Case Law Details
Nimshaskiya Madhyanik Shaley Karamchari Sahakari Sanstha Ltd Vs ITO (ITAT Nagar)
Conclusion: Interest income from bank deposits is eligible for deduction under Section 80P(2)(a)(i) as the funds in the voluntary reserves which were utilized for investment by the co-operative banks were the funds generated from the banking business.
Held: Assessee-a cooperative society of teaching and non-teaching employees of Maharashtra Government Middle Schools, contested an order from CIT (Appeals), which disallowed a deduction of ₹3,27,687 claimed for interest earned on deposits in a nationalised bank. Initially, assessee filed its return of income for the assessment year 2017-18, declaring a total income of ₹24,080 after claiming a significant deduction under Section 80P amounting to ₹14,28,366. The return was scrutinized due to the substantial deduction claimed, leading to notices under Section 143(2) for further details. The society maintained that it was compelled to open accounts with nationalised banks to safeguard the interests of its members following a significant loss incurred when a cooperative bank collapsed. During the proceedings, AO acknowledged that while the cooperative society had a responsibility to protect its members’ funds, the income earned from these deposits was categorized as income from other sources, not qualifying for deductions under Chapter VIA (80P). Consequently, AO restricted the deduction to exclude interest earned on such deposits. Appellant further argued that the interest income was derived from their regular business activities and complied with legal requirements. It was held that following the decision of the Co–ordinate Bench in The Ismailia Urban Co–operative Society v/s ITO, ITA no.122/ Nag./2023, order dated 18/06/2024, wherein it was held that the funds in the voluntary reserves which were utilized for investment in KVP/IVP by the co-operative banks were the funds generated from the banking business, Tribunal was justified in holding that the interest income received by the co-operative banks from the investments in KVP/I VP made out of the funds in the voluntary reserves were eligible for deduction under section 80P(2)(a)(i) and hold that assessee was eligible to claim deduction under Chapter VIA (80P).
FULL TEXT OF THE ORDER OF ITAT NAGPUR
The present appeal has been filed by the assessee challenging the impugned order dated 08/03/2023, passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2017–18.
2. During the course of hearing, the Registry has pointed out a delay of 22 days in filing the present appeal before the Tribunal. While going through the record available before us, we find that the assessee has filed an application dated 29/05/2023, requesting the Bench for condoning the delay in filing the present appeal. In support of the application for condonation of delay, the assessee has also filed Affidavit duly sworn.
3. After considering the submissions of the learned Authorised Representative appearing for the assessee and the averments made in the affidavit, we are of the opinion that the assessee is prevented in filing the appeal belatedly and we are satisfied that the delay in filing the appeal is due to reasonable cause. Balance of convenience is also in favour of the assessee. Consequently, we condone the delay of 22 days in filing the present appeal and admit the same for adjudication on merit.
4. In its appeal, the assessee has raised following grounds:–
“1. Whether the Ld. AO and CIT(A) is correct in disallowing a sum of Rs. 3,27,687/- from deduction claimed under Sec 80P as interest income on deposit nationalized bank.
2. The appellant craves leave to add/alter/amend and/or rescind any of the ground/grounds before or at the time of hearing. Any other additional/further ground/grounds of appeal may be given at the time of hearing.”
5. Facts in Brief:– The assessee is a Co–operative Society engaged in accepting deposits and providing credit facilities to its members. The members of the society consist of teaching and non-teaching employees of Maharashtra Government Middle Schools of Arvi Taluka (Semi Govt). The assessee filed its return of income electronically on 05/08/2017, declaring total income at ` 24,080, after claiming deduction under Chapter VIA (80P) at ` 14,28,366, from the gross total income of ` 14,52,441. This return of income was processed by Central Processing Centre,. The case was picked up by CASS for the reason of large deduction under Chapter VIA from total income. Notice under section 143(2) of the Income Tax Act, 1961 (“the Act”) was issued online 09/08/2018. Subsequently, notice/questionnaire was issued on different dates requiring the assessee to furnish details / documents with regard to the CASS reason. In response to the notices, the assessee has filed written submission along with Audit Report as per Societies Act and its annexures, computation of total income, etc. In response the questionnaire issued by the Assessing Officer, the assessee submitted that in accordance with the legal requirements under Maharashtra State Co-operative Societies Act, the assessee maintained saving and current account and reserve account with Wardha District Central Co-operative Bank, Arvi. The assessee submitted that as the said bank had collapsed which resulted in loss of an amount ` 11.16 lakhs, therefore, in order to safeguard the interest of their members and secure the money the society opened accounts with nationalised banks and kept deposits with such banks. The assessee society has also stated that the deposits with nationalised banks are purely its business income earned during the regular course of business and to comply with certain legal requirements. It was submitted that the FDRs are made to meet any eventuality towards repayment of deposits and share capital. The assessee has also submitted that as per section 56(2)(d) of the Act, interest by way of interest on securities is chargeable under the residuary head i.e, other sources only if the income is not chargeable under the head profit & gains of businesses. The assessee has relied on the decision of ITAT in the case of Chhattisgarh Urban Credit Sahakari Sanstha Maryadit Vs. ITO reported in 371/Nag/2012 (for AY 2009-10).
6. The Assessing Officer considering the submissions of the assessee found that they are not acceptable. The Assessing Officer was of the view that the assessee is under the wrong impression that the relevant Section of the Act prohibits the assessee from investing its funds in Nationalised Banks which is not so. He was further of the view that since the assessee is the custodian of the hard-earned money of its numerous members, it has the responsibility to park the excess funds in safe hands which may include banks in co-operative and public sector wherein they have trust as the funds would be safe. However, the Assessing Officer held that the only issue is that the income earned by way of interest on such deposits kept with banks does not qualify for claiming as deduction under Chapter–VIA (80P). In view of the above, the deduction claimed under Chapter–VIA (80P) of the Act was restricted by excluding the amount of interest earned on deposits with Bank. Aggrieved, the assessee carried the matter before the first appellate authority.
7. The learned CIT(A) confirmed the order passed by the Assessing Officer and dismissed the assessee’s appeal by observing as follows:–
“4.4 On perusal of the findings of the AO as well as written submission filed by the appellant, it is found that the contention of the appellant is not acceptable as the case of the appellant is not falling under the provisions of section 80P of the IT Act, 1961. As per the provision of Section 80P(2)(d), ‘in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income’. As can be seen from Para 4.3 above, the appellant has invested the funds in Bank of India & IDBI Arvi. As per the official website of the RBI, the Bank of India is under the list of scheduled public sector banks and the IDBI Bank is under the list of scheduled private sector banks. The case of the appellant is not falling under the provisions of section 80P(2)(d) of IT Act. Further, the judicial decisions relied upon the appellant are different and distinguishable from the facts of the case under consideration.
4.5After considering all the facts and circumstances of the case under consideration, I am of the considered opinion that the AO has rightly disallowed the deduction of Rs. 3,27,687/- u/s 80P of the IT Act, 1961. Therefore, the disallowance made by the AO u/s 80P of the IT Act of Rs. 3,27,687/- is hereby confirmed. Accordingly, the grounds of appeal are dismissed.”
8. Before us, the learned Counsel for the assessee reiterated the submissions made before the authorities below and prayed that the claim so made.
9. The learned Departmental Representative vehemently relied upon the order of the authorities below.
10. I have heard the rival arguments, perused the material available on record and gone through the orders of the authorities below. I find that the assessee suffered loss of ` 11.16 lakh, as the money deposited in the bank was collapsed. It was the intention of the assessee to safeguard the interest of its members and to secure the money, the assessee society kept money in the Nationalised Banks which are assessee’s business income earned during the course of regular business as well as to comply with its legal requirement. Thus, I do not find any ambiguity on such action of the assessee. It is an admitted fact that the assessee is a Co–operative Society and the assessee has deposited certain funds with Nationalised Bank and has received interest income which was claimed the as deduction under section Chapter VIA (80P) of the Act. The case of the Assessing Officer is that the interest income received by the assessee is from income from other sources not eligible for deduction under Chapter VIA (80P) of the Act. I find that similar issue came up for adjudication before the Tribunal, Nagpur Bench, wherein the very same Bench was a party to that order rendered in The Ismailia Urban Co–operative Society v/s ITO, ITA no.122/ Nag./2023, order dated 18/06/2024, (the very same Bench is a party to this order) wherein the Tribunal has considered this issue in detail and held that interest income earned by the assessee trust is eligible for deduction under Chapter VIA (80P) of the Act. The relevant portion of the order reproduced below:–
“9. Upon hearing both the counsel and perusing the record, we find that the issue involved is covered in favour of the assessee by a catena of decisions from ITAT as well as a decision of jurisdictional High Court. In this regard we may gainfully refer the Hon‟ble Jurisdictional High Court decision in the case of CIT vs. Solapur Nagri Audyogik Sahakari Bank Ltd. 182 Taxman 231 wherein the following question was raised.
“Whether the interest income received by a Co-operative Bank from investments made in Kisan Vikas Patra („KVP‟ for short) and Indira Vikas Patra („IVP‟ for short) out of voluntary reserves is income from banking business exempt under Section 80P(2)(a)(i) of the Income Tax Act, 1961 ?”
After considering the issue, the Hon‟ble Jurisdictional High Court has concluded as under :
“12. Therefore, in all these cases, where the surplus funds not immediately required for day-to-day banking were kept in voluntary reserves and invested in KVP/IVP, the interest income received from KVP/IVP would be income from banking business eligible for deduction under section 80P(2)(i) of the Act.
13. In the result, there being no dispute that the funds in the voluntary reserves which were utilized for investment in KVP/IVP by the co-operative banks were the funds generated from the banking business, we hold that in all these cases the Tribunal was justified in holding that the interest income received by the co-operative banks from the investments in KVP/I VP made out of the funds in the voluntary reserves were eligible for deduction under section 80P(2)(a)(i) of the Act.”
The above case law fully supports the assessee‟s case. Here also surplus funds not immediately required for day to day banking were kept in Bank deposits. The income earned there from thus would be income from banking business eligible for deduction u/s 80P(2)(a)(i).
10. Similarly we find that similar issue was considered by this Tribunal on similar grounds raised by the Revenue in the case of MSEB Engineers Co-Op. Credit Society Ltd., wherein the ITAT, Nagpur Bench, vide order dated 05/05/2016 held as under :
“Upon hearing both the counsel and perusing the records, we find that the above issue is covered in favour of the assessee by the decision of this ITA, referred by the Ld. CIT(A) in his appellate order. The distinction mentioned in the grounds of appeal is not at all sustainable. We further find that this Tribunal again in the case of Chattisgarh Urban Sahakari Sanstha Maryadit Vs. ITO in ITA No. 371/Nag/2012 vide order dated 27.05.2015 has adjudicated similar issue as under:-
“11. Upon careful consideration, we not that identical issue was the subject matter of consideration by ITAT, Ahmedabad Bench decision in the case of Dhanlaxmi Credit Cooperative Society Ltd (supra), in which one of us, learned Judicial Member, was a party. The concluding portion of the Tribunal‟s decision is as under:
“4. With this brief background, we have heard both the sides. It was explained that the Co-operative Society is maintaining “operations funds” and to meet any eventuality towards repayment of deposit, the Co-operative society is maintaining some liquidated funds as a short term deposit with the banks. This issue was thoroughly discussed by the ITAT “B” Bench Ahmedabad in the case of The Income Tax Officer vs. M/s.Jafari Momin Vikas Co-op Credit Society Ltd., bearing ITA No. 1491/Ahd/2012 (for A.Y. 2009-10) and CO No. 138/Ahd/2012 (by Assessee) order dated 31/10/2012. The relevant portion is reproduced below :-
“19. The issue dealt with by the Hon‟ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts as under :
What is sought to be taxed The issue dealt with by the Hon‟ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts as under : under section 56 of the Act is interest income arising on the surplus invested in short term deposits and securities, which surplus was not required for business purposes? The assesse(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question before us, is whether interest on such deposits/securities, which strictly speaking accrues to the members‟ account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of „income from other sources‟ hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer…..”
19.1However, 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 assesse(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 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).
19.2 CFrom the above, it emerges that
(a) that assessee (issue before the Supreme) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits;
(b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members;
(c) that assessee carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii)marketing the agricultural produce; and
(d) that the surplus had arisen emphatically from marketing of agricultural produces.
19.3 In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds.
19.4 While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely:
(1)in the case of assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds:-
– in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members;
(2)in the case of present assessee, it had not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such;
– in the case of Totgars, the Hon‟ble Supreme Court had not spelt out anything with regard to operational funds;
19.5 Considering the above facts, we find that there is force in the argument of the assessee that the assessee not a cooperative bank, but its nature of business was coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds. That was why, it was submitted by the assessee that it had invested in short-term deposits. Furthermore, the assessee had maintained overdraft facility with Dena Bank and the balance as at 31.3.2009 was Rs.13,69,955/- [source : Balance Sheet of the assessee available on record].
19.6 In overall consideration 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.”
5. Respectfully following the above decision of the Co-ordinate Bench, we hereby hold that the benefit of deduction u/s 80P(2)(a)(i) was rightly granted by ld. CIT(A), however, he has wrongly held that the interest income is taxable u/s 56 of the Act so do not fall under the category of exempted income u/s 80P of the Act. The adverse portion of the view, which is against the assessee, of ld. CIT(A) is hereby reversed following the decision of the Tribunal cited supra, resultantly ground is allowed.
8. We find that the ratio of above case also applies to the present case. As observed in the above case law, in this case also the submissions of the assessee‟s counsel is that the assessee society is maintaining operational funds and to meet any eventuality towards repayment of deposit the cooperative society is maintaining some liquidated funds as short term deposits with banks. Hence adhering to the doctrine stair desises, we hold that the assessee should be granted benefit of deduction under section 80P(2)(a)(i). Accordingly, the interest on deposits would qualify for deduction under the said section. Accordingly, we set aside the order of authorities below and decide the issue in favour of assessee. “4.
4. We further find that batch of similar appeals decided by the ITAT in favour of the assessee has also been considered by the Jurisdictional High Court. The Hon‟ble Jurisdictional High Court has duly affirmed of this Tribunal. Accordingly, in the background aforesaid discussion, we do not find infirmity in the order of Ld. CIT(A).”
11. In the background of aforesaid discussion and decisions, we find that CIT (A) has erred in upholding the 11 assessment order. The Appellant Co-operative society is entitled for deduction u/s 80P as claimed in the return.”
11. In the above decision, the Co–ordinate Bench has already considered the judgment of the Hon’ble Supreme Court in The Totgars’ Co–operative Sale Society Ltd. (supra) and held that the facts of this case are distinguishable and not applicable to the facts of the present case. I, therefore, following the decision of the Co–ordinate Bench in The Ismailia Urban Co–operative Society v/s ITO, ITA no.122/ Nag./2023, order dated 18/06/2024, set aside the impugned order passed by the learned CIT(A) and hold that the assessee is eligible to claim deduction under Chapter VIA (80P) of the Act. Thus, ground no.1, raised by the assessee is allowed.
12. Ground no.2, being general in nature, hence, no separate adjudication is required.
13. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open Court on 09/09/2024
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