TaxTMI 
TaxTMI 
2018 (6) TMI 1880
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. In the facts and circumstances of the case and in law the Ld.CIT(A) has grossly erred in denying deduction u/s. 80P(2)(a)(i) of the I.T. Act, 1961 to the appellant in respect of Dividend income and Interest on NRF amounting to Rs. 9,28,403/-. The aforesaid addition being patently illegal, bad in law, arbitrary, perverse and devoid of merits the same may please be deleted and it may please be held that the aforesaid interest income is exempt u/s. 80P(2)(i) of the I.T. Act, 1961. 3. The appellant craves the permission to add, amend, modify, alter, revise, substitute, delete any or all grounds of appeal, if deemed necessary at the time of hearing of the appeal." 3. Briefly stated relevant facts include that the assessee is a Co-operative credit society and engaged in the business of provides credit facilities to its members. Assessee society derives income from providing credit facilities which includes interest on loans to members, interest on investments etc. Assessee follows mercantile system of accounting. The assessee-society filed return of income on 31-10-2006 declaring Nil income. Assessee's case was selected for scrutiny under CASS. Assessee disclosed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the Revenue relied heavily on the orders of AO/ CIT(A). 8. I heard both sides. The issue raised in the present appeal is against the claim of deduction u/s. 80P(2)(a)(i) of the Act on the interest income earned from nationalized banks. Although Ground No.2 refers to the Dividend income, the same is not the issue for adjudication before me. Neither there are any specific arguments on this issue nor it requires any adjudication. It is undisputed fact that is a Credit Cooperative Society and received advances and loans from its members, on which interest was being received and paid. I find the Pune Bench of Tribunal in the case of Vijay Gramin Bigarsheti Sah. Patsanstha (supra), relying on the decision of Coordinate Bench of the Tribunal in the case of Baliraja Gramin Bigarsheti Sahakari Pat Sanstha Maryadit Vs. ITO in ITA Nos.50 & 51/PUN/2017, decided on 26-03-2018 and held that assessee is eligible for claiming deduction u/s.80P(2)(a)(i) of the Act. For the sake of completeness of the order, I proceed to extract the relevant finding of the Tribunal (supra) here as under : "10. We find that the issue has been elaborately considered by the Pune Bench of Tribunal in ITO V....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies Act, it is incumbent upon the society which is making profits to park one-fourth of its profits in the reserve fund. Further, the said reserve funds as per directions of the State Government by general or special order are to be invested in one of the securities, which are provided under section 70 of the said Act. Clause (d) clearly lays down that the investment or deposit of funds could be in any Co-operative Bank or Banking company approved for this purpose by the Registrar. The assessee society belonging exclusively to the employees of Bank of Maharashtra, had invested its reserve funds in FDs with Bank of Maharashtra. Accordingly, the assessee society applied for requisite permission from the Registrar of Co-operative Societies under section 70 to do so. The Registrar vide its letter dated 18.10.1995 in respect of investment of reserve funds consequent to Society's Resolution dated 25.08.1994 and Management Committee's Resolution dated 29.07.1991 and further the assessee's letter dated 11.07.1995, granted permission under section 70 of the Maharashtra Cooperative Societies Act, 1960 and Rule 54 of the Rules 1961 to transfer reserve funds amount with Pune District Central C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dit (supra), wherein the issue was with regard to investments with other Co-operative Society as per the mandate of Maharashtra Co-operative Societies Act and whether the interest income earned by the assessee on such investments was liable for deduction under section 80P(2)(a)(i) of the Act. The Assessing Officer had denied the claim relying on the ratio laid down by the Hon'ble Supreme Court in Totgar's Co-operative Sale Society Ltd. Vs. ITO (supra), the Tribunal after considering the factual and legal aspects held as under:- "17. In order to adjudicate the issue, first reference is made to the decision of Hon'ble Supreme Court in Totgar Co-operative Sale Society Ltd. Vs. ITO (supra). In the facts of the said case, the assessee before the Hon'ble Apex Court was a co-operative society providing credit facilities to the members or marketing agricultural produce of its members. The assessee had parked its funds in short term bank deposits and securities and the interest earned on the same was claimed as deductible under section 80P(2)(a)(i) of the Act. The Revenue authorities held that the same was taxable under the head 'income from other sources'. The claim of the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the Hon'ble Supreme Court held that such interest income could not be said to be attributable either to the activity mentioned in 80P(2)(a)(i) or 80P(3) of the Act. In view thereof, the Hon'ble Supreme Court upheld the order of Assessing Officer in taxing the said amount under section 56 of the Act. The alternate plea of the assessee that even if the said interest income was held to be covered under section 56 of the Act, was eligible for deduction under section 80P(2)(a)(i) of the Act, was rejected. 18. In the facts of the case before Hon'ble High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (supra), the assessee co-operative society was engaged in the activity of carrying on of business of providing credit facilities to its members and it had earned interest income on its deposits. Another fact noted by the Hon'ble High Court of Karnataka was that the amount which was invested in banks to earn interest was not the amount due to any members and it was not the liability of the assessee. In fact, the said amount was in the nature of profits and gains, which was not immediately required by the assessee for lending money to the members as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any other business, then the surplus funds which it had earned as profits of its business when temporarily not required were invested in banks to earn interest was attributable to carrying on the business of banking and therefore, liable to be deducted under section 80P(1) of the Act. 20. Further, the Pune Bench of Tribunal in ITO Vs. Niphad Nagari Sahakari Patsanstha Ltd. (supra) had laid down the similar proposition as by the Hon'ble High Court of Karnataka. 21. ......... The claim of the assessee before us is that it was engaged in the business of providing credit facilities to its members, out of loan received from its members itself. The surplus amount which was on account of amount received from its members only, which had not been advanced to any of the members was invested in the banks, against which the said investment was made out of surplus funds available with the assessee, which in turn, were amounts advanced by the members itself. The said parking of funds with the co-operative banks was claimed by the assessee to be in the nature of its business activity as it was the requirement of Maharashtra Co-operative Societies Act, 1960, that 20 to 30% of tot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....capital or out of surplus funds was of no consequence. The said decision of the Hon'ble Punjab & Haryana High Court has been confirmed by the Hon'ble Supreme Court in CIT Vs. Nawanshahar Central Cooperative Bank Ltd. (2007) 289 ITR 6 (SC), wherein it has been held that where a Co-operative bank carrying on the business of banking, statutorily required to place part of its funds in approved security, then the income attributable thereto is deductible under section 80P(2)(a)(i) of the Act. The Hon'ble Supreme Court relied on earlier decisions of the Apex Court in this regard. 16. The Hon'ble Punjab & Haryana High Court in CIT Vs. Punjab State Co-operative Agricultural Development Bank Ltd. (2016) 389 ITR 607 (P&H) has remanded the issue back to the Tribunal to decide whether the assessee was carrying on business of banking and thereafter, decide the issue of eligibility of deduction under section 80P(2)(a)(i) of the Act on the interest income attributable to the business of banking. 17. However, we find that the Hon'ble High Court of Gujarat in State Bank of Income Vs. CIT (supra) while deciding similar issue of eligibility of deduction under section 80P(2)(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such interest income is not eligible for claim of deduction under section 80P(2)(a)(i) of the Act. However, the facts of the present case before us are at variance, it is not surplus funds which has been deposited by the assessee. On the other hand, the assessee is statutorily required to deposit 25% of its profits in reserve funds, which in turn, have to be parked in FDRs with Co-operative Bank or Scheduled Banking company. The assessee before us, in line with statutory obligation of maintaining its status of Co-operative society and as per the regulations of Maharashtra State Cooperative Societies Act, was duty bound to transfer 25% of its profits to reserve funds, which it has done. There is no dispute to the same. The second aspect is the utilization of funds in reserve funds by way of making FDRs with Scheduled bank under section 70 of the said Act. The assessee has received permission of the Registrar of Maharashtra Co-operative Societies Act to make such investment with Bank of Maharashtra and also in order to carry on the business activities of providing credit facilities to its employees, it is mandatory upon the assessee to invest 25% of its profits in the reserve funds, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r than cooperative banks, interest on mutual funds, long term and short term capital gain on sale of mutual funds etc. are not covered by the activity of providing credit facilities to its members and hence not eligible for deduction u/s.80P(2)(a)(i) of the Income Tax Act in view of the decision of Hon'ble Supreme Court in the case of Totagar's Cooperative Sale Society Ltd. (Supra). We find the Ld. CIT(A) allowed the claim of the assessee on the ground that the assessee is entitled to deduction u/s.80P(2)(a)(i) on account of interest from banks other than cooperative banks, interest on mutual funds long term and short-term capital gain on mutual funds etc. While doing so, he held that the decision in the case of Totagar's Cooperative Sale Society Ltd. (Supra) is not applicable to the facts of the present case since in that case the amount invested in short term deposits and securities was not out of interest-bearing deposits collected from members but out of sale proceeds of agricultural produce of farmer members marketed by the society. Further, the Hon'ble Apex Court has considered only the latter part of section 80P(2)(a)(i), i.e. income of a cooperative society ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e from other sources', hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer..." 19.1 However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon'ble Supreme Court - "(On page 286) 7............Before the assessing officer, it was argued by the assessee(s) that it had invested the funds on short term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the ITA No. 2180/PN/2013, A.Y. 2010-11 Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence, these civil appeals have been filed by the assessee(s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of all the aspects, we are of the considered view that the ratio laid down by the Hon'ble Supreme Court in the case of Totgars Co-op Sale Society Ltd (supra) cannot in any way come to the rescue of either the Ld. CIT (A) or the Revenue. In view of the above facts, we are of the firm view that the learned CIT (A) was not justified in coming to a conclusion that the sum of Rs. 9,40,639/- was to be taxed u/s 56 of the Act. It is ordered accordingly. 19.7 Before parting with, we would, with due regards, like to record that the ruling of the Hon'ble jurisdictional High Court in the case of CIT v. Manekbang Co-op Housing Society Ltd reported in (2012) 22 Taxmann.com 220(Guj) has been kept in view while deciding the issue." 11.2 We find the Cochin Bench of the Tribunal in the case of Muttom Service Cooperative Aplappuzha Bank Ltd. Vs. ITO (Supra) after considering the decision of Hon'ble Supreme Court in the case of Totagar's Cooperative Sale Society Ltd. (Supra) and various other decisions has observed as under : "5. We have considered the rival submission on either side and also perused the material available on record. We have also carefully g....