Interest income on investments of Service Co-operative Banks is business income eligible for deduction u/s 80P(2)(a)(1) and not income from other sources.
Brief Facts of the Case
The assessee is a cooperative society. The return of income for the AY 2009-10 was filed on 25.3.2010 declaring net income of Rs. ‘Nil”, after claiming deduction u/s 80P(2) of the I T Act. The AO had treated the assessee’s income from investment amounting to Rs. 8,42,219/- as income from other sources. The assessee had claimed the said income as income from business of banking and was eligible for deduction u/s 80P(2)(a)(i) of the I T Act. The AO placed reliance on the judgment of the Hon’ble Apex Court in the case of Totgar Cooperative Sale Society Ltd vs ITO reported in 322 ITR 283 in taking the above stand. The relevant findings of the AO in treating the interest income amounting to Rs. 8,42,219/- as ‘income from other sources’ read as follows:
“It is also observed that apart from interest on loan it is getting interest from deposits with other banks. These cannot be categorized as providing credit facility as envisaged in 80P(4)(a) and (b) of the Income Tax Act. Thus the assessee is having deposits with the following banks etc.:
Sub Treasury Meenachil
Kerala State Rubber Marketing Federation
Kerala State Consumer Cooperative Consumer federation
FD with Treasury
Term Deposit with Radico
Teekoy Cooperative Ta Factory
South Indian Bank Pala
The assessee was therefore informed that its income is not eligible for deduction u/s 80P and also that its from investment will be assessed as other Source. However the assessee claimed that the investment income is also to be assessed as a income from banking. But this income is assessed as income from other source in view of the order of the Supreme Court in the case of Tot gar cooperative society limitedl.td (SLP Cno 7572 of2009) civil appeal no 1622 of2010 where it was held that interest on deposits with other banks and societies are to be assessed as income from other source and it will also not entitled to deduction under section 80P of the Income tax even if it is assessed as business income. The assessee however cited the decision of Supreme Court in 251 ITR. The interest from investments is according to the assessee also from the banking business and, therefore its income is eligible for deduction u/s 80P. However the case of the assessee is not the same. In the case cited by the assessee, the appellant had to deposit certain amounts with certain banks. In this case the. assessee is not bound by the Banking Regulation Act. It is not bound to deposit in any of the above organizations it at all there is an obligation it is to deposit in the District Cooperative societies.
I therefore hold that the income from deposits in these societies is assessable under Other source. However only the net interest from deposits and investments amounting to Rs.3,55,01,304/~ is taxed under the head “Income from other sources”. This is determined at Rs 827510/– worked out in the following manner
(3550130 x 100 ÷ 180317783or 19.69% of the total income of Rs. 42,02,695/- of Rs. 82,7510/-
Other income of Rs.6,25,736/-included in miscellaneous income is also assessed under other source. However, only the net income of only 14,709/- is assessed.
Total income from other source is therefore 8,27,510 +14,709 or Rs. 8,42,219/-
Held by ITAT
a major portion of the investment income was interest receipt from other cooperative societies. Section 80P(2(d) provides for deduction in respect of any income by way of interest or dividend derived by a cooperative society from its investment in another cooperative society. Therefore, interest income received from other cooperative societies are eligible for deduction u/s 80P(2)(d) of the act and cannot be assessed as “income from other source.”
As regards the interest from treasury and banks, we find on identical facts, the Cochin Bench of the Tribunal in the case of the Muttom Service Cooperative Bank Ltd in ITA No. 372/Coch/2010 had decided the matter in favour of the assessee. The Cochin Bench of the Tribunal in the case of Muttom Service Cooperative Bank Ltd (supra) has distinguished the judgment of the Hon’ble Apex Court in the case of Totgar’s Cooperative Sale Society Ltd (supra). The relevant finding of the coordinate Bench of the Tribunal in the case of the Muttom Service Cooperative Bank Ltd (supra) read as follows:
“5. We have considered the rival submission on either side and also perused the material available on record. We have also carefully gone through the order of the lower authority. No doubt, the latest judgment in Totgar’s Co-operative Sale Society Ltd vs ITO (supra), the Apex court found that the deposit of surplus funds by the co-operative society is not eligible for deduction u/s 80P(2). In the case before the Apex Court in Totgar’s Co-operative Sale Society Ltd vs ITO (supra), the assessee co-operative society was to provide credit facility to its members and market the agricultural produce. The assessee is not in the business of banking. Therefore, this Tribunal is of the opinion that the judgment of the Apex court in Totgar’s Co-operative Sale Society Ltd (supra) is not applicable in respect of the co-operative society whose business is banking. Admittedly, the assessee has invested funds in state promoted treasury small savings fixed deposit scheme. Since Government of India has withdrawn India Vikas Patra, as a small savings instrument, funds invested at the discretion of the bank is one of the activities of the banking as per the Banking Regulation Act. Since the assessee co-operative society is in the 4 ITA No.372/Coch/2010 business of banking the investment in the state promoted treasury small savings fixed deposit certificate scheme is a banking activity, therefore, the interest accrued on such investment has to be treated as business income in the course of its banking activity. Once it is a business income, the assessee is entitled for deduction u/s 80P(2)((a)(i). therefore, this Tribunal is of the opinion that the judgment of the Larger Bench of the apex Court in Karnataka State Cooperative Apex Bank (supra) is applicable to the facts of this case. By respectfully following the judgment of the Apex court in Karnataka State Co-operative Bank (supra), the order of the Commissioner of Income-tax(A) is upheld.”
In the instant case, the assessee is a cooperative Bank. The investment in treasury/banks and earning interest on the same is part of the banking activity of the assessee’s cooperative bank. Therefore, the said income is eligible for deduction u/s 80P(2)(a)(i) of the Act. Therefore, the Income Tax Authorities were not jusgified in treating interest income received by the assessee as ‘income from other source’ and denying the benefit of section 80P(2) of the Act. It is ordered accordingly.