Tax Tribunal affirms co-op society status for deduction & allows interest income as business income.

The Tribunal upheld the CIT(A)'s decision that the assessee is a co-operative society entitled to deduction under section 80P(2)(a)(i). The Tribunal also allowed the assessee's appeal, directing the AO to grant deduction for interest earned on Government Securities and Debentures as business income. The Revenue's appeal for the assessment year 2010-11 was dismissed, and the assessee's cross-appeal was allowed.

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Issues Involved:
1. Whether the assessee is a Co-operative Society or a Co-operative Bank for the purpose of deduction under section 80P(2)(a)(i) of the IT Act, 1961.
2. Whether the interest received on Government Securities and Secured Redeemable Non-convertible Debentures is entitled to deduction under section 80P(2)(a)(i) or should be taxed as income from other sources.

Detailed Analysis:

1. Co-operative Society vs. Co-operative Bank:
- Assessing Officer's View: The AO contended that the assessee, a co-operative society engaged in banking activities, was not entitled to deduction under section 80P(2)(a)(i) due to the amendment by Finance Act, 2006, which inserted sub-section (4) in section 80P. The AO classified the assessee as a co-operative bank, thus disqualifying it from the deduction.
- CIT(A)'s Decision: The CIT(A) disagreed with the AO, holding that the assessee is a co-operative society and not a co-operative bank, thus eligible for the deduction. This decision was based on the fact that the assessee accepted deposits and provided loans only to its members without having a banking license.
- Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, referencing the Gujarat High Court's ruling in CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd. and the Karnataka High Court's decision in Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha Bagalkot. The Tribunal concluded that the assessee, being a credit co-operative society without a banking license and operating exclusively with its members, is entitled to the deduction under section 80P(2)(a)(i).

2. Interest on Government Securities and Debentures:
- CIT(A)'s Decision: The CIT(A) ruled that the interest earned on Government Securities and Secured Redeemable Non-convertible Debentures should be taxed as income from other sources, not qualifying for deduction under section 80P(2)(a)(i). This decision was influenced by the Supreme Court's ruling in Totgar's Co-operative Sale Society Ltd.
- Assessee's Argument: The assessee argued that the interest income should be considered business income attributable to its primary activity of providing credit facilities to its members, thus qualifying for the deduction under section 80P(2)(a)(i). The assessee cited the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-op. Ltd., which distinguished the Totgar's case and supported the assessee's position.
- Tribunal's Analysis: The Tribunal sided with the assessee, noting that the surplus funds invested in Government Securities and Debentures were attributable to the business of providing credit facilities to members. The Tribunal referenced the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-op. Ltd., which held that such interest income is attributable to the business of the co-operative society and thus qualifies for deduction under section 80P(2)(a)(i).

Conclusion:
- Revenue's Appeal: Dismissed. The Tribunal upheld the CIT(A)'s decision that the assessee is a co-operative society entitled to deduction under section 80P(2)(a)(i).
- Assessee's Appeal: Allowed. The Tribunal directed the AO to grant the assessee deduction under section 80P(2)(a)(i) for the interest earned on Government Securities and Secured Redeemable Non-convertible Debentures, treating it as business income.

Final Order:
- Revenue's appeal for the assessment year 2010-11 is dismissed.
- Assessee's cross-appeal is allowed as indicated.

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