2022 (4) TMI 174 - AT - Income Tax

Interest income from Co-operative banks qualifies for deduction under Section 80P - Tribunal ruling

The Tribunal allowed the appeal filed by the assessee, holding that interest income earned from deposits with Co-operative banks is eligible for deduction ... Deduction u/s 80P - as per AO interest from Co-op bank is taxable u/s.56 - assessee was in the business of providing credit facilities to its member and earned entitled to deduction u/s.80P(2)(a)(i) itself of the Act - said interest was attributable to business carried on by the assessee and there was no investment out of surplus funds generated - HELD THAT:- Interest income received by the assessee society from its short term deposits with cooperative banks is not to be construed as income from its investments with any other co-operative society, conclude, that the interest income received by the assessee society on its investments/deposits with the Co-operative Banks would be eligible for deduction u/s 80P(2)(d) - Grounds of appeal No.(s) 1 and 2 are allowed in terms of our aforesaid observations. Interest income earned by the assessee society on its deposits with the banks is eligible for deduction u/s 80P(2)(a)(i) - Whether or not the interest income earned by the assessee society on its surplus funds, which, in the normal course of its business of providing credit facilities to its members was parked as short term deposits with the banks, i.e, at a point of time when there were no takers for the said funds, would be eligible for deduction u/s. 80P(2)(a)(i) of the Act? - We are of the considered view that as the amount deposited by the assessee society for a short term with the banks, i.e, Co-operative banks or nationalized banks in the course of its business of providing credit facilities to its members, was in the nature of a simplicitor parking of its surplus/excess idle funds for which there were no takers at the relevant point of time, therefore, the same, as stated by the ld. A.R, and rightly so, was inextricably inter-linked, or, in fact interwoven with its aforesaid primary activity, i.e, of providing credit facilities to its members. We are of the considered view, that as held in the case of Guttigedarara Credit Co-operative Society Ltd. [2015 (7) TMI 874 - KARNATAKA HIGH COURT] and Tumkur Merchants Souharda Cooperative Ltd. [2015 (2) TMI 995 - KARNATAKA HIGH COURT] the interest income earned by the assessee society on the surplus amount that was parked by it as short term deposits with the banks, i.e, Co-operative banks and nationalized banks would duly be eligible for deduction u/s.80P(2)(a)(i) - We, thus, in terms of our aforesaid observations set-aside the order of the CIT(Appeals), and direct the AO to allow the assessee’s claim for deduction u/s 80P(2(a)(i) qua the interest income received by it on deposits with the banks. Grounds of appeal No.(s) 3 and 4 are allowed in terms of our aforesaid observations. Issues Involved:1. Taxability of interest income from Co-operative banks under Section 56 of the Income Tax Act, 1961.2. Eligibility of Co-operative banks as Co-operative societies for the purpose of Section 80P(2)(d).3. Deduction eligibility under Section 80P(2)(a)(i) for interest income from credit facilities provided to members.4. Qualification of investments made as per SLR for deduction under Section 80P(2)(a)(i).Issue-Wise Detailed Analysis:1. Taxability of Interest Income from Co-operative Banks under Section 56:The assessee, a co-operative credit society, filed an appeal against the CIT(Appeals) order, which held that interest income from Co-operative banks is taxable under Section 56 and disallowed the deduction under Section 80P(2)(d). The CIT(Appeals) concluded that the interest/dividend income from deposits/investments with Co-operative banks and scheduled banks is taxable under Section 56, as these banks are not considered Co-operative societies for the purpose of Section 80P(2)(d).2. Eligibility of Co-operative Banks as Co-operative Societies for Section 80P(2)(d):The Tribunal found substantial force in the assessee's claim that Co-operative banks fall within the definition of 'Co-operative Society' as per Section 2(19) of the Act. It was held that the interest income earned by the assessee on its deposits with Co-operative banks is eligible for deduction under Section 80P(2)(d). This view is supported by various judicial pronouncements, including the ITAT, Mumbai in the case of M/s Solitaire CHS Ltd Vs. Principal Commissioner of Income Tax-26, ITA No.3155/Mum/2019, and the Hon'ble High Court of Karnataka in Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn).3. Deduction Eligibility under Section 80P(2)(a)(i) for Interest Income:The Tribunal considered whether the interest income earned by the assessee on its deposits with banks is eligible for deduction under Section 80P(2)(a)(i). The Tribunal noted that the interest income from surplus funds parked as short-term deposits with banks is inextricably linked to the business of providing credit facilities to its members. Citing the judgments of the Hon'ble High Court of Karnataka in Guttigedarara Credit Co-operative Society Ltd. Vs. ITO, 377 ITR 464 (Kar.) and Tumkur Merchants Souharda Cooperative Ltd. Vs. ITO, 55 taxmann.com 447 (Kar.), the Tribunal held that such interest income is eligible for deduction under Section 80P(2)(a)(i).4. Qualification of Investments Made as per SLR for Deduction under Section 80P(2)(a)(i):The Tribunal observed that the investments made by the assessee as per the Statutory Liquidity Ratio (SLR) qualify for deduction under Section 80P(2)(a)(i). The investments were made in the normal course of business, and the interest income from these investments is attributable to the business of providing credit facilities to its members.Conclusion:The Tribunal allowed the appeal filed by the assessee, holding that:- The interest income earned from deposits with Co-operative banks is eligible for deduction under Section 80P(2)(d) as Co-operative banks are considered Co-operative societies.- The interest income from surplus funds parked as short-term deposits with banks is eligible for deduction under Section 80P(2)(a)(i).- Investments made as per SLR also qualify for deduction under Section 80P(2)(a)(i).The order pronounced in Open Court on 31st March 2022 concluded that the appeal of the assessee is allowed in terms of the observations made.