2019 (2) TMI 2090 - AT - Income Tax

Interest income from investments of a Cooperative Society eligible for deduction under Section 80P

The Income Tax Officer, Ward-3, Satara Versus M/s. Shri Bhairavnath Multistate Co-operative Credit Society Ltd.

The Income Tax Officer, Ward-3, Satara Versus M/s. Shri Bhairavnath Multistate Co-operative Credit Society Ltd. - TMI Issues Involved:1. Deduction under Section 80P(2)(d) of the Income Tax Act.2. Applicability of the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd. v. ITO.3. Nature of interest income from surplus funds.4. Eligibility for deduction under Section 80P(2)(a)(i).Issue-wise Detailed Analysis:1. Deduction under Section 80P(2)(d) of the Income Tax Act:The primary issue was whether the assessee, a Multi-State Cooperative Credit Society, was entitled to a deduction under Section 80P(2)(d) for interest earned from surplus funds invested in various banks. The Assessing Officer (AO) had rejected the claim, arguing that the interest income from non-cooperative banks did not qualify for the deduction. The AO based this decision on the Supreme Court's judgment in Totgar's Co-operative Sale Society Ltd. v. ITO.2. Applicability of the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd. v. ITO:The AO relied on the Totgar's case to assert that the interest income should be taxed under 'Income from other sources' and not be eligible for deduction under Section 80P(2)(a)(i). However, the assessee contended that the Totgar's case was not applicable as it involved surplus funds from the sale proceeds of agricultural produce, which were not immediately required for business purposes. In contrast, the assessee's funds were part of its business operations, invested to maintain liquidity and maximize returns.3. Nature of Interest Income from Surplus Funds:The assessee argued that the interest income was integral to its business of providing credit facilities to its members. The funds were not surplus but part of the operational funds required for maintaining liquidity. The assessee cited several judgments, including CIT v. Karnataka State Co-operative Apex Bank and CIT v. Bangalore District Co-operative Central Bank Ltd., to support the claim that interest income from investments made out of operational funds should be considered business income and eligible for deduction under Section 80P(2)(a)(i).4. Eligibility for Deduction under Section 80P(2)(a)(i):The CIT(A) and the ITAT Pune Bench agreed with the assessee's contention, distinguishing the Totgar's case. The ITAT noted that the assessee's business involved accepting deposits and providing credit facilities, akin to banking activities. The funds were invested to ensure liquidity and were not surplus. Therefore, the interest income was attributable to the business of the assessee and eligible for deduction under Section 80P(2)(a)(i).The ITAT also referred to the CBDT's Circular No. 18/2015, which clarified that income from investments made by banking concerns is attributable to business income. The ITAT upheld the CIT(A)'s decision, granting the deduction under Section 80P(2)(a)(i) and dismissing the Revenue's appeal.Conclusion:The ITAT Pune Bench concluded that the interest income earned by the assessee from investments made in the course of its business was eligible for deduction under Section 80P(2)(a)(i). The decision in Totgar's Co-operative Sale Society Ltd. was deemed not applicable to the facts of the case, and the appeal by the Revenue was dismissed. The judgment emphasized that the nature of the funds and their use in business operations were crucial in determining eligibility for deductions under Section 80P.