeals were therefore
heard together and are being disposed off by this common
order.
The sole issue in all the above appeals relates to denial
of deduction claimed by the assessee cooperative society u/s
80P(2)(a)(i) of the Income Tax Act, 1961 (in short ‘the Act’)
on interest earned on FDRs kept with bank.
Brief facts relating to the case, as emanating from the
orders below, is that the assessee is a primary agricultural
Service Society engaged in accepting deposits and providing
credit facilities to its members and in sale and distribution
of PDS(Public Distribution System) items under scheme of
Himachal Pradesh Government. The assessee had in all the
impugned years earned income on FDRs kept with bank and
claimed deduction u/s 80P(2)(a)(i) of the Act on the same as
under:
Assessment Year Interest earned on FDRs with bank
2009-10 Rs.7,42,295/- 2010-11 Rs.20,17,349/- 2011-12 Rs.18,25,124/- 2012-13 Rs.27,28,485/-
The same was denied by the Assessing Officer following
the ratio laid down by the Hon'ble Apex Court in Totgars
Cooperative Sale Society (2010) 322 ITR 283 (SC) that the
interest income earned from investment of surplus funds in
Banks and government securities could not be attributable
to the activity carried out by the society and hence was not
entitled for deduction u/s 80P(2)(a)(i) of the Act.
The Ld.CIT(Appeals) upheld the order of the Assessing
Officer. Before the Ld.CIT(Appeals) the assessee also took
up an alternative plea that against the aforestated income
of interest earned from FDRs with banks, the deduction on
account of interest paid by it should be deducted and only
the net interest income be subjected to tax. The said
contention/ground raised by the assessee was also
dismissed by the Ld.CIT(Appeals)for the reason that no
nexus had been established by the assessee of the interest
paid with the interest earned by the assessee on FDRs made
with the banks.
Aggrieved by the same, the assessee has come up in
appeal before us, raising the following effective common
grounds in all the above appeals:
“1. That the order of the Assessing Officer as upheld by the Ld. Commissioner of Income Tax (Appeals) Palampur disallowing claim of the Appellant u/s 80P(2)(a)(i) in respect of the Interest income received form Nationalized Bank amounting to Rs.7,42,295/- being business income claimed and holding the same as income from other sources is bad in law and needs to be set- aside. 2. That, in alternatively and without prejudice to above, if the Interest earned on deposits maintained with the Nationalized bank is treated as Income from Other sources, the Ld ITO, Ward Dharamshala may be directed to allow proportionate deduction for Interest paid against the Interest received from the Nationalized Banks. 8. In ground No.1, the assessee has challenged the action
of the Ld.CIT(Appeals) in upholding the disallowance of
deduction made by the Assessing Officer u/s 80P(2)(a)(i) of
the Act on the interest income earned by the assessee
cooperative society on account of FDRs kept in bank.
We have heard rival contentions. Since the issue relates
to deduction claimed u/s 80P(2)(a)(i) of the Act it is relevant
to reproduce the section as under:
80P. (1) 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. ……………………………………………………….. ……………………………………………………… ……………………………………………………… The whole of the amount of profits and gains of business attributable to any one or more of such activities” 10. As is evident from a bare perusal of the above section,
income earned by cooperative societies carrying on business
of banking or providing credit facilities to its members is
entitled to claim deduction under the said section, of income
earned from carrying on the aforesaid business activities.
Having clarified the position relating to the deduction
claimed by the assessee, it is pertinent to bring out the
facts relating to the issue in the present case. The business
activity carried on by the assessee in the present case is of
providing credit facilities to its members which was stated
by the Ld. counsel for assessee before us and reaffirmed on
a pointed and specific query asked in this regard to him.
Further this fact emanates from the submissions made by
the Ld. counsel for assessee before the lower authorities also
wherein it has been categorically admitted by the assessee
that it was engaged in the services of providing credit
facilities to its members and encouraging thrift and savings
amongst its members by accepting deposits and offerings
and providing other suitable facilities. It is also not disputed
that the income in dispute which has been denied deduction
u/s 80P(2)(a)(i) of the Act has been earned from FDRs kept
with banks who are not members of the assessee cooperative
society.
In the backdrop of the above facts and proposition of
law, it has to be seen whether the impugned interest income
earned from FDRs could be said to be earned from the
activities of providing credit facilities to its members.
The contention of the Ld. counsel for assessee
consistently before the lower authorities and even before us
is that the FDRs made with banks were made in the normal
course of carrying out its activities of collecting deposits
from its members. It was contended that the amount
received as deposits from its members, during the course of
carrying on business, were parked in nationalized banks to
maintain liquidity and provide ready availability of funds for
repayment of deposits of the depositors and for redemption
of deposits on maturity. The Ld. counsel for assessee drew
our attention to the submissions made before the
Ld.CIT(Appeals) reproduced at para 4.2 of the order as
under:
“4.2 During appeal, the appellant filed written submissions as under: In this context, it is submitted that, the Appellant is a Primary Co operative Agricultural Service Society registered under Section 2(19) of the Co-operative
Societies Act, 1912 engaged in- the services of providing credit facilities to its Members and encourages thrift and savings among its Members by accepting deposits and offerings and provide other suitable facilities and also engaged in supplying of Public Distribution system (PDS) items on behalf of State Government. The Assessee has deposited its funds with the Nationalized Banks and other Cooperative institutions/Banks in shape of LTD's and has received interest thereon. The amount deposited by the Assessee Society with the Nationalized Banks and other Cooperatives were received as deposits from its Members and Nominal Members during the course of earning on its business and the Funds parked in deposits with the Nationalized Banks is in order to maintain liquidity and provide ready availability of Funds for repayment of deposits of the depositors and for redemption of deposits on maturity. The Interest received from these deposits "with the Nationalized Banks other than Cooperatives Institutions/Banks have direct nexus to the interest paid proportionately as the Funds being Operational Funds. The Appellant maintains a cycle and rotation of funds received from the depositors invested with the Banks and on maturity are paid to the Depositors and the Interest received is successively utilized for the purpose of business as being paid to the depositors as Interest on their deposits which are maintained in shape of Saving Accounts, FDR's Account & Recurring Deposits. Hence the Funds parked -with the Bank in shape of LTD's/FDR's are not Surplus Funds and the Interest derived from these deposits is nothing but income attributable to providing credit facilities and is taxable under the head "Income from Business & Profession" and making Appellant entitled for deduction under Section 80 P(2)(a)(i) of the Act...” 13. Ld.Counsel therefore contended that the interest
income earned from banks was in the regular course of
carrying on its business and thus entitled to deduction u/s
80P(2)(a)(i) of the Act. The Ld. counsel for assessee further
relied upon the following case laws in support of his
contention:
ITO, Patan Vs M/s Jafari Momin Vikas Coop Credit Society Ltd. ITAT-Ahmedabad ITANo. 1491/Ahd/2012 C.O. No. 138/Ahd/2012 2. Shri Venkatesh Nagari Sah. Pat Sanstha Maryadit, Sangli v. ITO, Sangli ITAT-Pune ITA No. 2178/PN/2013. 3. Mahesh Nagari Sahkari Pat Sanstha Ltd. Vs Income Tax Officer, Sangli ITAT-Pune Bench ITA No. 2180/PN/2013.
Shivneri Nagari Sah. Pat Sanstha Maryadit Vs Income Tax Officer, Kolhapur ITAT-Pune Bench ITA No. 2223/PN/2013. 14. Further the Ld. counsel for assessee contended that
reliance placed by the lower authorities, while confirming
the disallowance, on the decision of the Hon'ble Apex Court
in the case of Totgars Cooperative Sale Society (supra) was
misplaced since it was distinguishable on facts. It was
contended by the Ld. counsel for assessee that in the said
case the Hon'ble Apex Court had held that the interest
income earned on FDRs did not qualify for deduction u/s
80P(2)(a)(i) of the Act since it was earned on surplus funds
which were invested in FDRs with banks. In this factual
background, it was pointed out, that the Hon'ble Apex Court
held that the said interest income could not be said to be
relatable to the business of providing credit facilities to
members and thus was not eligible for deduction u/s
80P(2)(a)(i) of the Act. Ld.Counsel for the assessee contended
that in the present case it was not investment of surplus
funds which had earned interest but that made in the
regular course of carrying on the business of the assessee,
and hence the present case was clearly distinguishable on
facts from the case of Totgars (supra). Ld.Counsel for the
assessee drew our attention to this distinction of fact
brought out in decisions of the ITAT, relied upon before us
above.
The Ld. DR per contra, relied upon the order of the
CIT(Appeals) stating that the interest earned on FDRs with
banks could not be said to qualify by any stretch of logic to
be income earned in the course of carrying on the business
of the assessee of providing credit facilities to its members
and the decision of the Hon'ble Apex Court in the case of
Totgars Cooperative Sale Society (supra) had been rightly
applied in the present case to reject the claim of deduction
of the assessee on the said income u/s 80P(2)(a)(i) of the
Act.
We are in agreement with the contention of the
Ld.Counsel for the assessee that where the FDR’s are made
with Banks from the operational funds of the cooperative
society during the course of carrying out its activity of
providing credit facilities to its members, the interest earned
thereon is incidental to the said activity and can be safely
attributed to the carrying out of the said activity, Such
interest earned is thus entitled to deduction u/s 80P(2)(a)(i)
of the Act. The Hon’ble Patna High Court in the case of Bihar
State Cooperative Housing Federation Ltd. Vs. CIT (2009)
315 ITR 286 had an occasion to deal with an identical
situation wherein it was found that the nature of activity in
which the assessee was involved, being collecting deposits
from its members and providing credit facilities to its
members, created a situation where short term surplus
funds were available with it which were hence deposited in
banks and interest earned thereon. The Hon'ble High Court
held that this act of making deposits in the banks therefore
was incidental to the activity of the assessee of providing
credit facilities to its members and the income earned
therefrom, though not directly relatable to the said activity,
was incidental to that activity and hence was to be treated
as earned in the course of carrying out that activity and
therefore eligible for deduction u/s 80P(2)(a)(i) of the Act.
The relevant findings of the Hon'ble High Court in this
regard are as under:
“9. Having considered the rival submissions, I am of the opinion that the interest earned on the deposits made does not arise out of one or more of the activities specified in s. 80P(2)(a)(i) of the Act but the interest received by the assessee on the bank deposit is ancillary and incidental to carrying on the business of providing credit facility to its members and, as such, exempt under the aforesaid provisions. It may be stated herein that the assessee deposits surplus funds available with it in banks and earns interest thereon. The nature of activity in which the assessee is involved clearly creates a situation when surplus fund is available to it which it deposits in bank and earns interest thereon. The placement of such fund being incidental and ancillary to carrying on of the business of providing credit facility to its members by reason of s. 80P(2)(a)(i) of the Act, same is exempt under the aforesaid provisions. 10. The view which I have taken finds support from the judgment of the Supreme Court in the case of CIT vs. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) in which it has been held as follows :
"The question is whether we agree with the reasoning in Madhya Pradesh Co-operative Bank Ltd. (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the RBI to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of s. 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within s. 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
In the premises, we take the view that the decision of this Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee." 11. In view of aforesaid, my answer to the first question referred to above, is in the negative, against the Revenue and in favour of the assessee and it is held that a sum of Rs.15,98,592 received by way of interest on bank deposit is ancillary and incidental to carrying out the business of providing credit facility to its members, and, as such, exempt under s. 80P(2)(a)(i) of the Act.”
This proposition, we find, was also applied by the
Coordinate Bench of the I.T.A.T. while allowing deduction
u/s 80P(2)(a)(i) on the interest earned on FDR’s in the case
ITO, Patan Vs M/s Jafari Momin Vikas Co-op. Credit Society
Ltd. I.T.A.T. Ahmedabad ITA No.1491/Ahd/2012 C.O. No.
138/Ahd/2012 holding as under:
“17. We have carefully considered the submissions of the either party, perused the relevant records and also the case law on which the learned AR had reservation in it's applicably in the circumstances of the assessee's case.
It was the stand of the learned CIT (A) that the entire income was not exempt and that it was to be examined as to whether there was any interest income on the short term bank deposits and securities included in the total income of this society which has been claimed as exempt. According to the CIT (A), a similar issue to that of the present one was dealt with by the Hon'ble Supreme Court in the case of Totgars Co- op. Sale Society Ltd v. ITO (supra). The issue before the Hon'ble Court for determination was whether interest income on short term bank deposits and securities would be qualified as business income u/s 80P (2)(a)(i) of the Act.
The issue dealt with by the Hon'ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts, as under:
"What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purposes? The assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such by such retention was not required immediately for business purposes, it was
invested in specified securities. The question, before us, is- whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under section 28 of the Act? in our view, such interest income would come in the category of 'income from other sources', hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer..." 19.1 However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon'ble Supreme Court -
"(On page 286) 7............Before the assessing officer, it was argued by the assessee(s) that it had invested the funds on short term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence, these civil appeals have been filed by the assessee(s)." 19.2 From the above, it emerges that - (a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits; (b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members; (c) that assessee carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii) marketing the agricultural produce; and (d) that the surplus had arisen emphatically from marketing of agricultural produces. 19.3 In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds.
19.4 While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely: (1) in the case of the assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds;
- in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members;
(2) in the case of present assessee, it did not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such;
- in the case of Totgars, the Hon'ble Supreme Court had not spelt out anything with regard to operational funds;
19.5 Considering the above facts, we find that there is force in the argument of the assessee that the assessee not a co- operative Bank, but its nature of business was coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds. That was why, it was submitted by the assessee that it had invested in short-term deposits. Furthermore, the assessee had maintained overdraft facility with Dena Bank and the balance as at 31.3.2009 was Rs.13,69,955/- [source: Balance Sheet of the assessee available on record] 19.6 In overall consideration of all the aspects, we are of the considered view that the ratio laid down by the Hon'ble Supreme Court in the case of Totgars Co-op Sale Society Ltd (supra) cannot in any way come to the rescue of either the Ld. CIT (A) or the Revenue. In view of the above facts, we are of the firm view that the learned CIT (A) was not justified in coming to a conclusion that the sum of Rs.9,40,639/- was to be taxed u/s 56 of the Act. It is ordered accordingly.”
Moreover, we are also in agreement with the contention
of the Ld. counsel for assessee that the decision of the
Hon'ble Apex Court in the case of Totgars Cooperative Sale
Society (supra) was based on separate set of facts since, as
rightly pointed out by the Ld. counsel for assessee, in that
case that it was the surplus funds available with the
assessee on account of sale of produce of its members which
was parked in FDR’s, the interest income earned from which
was held by the Hon'ble Apex Court to be not attributable to
the activity carried out by the assessee and hence not
eligible for deduction u/s 80P(2)(a)(i) of the Act. The same is
evident from the findings of the Hon'ble Apex Court in the
case of Totgars Cooperative Sale Society (supra) which is as
under: “10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under s. 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under s. 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is—whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under s. 28 of the Act? In our view, such interest income would come in the category of "income from other sources", hence, such interest income would be taxable under s. 56 of the Act, as rightly held by the AO. In this connection, we may analyze s. 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The head note to s. 80P indicates that the said section deals with deductions in respect of income of co- operative societies. Sec. 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 s. 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under s. 2(24)(i) of the Act 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, we are required to give a precise meaning to the words "profits and gains of business" mentioned in s. 80P(2) of the Act. In the present case, as stated above, assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also 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. When the assessee- society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under s. 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as
"investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. 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. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in s. 80P(2)(a)(i) of the Act or in s. 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the AO was right in taxing the interest income, indicated above, under s. 56 of the Act.”
Thus we hold that where the FDR’S in banks are made
from the operational funds of the cooperative society while
carrying out its activity of providing credit to its members,
the interest earned thereon being incidental to carrying out
the said activity, is attributable to the said activity and
hence entitled to deduction u/s 80P(2)(a)(i) of the Act.
Having said so and reverting to the facts of the present
case, we find that the activity of the assessee involves
providing credit facilities to its members, though the
consistent pleading of the Ld. counsel for assessee before
the lower authorities and even before us, is that the said
income has been earned by parking deposits collected from
its members, in FDRs to maintain liquidity so as to refund
the deposits as and when demanded. This activity of the
assessee clearly does not qualify as providing credit facilities
to its members and in fact tantamounts to only collecting
deposits from members. But at the same time we note that
nothing is there on record to bring out the nature of activity
carried out by the assessee. It is necessary, therefore, to
first establish the facts relating to the case whether the
assessee is involved in the activity of providing credit
facilities to its members and the deposits made in banks
were in the course of carrying out these activities and the
said facts need to be examined and verified also. We,
therefore, consider it fit to restore the issue back to the file
of the Assessing Officer for the limited purpose of examining
the activities carried out by the assessee society and
whether the deposits made by it in banks were done during
the course of carrying out its stated activities and thereafter
decide the issue in accordance with law.
The ground of appeal No.1 raised by the assessee in all
the appeals, therefore, stands allowed for statistical
purposes.
In the next ground of appeal, the Ld. counsel for
assessee has agitated against the dismissal of its alternative
claim made before the Ld.CIT(Appeals) that the gross
interest income should not be subjected to tax but the net
interest income after deducting interest paid relating to the
funds invested in FDRs. The Ld. counsel for assessee in this
regard relied upon the following case law before us:
ITO, Ludhiana Vs The Ayali Kalan Co-op Agri. Multipurpose Society Ltd. ITAT-Chandigarh, ITA No. 414/CHD/2011. 23. The Ld. DR, on the other hand, relied upon the order of
the Ld.CIT(Appeals).
We have heard the contentions of both the parties. The
sole contention raised before us in this ground is that in the
event no deduction is allowed to the assessee of the interest
income earned on FDRs kept with banks u/s 80P(2)(A)(i) of
the Act, it is only the net interest income which should be
subjected to tax after deducting the interest expenses
incurred and not the gross interest income earned as held by
the authorities below. We have also gone through the order
of the Ld.CIT(Appeals) dismissing the contention of the
assessee as under:
“Ground of appeal 3 is regarding an alternative plea taken by the appellant to the effect that Ld AO has erred in taxing the gross interest received from SBI. In the written submissions filed during appeal as reproduced in para 4.2 above, it has been submitted that out of the interest of Rs.7,42,295/-, interest of only Rs.48,415/- is taxable after excluding the interest paid by it. The calculation submitted by Ld AR in this regard is, however, not correct as the expenditure directly attributable to interest earned is to be seen with reference to the funds invested and not the income earned. As held by Hon'ble ITAT, Chandigarh, in the case of ITO Ward 111(4) Ludhiana Vs The Ayali Kalan Co-op Agri. Multipurpose Society Ltd reproduced above, only that much of the interest paid is to be excluded which has a direct nexus with the interest received. In this case, the appellant has already claimed the entire interest paid and other administrative and other costs in the P&L account. Hence, there are no further expenses remaining to be allowed against the FDR interest from nationalized banks. The appellant also has non cost-bearing funds from Membership fee and Reserves of Rs.26,88,413/- and Rs.32,08,024/- respectively. Apart from making general submission regarding the differential in the average rates at which interest has been received and paid, no details have been given of the interest paid which had a direct nexus with the interest received. In view of the totality of above facts, the alternative ground cannot be accepted and is rejected.” 25. We find no infirmity in the same. The findings of the
Ld.CIT(Appeals) to the effect that the assessee has been
unable to establish direct nexus between the interest
expenses incurred of the interest income earned has
remained uncontroverted even before us. The Ld. counsel for
assessee has failed to establish any nexus between the
interest expenses incurred by it and interest income earned
by it on FDRs. Further there is no denying the fact that the
assessee has already claimed the entire interest paid in its
Profit & Loss Account and there remains nothing to be
allowed against the FDRs interest from nationalized banks.
Further the findings of the Ld.CIT(Appeals) that it had
sufficient non interest bearing funds also in the form of
membership fees and reserves of Rs.26,88,413/- and
Rs.32,08,024/- respectively has also not been controverted
by the Ld. counsel for assessee before us. In the backdrop
of the above facts, we find no merit in the contention of the
Ld. counsel for assessee that the interest expenses should
be set off against the interest income earned from FDRs
before subjecting the same to tax. In the absence of
establishing any nexus between the two, no set off of
interest income is allowable against the interest income
earned as rightly held by the Ld.CIT(Appeals). The
Ld.CIT(Appeals), we hold, has rightly dismissed this
contention of the assessee, following the decision of the ITAT
Chandigarh Bench in the case of Ayali Kalan Co-op Agri.
Multipurpose Society Ltd.(supra) wherein it has been
categorically held that only that much of the interest paid
is to be excluded which has a direct nexus with the interest
earned. The logic being that the interest earned on FDRs
would be taxable as income under the head “other sources”
u/s 56 of the Act and the only deduction allowable against
such incomes are those which are laid out wholly and
exclusively for the purpose of earning such income, as per
the provisions of section 57 of the Act which deals with
deduction which are allowed against incomes subject to tax
under the head “income from other sources” u/s 56 of the
Act.
In view of the above, we uphold the order of the
Ld.CIT(Appeals) on this issue that it is the gross interest
earned which is to be subjected to tax, if any.
Ground of appeal No.2 is therefore dismissed
In the result, all the appeals of the assessee are partly
allowed for statistical purposes.
Order pronounced in the Open Court.
Sd/- Sd/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 1st May, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR Assistant Registrar, ITAT, Chandigarh