Deduction U/s 80P on interest from employees, jeep charges & charges for issuing ‘no dues certificates’ to members?
IN THE ITAT JAIPUR BENCH ‘B’
Income-tax Officer, Jhalawar
Jhalawar Sahkari Bhoomi Vikas Bank Ltd.
IT Appeal No. 812 (Jp.) of 2011
[Assessment year 2005-06]
May 31, 2012
Sanjay Arora, Accountant Member
This is an Appeal by the Revenue directed against the Order by the Commissioner of Income-tax (Appeals), Kota (‘CIT(A)’ for short) dated 28-07-2011, allowing the assessee’s appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 26-10-2007 for the assessment year (A.Y.) 2005-06, as modified vide order u/s. 154 of the Act dated 29-05-2009 (copy on record).
2. The only issue arising in the instant appeal, as raised by the Revenue per its Ground No. (i), is the exclusion of three items in computing the deduction exigible to the assessee, a cooperative society, u/s. 80P (2)(a)(i) of the Act. We shall examine the case of both the opposite parties qua each to the three incomes.
3.1 The first exclusion is qua interest from employees, at Rs. 2,91,626/-. While the Revenue’s claim is that the same is income from other sources, the assessee’s stand is that the same is an integral to its principal business, i.e., provision of credit facilities to its members. Further, even incidental income qualifies for deduction u/s. 80P(2)(a)(i) of the Act, as the same is for profits and gains ‘attributable’ to activities specified there-under, and not necessarily ‘derived’ from them. Reliance is placed on the decisions in the case of Rajasthan Rajya Sahakari Bhoomi Vikas Bank v. Dy. CIT, 29 TW 286 (Raj.); the Milli Co-op. Urban Bank Ltd. v. ITO  106 ITD 151 (Hyd.), and Asstt. CIT v. H.P. State Co-op. Agriculture & Rural Development Bank Ltd.  100 ITD 479 (Chd.).
3.2 Section 80P(2)(a)(i) of the Act, where-under the claim for deduction in respect of all the three incomes is under consideration, reads as under:
Deduction in respect of income of cooperative societies
“80P. (1) Where, in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely:-
(a) in the case of a cooperative society engaged in -
(i) carrying on the business of banking or providing credit facilities to its members, or
the whole of the amount of profits and gains of business attributable to any one or more of such activities:”
3.3 The assessee is not in the business of banking, even as confirmed by the ld. AR on a query raised by the Bench in this behalf during hearing. The assessee’s claim to exemption u/s. 80P(2)(a)(i) could thus arise only with reference to the activity of providing credit facilities to its members. The hon’ble apex court has per its recent decision in the case of Totgar’s Co-op. Sale Society Ltd. v. ITO  322 ITR 283, clarified that it is not business income, but only the operational income from the specified activity/s that would be eligible for deduction u/s 80P(2)(a)(i). It was explained that the Legislature had specifically used the words ‘profits and gains of business’ in section 80P(2) of the Act, implying profits as assessable u/s. 28 of the Act. As such, only interest income from lending or otherwise providing credit facilities to its members, would qualify for exemption there-under. In the facts of that case, the assessee, again, a cooperative society, invested its surplus funds arising out of the amounts retained against the dues to its members, in short term deposits and securities. It was explained by it that the said investment/s was only in specified securities and an activity incidental to its business and, further, in compliance with the statutory mandate. The hon’ble apex court held that even so, it is only an income from other sources, and rightly assessed by the Revenue u/s. 56 of the Act. The action by the Revenue in denying deduction u/s. 80P(2)(a)(i) thereon was accordingly confirmed by the hon’ble apex court. In the instant case, the question that arises is: How could the said interest income be considered as attributable to the activity of provision of credit facilities by the assessee to its members? By no stretch of imagination, it a part of the assessee’s operational income. Most of the employers facilitate and accommodate their employees by giving loans, either on interest bearing or even on interest-free basis. The income so earned would only be assessable u/s. 56 of the Act, and cannot be considered as undertaking of an activity incidental to its principal or operational activity/s. In fact, what is the relevant from the standpoint of section 80P(2)(a)(i) is whether the relevant income flows from the members or non-members, disqualifying the income arising from the latter from the deduction u/s. 80P(2)(a)(i) of the Act. That is, the relevant consideration is the income under reference flows from or is by way of providing credit facilities by the assessee-society to its members, the answer to which is clearly in the negative. The decisions relied upon by the assessee, being even otherwise prior to the decision by the apex court, would be of no consequence in view of the clear pronouncement by it in the said case, being relied upon by us, to which reference was made in the open court (also refer para 7 of this order).
4. The second item of income is ‘jeep charges’, at Rs. 8,53,392/-. The assessee explained that the same is not the source of income, but represents only the recovery of jeep expenses incurred on trips made by the staff to recover the dues from the defaulting borrowers as also for inspection of securities. The total expenditure is for Rs. 9.92 lacs, so that there is in effect a net income of Rs. 1.39 lacs. The same is being considered as a source of income by the Revenue only because the said charges stand shown separately as a credit item of the profit and loss account. We wholly agree. Whether the collection is from the debtors or from the members, the same is not in fact a source of revenue but only a recoupment of cost. If at all there is a net gain, which could well be (even though the figures stated by the assessee suggest otherwise), it is only the net income which would in that case stand to be excluded, and that too if the same is not a part of the lending activity to its members. There is as such no question of its exclusion while computing the deduction eligible u/s. 80P(2)(a)(i). The Revenue has not stated any reason, much less a cogent one, in denying the assessee’s claim, apart from stating of it to be an income from other sources. We decide accordingly.
5. The third item of income is from ‘No Dues Certificates’, at Rs. 43,990/-. When the borrower, it stands explained, wishes to transfer his borrowing or otherwise switch to another bank or cooperative society, he has to be issued a ‘no dues certificate’ from the existing lender. The assessee charges a nominal fee for the same. We are again in full agreement with the assessee, i.e., that the same cannot be assessed as income from other sources, being only integral to the assessee’s principal business of lending. We decide accordingly.
6.1 So, however, it would be necessary to place the issue/s raised in this appeal and adjudicated by us per the preceding paras of this order in proper perspective. The actual issue, as discerned from the undisputed facts on record per the assessment order, and contrary to what one may have gathered from the reading of this order – which is based principally on the ground raised and the respective arguments of the parties before us – so that the same had to be addressed, is not the eligibility of certain incomes to deduction u/s. 80P(2)(a)(i) of the Act, but whether the same would fall to be assessed as income from other sources u/s. 56, or as profits and gains of business u/s. 28. This is as undisputedly the assessee has a huge brought forward loss under the head ‘profits and gains of business or profession’, leading to nil gross total income, precluding any deduction whatsoever u/s. 80P(2)(a)(i). Even as clarified by the tribunal in the case of Asstt. CIT v. Bundi Chittorgarh Kshetriya Gramin Bank  23 taxmann.com 324 (JP), with reference to the decision in the case of CIT v. Kotagiri Industrial Co-op. Tea Factory Ltd.  224 ITR 604, no deduction under the said section is permissible in the absence of a positive income. The same, in fact, represents the settled position of law, on which we observe no dispute in the instant case, with the assessee having not preferred any claim u/s. 80P(2)(a)(i) per its return, and only for that reason. The reference to the said section, in the facts and circumstances of the case, has in fact arisen only due to the assessment of the impugned incomes by the Revenue u/s. 56, which being a different head of income, would not stand to be set off against brought forward business loss in view of sec. 72. The same, in turn, led the assessee, to plead for the eligibility of the said incomes there-under. No doubt, the assesse is under the circumstances justified in raising the claim for deduction u/s. 80P, but the said issue is thus only illusory and, in any case, secondary; the primary issue being the correct head of income under which the said incomes would stand to be assessed in law. The province of the tribunal, it is trite, is to discern the issue/s involved, and adjudicate the same on the basis of its factual findings, applying the law as declared by the higher courts of law, and for which we may refer to the decisions, inter alia, in the cases of Hukum Chand Mills Ltd. v. CIT  63 ITR 232 (SC) and Kapurchand Shrimal v. CIT  131 ITR 451.
6.2 With regard to the primary issue arising in the instant case, the income from ‘jeep charges’ and ‘no dues certificates’, as would be apparent from the foregoing (refer paras 4 & 5), is clearly business income. The Revenue’s stand of the same being assessable u/s. 56 is inconsistent with the facts of the case. As regards the income by way of ‘interest from employees’, discussed vide para 3 of this order, the same in our view would stand to be answered in favour of it being a business income. This is as the assessee-society is engaged primarily in providing credit facilities to its members, so that the same represents its principal or core business activity. Its employees, under the circumstances, can only be considered as non-members, to whom to whom the monies have been similarly lent, making it a collateral activity, incidental to its business. Rather, if the assessee is actively engaged funding non-members as well, i.e., other than its members, the employees would stand to fall under the said category, rendering their separate categorization in accounts as of little moment. Again, the employees being an intrinsic part of the business set-up of any organization, making the firm’s resources available to them, i.e., from which it generates business income, could only be considered as integral part to its business. Accordingly, all the three incomes under reference, irrespective of whether exigible to deduction u/s. 80P(2)(a)(i) or not, are liable to be assessed as business income, i.e., as returned by the assessee. No disturbance to its returned income on that count would thus ensue. In other words, though in answering the Revenue’s ground (i), we have considered the interest from employees as not eligible for deduction u/s. 80P(2)(a)(i) in view of the decision in the case of Totgar’s Co-op. Sale Society Ltd. (supra), so that it stands partly allowed, there is no case for disturbing the assessee’s return in respect of these three incomes, being liable to be assessed as business income, which would stand to be set off against the brought forward loss u/s. 72 of the Act. The afore-referred decision by the apex court, wherein the interest on investment in securities was held as rightly assessable u/s. 56, would not in our view impact the determination of the correct head of income, being essentially a matter of fact, with our decision in the present case resting on the factual finding of the assessee being actively engaged in financing business. The income under reference in that case was found to have been earned out of surplus funds available with the assessee-society for the time being, on being invested in government approved securities, so that the same is distinguishable on facts. We decide accordingly.
7. Finally, coming, once again, to the case law relied upon by the assessee (refer para 3.1). The same are, firstly, not on the issue involved, i.e., the correct head of income under which the impugned incomes stand to be assessed under law. Two, the same, even as observed by the Bench during hearing, are not relevant, inasmuch as they are in respect of assessees engaged in the business of banking, which is not the case in the instant case, even as clarified by us at the outset (refer para 3.3), with the ld. AR in fact confirming the same in writing (copy on record). In fact, all these decisions are prior to and de hors the decision by the hon’ble apex court in the case of Totgar’s Co-op. Sale Society Ltd. (supra), which, apart from the decision in the case of Kotagiri Industrial Co-op. Tea Factory (supra), have been found by us to be applicable in the facts of the case and, accordingly, applied.
8. In the result, the Revenue’s appeal is disposed of in the above terms.