Cooperative society qualifies for tax deduction on interest from deposits with Sub Treasury

The Tribunal held that the assessee, a cooperative society providing credit facilities without a banking license, is eligible for deduction under Section 80P(2) for interest earned on deposits with Sub Treasury. The appeal was allowed, and similar appeals with identical facts were also granted relief.

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Issues Involved:
1. Eligibility for deduction under Section 80P(2) of the Income Tax Act for interest earned on deposits with Sub Treasury.
2. Classification of interest income as 'income from other sources' or 'income from business'.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2) of the Income Tax Act for Interest Earned on Deposits with Sub Treasury:

The primary issue under consideration was whether the interest earned on deposits with Sub Treasury by the assessee, a primary agricultural credit society, qualifies for deduction under Section 80P(2) of the Income Tax Act. The assessee claimed the entire total income as a deduction under Section 80P, but the Assessing Officer denied this claim, asserting that the assessee was engaged in banking business and hence, ineligible for the deduction due to the insertion of sub-section (4) to Section 80P.

The CIT(A) allowed the claim of deduction under Section 80P(2) based on the judgment of the Hon’ble jurisdictional High Court in the case of Chirakkal Service Co-op Bank Ltd vs CIT. However, the CIT(A) denied the deduction for the interest earned on deposits with Sub Treasury, amounting to Rs. 4,03,088/-, classifying it as 'income from other sources' based on the Supreme Court's decision in M/s Totgars Cooperative Sales Society Ltd vs ITO.

2. Classification of Interest Income as 'Income from Other Sources' or 'Income from Business':

The Tribunal had to determine whether the interest received on investments with Sub Treasury should be assessed under the head 'income from other sources' or 'income from business'. The Tribunal noted that if the interest is assessed as 'income from business', the assessee would be entitled to the deduction under Section 80P(2).

The Tribunal referred to the Karnataka High Court's decision in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO, which clarified that a primary agricultural credit society or a primary cooperative agricultural and rural development bank, which does not have a license from the Reserve Bank of India to carry on banking business, is not considered a cooperative bank under Section 80P(4). Therefore, such entities are eligible for the deduction under Section 80P(2).

The Tribunal also distinguished the facts of the present case from the Supreme Court's decision in M/s Totgars Cooperative Sales Society Ltd, noting that the latter involved a cooperative society engaged in marketing agricultural produce, which retained sale consideration and invested it in short-term deposits. In contrast, the assessee in the present case was engaged in providing credit facilities to its members and did not possess a banking license.

The Tribunal cited the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd, which held that interest income from deposits made in banks by a cooperative society engaged in providing credit facilities to its members is attributable to the business of banking and eligible for deduction under Section 80P(2).

Conclusion:

The Tribunal concluded that the assessee, being a cooperative society engaged in providing credit facilities to its members and not possessing a banking license, is entitled to the deduction under Section 80P(2) for the interest earned on deposits with Sub Treasury. The Tribunal allowed the appeal filed by the assessee in ITA No. 261/Coch/2017 and similarly allowed the appeals in ITA Nos. 208, 209, 210, 263, 268, and 269/Coch/2017, as they involved identical facts.

Final Order:

The appeals of the assessees were allowed, and the order was pronounced in the open Court on the 12th of July, 2017.

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