2014 (1) TMI 481 - AT - Income Tax

Cooperative Credit Society Allowed Deduction Under Section 80P(2)(a)(i) Including Interest Income as Business Income

Income Tax Officer Versus M/s. Jafari Momin Vikas Co-op Credit Society Ltd.

The ITAT Ahmedabad held that a cooperative credit society engaged in providing credit facilities to its members is entitled to deduction under section ... Deduction u/s 80P(2)(a)(i) - cooperative credit society - Taxability of interest income u/s 56 of the Income Tax Act - Held that:- Section 80P(2) provides deduction to co-operative societies engaged in carrying on the business of banking providing credit facilities to its members - Section 80P(4) only takes out co-operative banks from the ambit of deduction u/s 80 P of the Act but further grants exemption to co-operative bank which is primarily an agricultural credit society or co-operative agricultural and rural development bank - As per clarification No. 133/06/2007-TPL dated 9th May 2007 issued by Central Board of Direct Taxes - Deduction is available to co-operative bank which is primarily an agricultural credit society - The assessee is entitled to the benefit of deduction u/s 80P(2)(a)(i) of the Act - Decided against Revenue. Whether interest income on short term bank deposits and securities would be qualified as business income u/s 80P(2)(a)(i) – Held that:- Following CIT v. Manekbaug Co-op Housing Society Ltd. [2012 (6) TMI 292 - GUJARAT HIGH COURT] – Decided in favour of assessee. Issues Involved:1. Deduction under Section 80P(2)(a)(i) of the Income Tax Act.2. Taxability of interest income under Section 56 of the Income Tax Act.Detailed Analysis:I. Deduction under Section 80P(2)(a)(i) of the Income Tax Act:The primary issue raised by the Revenue in ITA No.1491/A/2012 was whether the CIT (A) erred in allowing the deduction under Section 80P(2)(a)(i) amounting to Rs.71,88,101/-. The assessee, a cooperative credit society, claimed this deduction for providing credit facilities to its members. The Assessing Officer (AO) disallowed the claim, arguing that the assessee did not qualify as a primary agricultural credit society or a primary cooperative agricultural and rural development bank per the insertion of sub-section (4) of Section 80P.The CIT (A), however, allowed the deduction, referencing a similar decision in the assessee's case for an earlier assessment year. The CIT (A) held that the assessee was a credit society eligible for the deduction.In support of its claim, the assessee argued that:- It was engaged solely in providing credit facilities to its members.- The objects of the society clearly indicated its role as a credit society.- The insertion of sub-section (4) to Section 80P did not withdraw the deduction for credit societies, only for cooperative banks.The Tribunal analyzed relevant case laws, including:- ACIT v. M/s. Bangalore Commercial Transport Credit Co-op. Society Ltd.: The Tribunal held that Section 80P(4) applies only to cooperative banks, not credit societies.- DCIT v. Jayalakshmi Mahila Vividodeshagala Soudharda Saharkari Ltd: The Tribunal concluded that the assessee was not a cooperative bank and thus eligible for the deduction under Section 80P(2)(a)(i).The Tribunal upheld the CIT (A)'s decision, confirming that the assessee was entitled to the deduction under Section 80P(2)(a)(i).II. Taxability of Interest Income under Section 56 of the Income Tax Act:The assessee's cross-objection (C.O No.138/A/2012) contested the CIT (A)'s decision to disallow the deduction under Section 80P to the extent of Rs.6,40,639/-, treating the interest income from bank deposits as taxable under Section 56.The AO had disallowed the entire claim, including interest income, which the CIT (A) upheld based on the Supreme Court ruling in Totgars Co-op. Sale Society Ltd. v. ITO. The CIT (A) reasoned that interest earned from surplus funds kept in banks was taxable under Section 56.The assessee argued that:- The funds were not surplus but operational, kept ready for repayment to members.- The CIT (A) had enhanced the income without issuing a show-cause notice.- The AO had treated the entire income under Section 28, not under Section 56.The Tribunal observed that:- The assessee's funds were operational, not surplus, and were necessary for maintaining liquidity.- The facts differed from the Totgars case, where surplus funds were invested.- The CIT (A) was not justified in treating the interest income as taxable under Section 56.The Tribunal concluded that the CIT (A) erred in taxing the interest income under Section 56 and allowed the assessee's cross-objection.Conclusion:- The Revenue's appeal was dismissed, and the assessee was entitled to the deduction under Section 80P(2)(a)(i).- The assessee's cross-objection was allowed, and the interest income was not taxable under Section 56.