2020 (6) TMI 630 - AT - Income Tax

Cooperative society wins tax exemption appeal for interest income as business income

The Appellate Tribunal ITAT DELHI allowed the appeal of the cooperative society, holding that it is eligible for exemption under section 80P(2)(a)(i) of ... Exemption u/s 80P(2)(a)(i) - advancing of loan to Members of the Society is not at par with providing credit facility to its members and thus the assessee was not entitled to a claim of exemption - treating interest earned on Fixed Deposit and Savings account as income from other sources and not business income - HELD THAT:- Where a co-operative society is engaged in carrying on business of giving loans and accepting deposits from its members, the income which relates to the business of these facilities to its members or providing credit facilities to its members will be eligible for deduction u/s 80P(2)(a)(i). There is no prohibition u/s 80P not to allow deduction to such co-operative societies in respect of these facilities provided to its members. The provisions of Sec. 80P(2)(a)(i) are applicable to a co-operative society which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank. The ratio laid down in the judgment of Totagars Co-operative Sale Society Ltd. vs. ITO [2010 (2) TMI 3 - SUPREME COURT] cannot apply in present case as the facts are different in that case. Thus, the CIT(A) wrongly applied the ratio in present case. Therefore, interest on saving bank account of the members is business income and cannot be termed as income from other sources as it has direct nexus of this income with the activity of business of providing credit facilities to its members who are banks. Hence, the CIT(A) was not correct in holding that the said interest is income from other sources. Section 80P(2)(i)(a) is very much applicable to the present assessee society. - Decided in favour of assessee. Issues:1. Eligibility for exemption under section 80P(2)(a)(i) of the Income Tax Act, 1961 for a cooperative society.2. Treatment of interest income earned on fixed deposits and savings account by the cooperative society.Issue 1: Eligibility for exemption under section 80P(2)(a)(i) of the Income Tax Act, 1961 for a cooperative society:The appeal was filed by the assessee against the order passed by CIT(A)-13, New Delhi for Assessment Year 2014-15. The assessee, a registered cooperative society, primarily engaged in giving loans and accepting deposits from its members, claimed exemption under section 80P(2)(a)(i) of the Income Tax Act, 1961. The Assessing Officer disallowed the exemption, treating interest income earned on fixed deposits and savings account as income from other sources. The CIT(A) upheld the Assessing Officer's decision. However, the Tribunal analyzed the provisions of section 80P(2)(a)(i) and concluded that a cooperative society engaged in providing credit facilities to its members is eligible for deduction under this section. The Tribunal emphasized that if a cooperative society carries out activities for persons other than its members, it would not qualify for the deduction. The Tribunal further clarified that interest on the saving bank account of members is considered business income, not income from other sources, as it directly relates to the business of providing credit facilities to its members. Therefore, the Tribunal allowed the appeal of the assessee, holding that section 80P(2)(a)(i) is applicable to the cooperative society in question.Issue 2: Treatment of interest income earned on fixed deposits and savings account by the cooperative society:The Assessing Officer treated the interest earned on fixed deposits and savings account by the cooperative society as income from other sources and not business income. The CIT(A) affirmed this treatment, leading to the appeal by the assessee. The assessee argued that the income earned from banks on fixed deposits should be eligible for deduction under section 80P(1). The Tribunal noted that the society was involved in finance business, accepting deposits and providing loans to members, with the income reflected in the profit and loss account. The Tribunal recognized the principle of mutuality governing such transactions and distinguished the present case from the decision in the M/s Bangalore Club case cited by the Assessing Officer. The Tribunal also referred to a previous order related to proportionate allocations in a similar case. Ultimately, the Tribunal allowed the appeal, stating that the interest income earned by the cooperative society should be assessed in a manner consistent with business income, not as income from other sources. Therefore, the Tribunal ruled in favor of the assessee, granting the exemption claimed and overturning the decisions of the lower authorities.In conclusion, the Appellate Tribunal ITAT DELHI allowed the appeal of the assessee, emphasizing the eligibility of the cooperative society for exemption under section 80P(2)(a)(i) and directing that the interest income earned by the society be treated as business income, not income from other sources.