ACIT Vs Sardar Patel Coop. Credit Society Ltd. (ITAT Ahmedabad)
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals), Gandhinagar, Ahmedabad in Appeal No. CIT(A)/GNR/10198/2018-19 dated 12/07/2019 for assessment year 2016-17. The dispute before the Tribunal concerned the allowability of deduction under Section 80P(2)(d) of the Income-tax Act, 1961 in respect of interest earned by the assessee on surplus funds deposited with co-operative banks.
The assessee was a co-operative society engaged in providing credit facilities exclusively to its members from deposits received from them. For the year under consideration, it declared net profit of ₹2,13,69,867/- and, after adjustment of certain items, determined its total income at Nil after claiming deduction under Section 80P of the Act.
During assessment proceedings, the Assessing Officer noted that the assessee had earned interest from co-operative banks as well as nationalized banks and had claimed deduction under Section 80P. The total interest income was ₹1,46,98,641/-, including substantial interest of ₹1,46,65,877/- from The Mehsana Urban Bank Sah. Bank. The Assessing Officer denied the deduction in totality, treated the interest income as “income from other sources” under Section 56 and also declined to allow proportionate expenses on the ground that the assessee had failed to establish the requisite nexus under Section 57(iii).
On appeal, the CIT(A) accepted the assessee’s contention partly. The CIT(A) held that the income earned from investment of surplus funds with nationalized banks was not allowable under Section 80P, but allowed deduction under Section 80P(2)(d) in respect of interest received on surplus funds deposited with other co-operative banks.
The Revenue challenged that portion of the CIT(A)’s order before the ITAT Ahmedabad.
The issue before the Tribunal was whether interest earned by a co-operative society from co-operative banks was eligible for deduction under Section 80P(2)(d).
The Tribunal considered the Gujarat High Court decision in State Bank of India Vs. CIT, (2016) 389 ITR 578 (Guj.). The High Court had held that interest derived from credit provided to members was deductible under Section 80P(2)(a)(i), whereas interest earned by depositing surplus funds with the State Bank of India was not deductible under that provision because it was not attributable to the business of providing credit facilities to members. The High Court had, however, specifically observed that if the assessee wanted to avail the benefit of deduction in respect of such interest income, it was open to it to deposit the surplus funds with a co-operative bank and claim deduction under Section 80P(2)(d).
The Tribunal also considered Surat Vankar Sahakari Sangh Ltd. v. Assistant Commissioner of Income-tax, [2016] 72 taxmann.com 169 (Gujarat), where deduction under Section 80P(2)(d) was allowed in respect of gross interest received from a co-operative bank without adjusting interest paid to that bank.
The Tribunal further referred to Surendranagar District Co-op. Milk Producers Union Ltd. v. Deputy CIT(A), 111 taxmann.com 69 (Rajkot Bench), where the benefit of Section 80P(2)(d) was held to be available in respect of interest earned on deposits made with a co-operative bank, although the benefit was not available for interest earned from nationalized/private banks.
The Tribunal also considered Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society, (2017) 392 ITR 74 (Karn.), in which the Karnataka High Court had held that interest income earned by a co-operative society on investments held with a co-operative bank was eligible for deduction under Section 80P(2)(d).
Following the decision of the Gujarat High Court and the other cases cited in the order, the Tribunal held that interest earned by the assessee on surplus funds held with co-operative banks was eligible for deduction under Section 80P(2)(d) of the Act.
Accordingly, the Revenue’s appeal was dismissed.
Cases Discussed
- State Bank of India Vs. CIT, (2016) 389 ITR 578 (Guj.) — considered on the distinction between interest earned from surplus funds deposited with a nationalized bank and interest earned from investments with a co-operative bank under Section 80P(2)(d).
- Surat Vankar Sahakari Sangh Ltd. v. Assistant Commissioner of Income-tax, [2016] 72 taxmann.com 169 (Gujarat) — referred to for allowing deduction under Section 80P(2)(d) in respect of gross interest received from a co-operative bank.
- Surendranagar District Co-op. Milk Producers Union Ltd. v. Deputy CIT(A), 111 taxmann.com 69 (Rajkot Bench) — referred to for the distinction between interest from nationalized/private banks and interest from co-operative banks for purposes of Section 80P(2)(d).
- Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society, (2017) 392 ITR 74 (Karn.) — referred to for the proposition that interest earned by a co-operative society on investments held with a co-operative bank is eligible for deduction under Section 80P(2)(d).
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the revenue against the order of the ld. Commissioner of Income Tax (Appeals), Gandhinagar, Ahmedabad in Appeal No. CIT(A)/GNR/10198/2018-19 vide order dated 12/07/2019 passed for the assessment year 2016-17.
2. The Revenue has raised the following grounds of appeal:-
“(i) Whether, the Ld. Commissioner of Income- Tax (appeals) has erred in law and on facts in deleting the addition of Rs. 1,46,68,200/- on account of interest earned under section 80P(2)(d) of the Act.
(ii) On the facts and circumstances of the case, the Ld. Commissioner of Income- Tax (Appeals) ought to have upheld the order of the Assessing Officer.
(iii) It is, therefore prayed that the order of the Ld. Commissioner of Income-tax(Appeals) may be set aside and that of the Assessing Officer be restored.
(iv) The appellant prays for leave, to amend or alter any ground or add a new ground which may be necessary.”
3. The assessee is a Cooperative Society and is engaged in providing credit facilities to its members only from the deposits received from them. During the year under consideration, the assessee declared net profit of ₹2,13,69,867/- and after adjustment of some items, total income of ‘Nil’ was worked out after claiming deduction section 80P of the Act. During the course of assessment proceedings, the AO noted that the assessee has earned interest income from cooperative banks as well as nationalized banks and claimed deduction under section 80P of the Act on the same. The details of interest earned from cooperative banks as well as nationalized banks during the year under consideration are as under:
| Name of Bank Amount of interest | ||
|---|---|---|
| 1 The Bank of Baroda Rs. 25,355/- | ||
| 2 The Denu Guj Gramin Bank Rs. 4,386/- | ||
| 3 The Kukarwad Nagrik Sah. Bank Rs. 1,486/- | ||
| 5 State Bank of India Rs. 699/- | ||
| 6 The Mehsana Urban Bank Sah. Bank | Rs. 1,46,65,877/- | |
| 7 The Vijapur Nagrik Sha. Bank Rs. 685/- | ||
| Total Rs. 1,46,98,641/- |
4 The Mehsana Dis. Bank Rs. 153/-
3.1 The assessing officer denied the claim of deduction under section 80P of the Act in totality and taxed the interest income as “income from other sources” under section 56 of the Act. Further, the assessing officer also denied deduction of proportionate expenses incurred for earning the aforesaid interest income. While passing the order, the assessing officer observed as under:
On perusal of the above judgment it is clear that the deduction claimed by the co.-op. society on interest income from nationalized banks as well as Co-operative banks of entities other than co-op. society will not be allowed as deduction u/s 80P of the Act. Hence, the deduction claimed by it on interest earned from entities other than co.-op. societies are disallowed and added to the income of the assessee. Accordingly, addition of Rs.1,46,98,641/- is made to the total income of the assessee under the head of income from other sources u/s. 56of the I.T. Act, 1961. As regards arguments of the assessee that proportionate expenses to be allowed in interest income. It is seen that assessee has invested its surplus funds in Nationalized Bank/Co-op. Bank. There is no nexus seen between the surplus fund invested in nationalized bank/Co-op, bank and expenses claimed by the assessee. The assessee has failed to prove that expenses incurred were for earning interest income from nationalized bank/Co-op. Bank in terms of provision of Section 57(iii) of the IT. Act. Therefore, no separate expenses on interest income received from nationalized banks/Co-op, banks needs to be allowed as deduction. Penalty proceedings u/s 271(1)(c) are initiated separately for furnishing inaccurate particulars of income. (Addition of Rs. 1,46,98,641/-)
4. In appeal, Ld. CIT(A) accepted the assessee’s contention and allowed deduction under section 80P(2)(d) of the Act and held that that the income earned by the appellant is not allowable u/s 80P of the Act in respect of interest earned from investment of surplus funds kept in nationalized banks. However, deduction u/s. 80P(2)(d) was allowed in respect of interest received on surplus funds deposited with other co-operative banks.
5. The Revenue is in appeal before us in respect of the aforesaid allowability of deduction u/s. 80P(2)(d) of the Act in respect of interest earned on surplus funds deposited with other cooperative banks.
5.1 The issue for consideration before us is whether the assessee is eligible to claim deduction on interest earned from Co-Operative Banks u/s 80P(2)(d) of the Act. The Hon’ble Gujarat High Court in the case of State Bank of India Vs. CIT (2016) 389 ITR 578 (Guj), held that that the interest income earned by a co-operative society on its investments held with a co-operative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. The Honourable Gujarat High Court made following observations in respect of interest earned from deposits kept with a cooperative bank:
Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)
(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India not being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a) (i) of the Act. If the appellant wants to avail of the benefit of deduction of such interest income, it is always open for it to deposit the surplus funds with a co-operative bank and avail of deduction under section 80P(2)(d) of the Act.
5.2 In the case of Surat Vankar Sahakari Sangh Ltd. v Assistant Commissioner of Income-tax [2016] 72 taxmann.com 169 (Gujarat), the Gujarat High Court held assessee-co-operative society was eligible for deduction under section 80P(2)(d) in respect of gross interest received from co-operative bank without adjusting interest paid to said bank.
5.3 In the case of Surendranagar District Co-op. Milk Producers Union Ltd. v Deputy Ld. CIT(A) 111 taxmann.com 69 (Rajkot Bench) the ITAT held that assessee-co-operative society could not claim benefit of section 80P(2)(d) in respect of interest earned by it from deposits made with nationalised/private banks, however, said benefit was available in respect of interest earned on deposits made with co-operative bank.
5.4 In the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn), the Karnataka High Court has held that the interest income earned by a co- operative society on its investments held with a co-operative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act.
5.5 Respectfully, following the decision of Honourable High Court of Gujarat and other cases cited above, in our view, interest earned by the assessee on surplus held with cooperative banks would be eligible for deduction under Sec.80P(2)(d) of the Act.
6. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 20-05-2022
