2024 (10) TMI 248 - AT - Income Tax

Cooperative society gets partial Section 80P deduction relief for agricultural credit and implements income

ITAT Kolkata partly allowed the appeal regarding Section 80P deduction for a cooperative society. The matter was restored to AO for bifurcation of ... Denial of deduction u/s 80P - income earned from deposits with bank - assessee claimed deduction in respect of interest income earned from the activity which was done for non-agricultural purposes - HELD THAT:- As considering that the assessee-society has also been doing the activity of granting credit facilities to its members for agricultural purposes and activities connecting thereto, and further the assessee-society is involved in the activity of purchase, sale and marking of agricultural implements, therefore, the interest income earned by the assessee for providing credit facilities to its members for agricultural activities and activities relating thereto will be eligible for deduction u/s 80P(2)(a)(i) and further the income of the assessee earned from the activity of purchase, sale and agricultural implements etc. will also be eligible u/s 80P(2)(a)(iv) - assessee-society, therefore, is given an opportunity to provide necessary details before the AO in this respect. The matter is accordingly restored to the file of the Assessing Officer for the limited purpose that on furnishing of necessary details, the Assessing Officer will bifurcate the interest income earned by the assessee from the credit facilities granted to its members for agricultural purposes or purposes connecting with agricultural activities and further after netting off such interest income with the expenditure/interest incurred by the assessee-society for getting deposits in respect of such income, the AO would accordingly allow deduction in respect of the said amount out of total interest income u/s 80P(2)(a)(i) and further the AO will also bifurcate the income earned by the assessee-society from the purchase, sale and agricultural implements intended for agriculture for the purpose of supplying them to its members and will allow deduction on such income u/s 80P(2)(iv) of the Act Addition u/s 68 - Deposits during Demonetization Period - HELD THAT:- The assessee-society has deposited the said demonetized currency accepted from its members in cooperative/schedule bank and earned interest income on the same. The assessee-society has claimed that it is indulged in the banking business activity. Therefore, the income earned by the assessee-society in the form of interest on such deposits is liable to be assessed as business income, however, not eligible for section 80P deduction. Assessee-society since has earned the said interest income from an activity which was prohibited by law by collecting deposits in demonetized currency during demonetization period, therefore, the expenditure incurred by the assessee-society in the shape of interest paid to the members cannot be allowed as deduction u/s 37 of the Act. The issue is restored to the file of the AO with a direction that the assessee-society will furnish the necessary details relating to the source of the deposits to the AO - If the assessee society proves the source, no addition shall be made u/s 68 of the Act. The assessee-society will not be eligible for deduction in the form of interest paid on such deposits to the members. AO will also give proper opportunity to the assessee to furnish necessary detail. Addition on account of contingent liability - HELD THAT:- The amount has not been debited by the assessee on account of any bad debt, rather, the same has been claimed as ‘interest overdue’, which has not been explained by the assessee. As held above, even otherwise, the assessee is not eligible for deduction 80P of the Act. In view of this, this ground has no merit and the same is accordingly dismissed. Issues Involved:1. Condonation of Delay in Filing the Appeal2. Denial of Deduction under Section 80P of the Income Tax Act3. Treatment of Interest Income from Fixed Deposits4. Addition of Cash Deposits during Demonetization as Unexplained Cash Credits5. Addition on Account of Contingent LiabilitiesIssue-wise Detailed Analysis:1. Condonation of Delay in Filing the Appeal:The appeal filed by the assessee-society was delayed by 105 days. A separate application for condonation of delay was submitted, and after considering the reasons provided, the delay was condoned. This allowed the appeal to be heard on its merits.2. Denial of Deduction under Section 80P of the Income Tax Act:The assessee-society contested the denial of deduction under Section 80P, which was claimed for income earned from deposits with banks. The Assessing Officer (AO) disallowed the deduction due to the failure of the assessee to substantiate the eligibility and mutuality of the loans, noting that loans were advanced to non-members and for business purposes. The AO referenced the Supreme Court decision in The Citizen Co-operative Society Limited case, which held that a cooperative society engaged in activities with the general public without approval was not entitled to deduction under Section 80P(2)(a)(i). The Tribunal upheld the AO's decision, emphasizing that the assessee failed to prove its primary activity was granting loans for agricultural purposes. However, the Tribunal allowed partial relief by directing the AO to bifurcate the interest income related to agricultural activities and allow deductions accordingly.3. Treatment of Interest Income from Fixed Deposits:The AO treated the interest income from fixed deposits as 'Income from Other Sources,' not qualifying for deduction under Section 80P(2)(a)(i). The AO noted that the main activity of the cooperative society was not extending credit facilities to its members, as evidenced by the significant investments in deposits compared to loans and advances. The Tribunal agreed with the AO, citing the Supreme Court ruling in M/s Totgars Cooperative Sale Society Limited, which clarified that interest on surplus investments is assessable as 'other income' and not 'business income.' The Tribunal concluded that the interest income from fixed deposits did not qualify for deduction under Section 80P.4. Addition of Cash Deposits during Demonetization as Unexplained Cash Credits:The assessee-society deposited Rs. 1,46,74,500 in Specified Bank Notes (SBNs) during the demonetization period. The AO treated these deposits as unexplained cash credits under Section 68, as the assessee failed to provide member-wise details and was not authorized to accept SBNs during the demonetization period. The Tribunal upheld the AO's decision, stating that the activity was in violation of law and the source of deposits was not proved. However, the Tribunal directed the AO to allow the assessee to furnish necessary details to prove the source of deposits, failing which the addition under Section 68 would stand.5. Addition on Account of Contingent Liabilities:The assessee-society challenged the addition of Rs. 1,01,718 made by the AO on account of contingent liabilities. The assessee argued that the provision related to overdue interest was a legitimate deduction. The Tribunal dismissed this ground, noting that the amount was not debited as a bad debt and was not explained adequately. The Tribunal also reiterated that the assessee was not eligible for deduction under Section 80P for this amount.Conclusion:The appeal was partly allowed, with the Tribunal providing limited relief by allowing the assessee to furnish additional details regarding interest income related to agricultural activities and the source of demonetization deposits. The other grounds were dismissed, upholding the AO's findings.