Section 80P Deduction Allowed on Bank Interest & Nominal Member Transactions: ITAT Pune

Nashik Road Nagari Sahkari Patsanstha Limited Vs ITO (ITAT Pune)

The assessee, a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960 and engaged in providing credit facilities to its members, filed its return of income for AY 2013-14 declaring nil income. The Assessing Officer completed the assessment under Section 143(3) of the Income-tax Act, 1961 by making additions aggregating to ₹44,01,002. The additions included treating interest earned on fixed deposits with Bank of Baroda and interest on Government/RBI securities as income from other sources, thereby denying deduction under Section 80P(2), along with disallowances relating to building fund provision, investment fluctuation, MSEB commission expenses and Section 14A. The CIT(A) further held that the assessee was a co-operative bank hit by Section 80P(4), denied deduction under Section 80P(2)(a)(i), enhanced the disallowance under Section 14A applying Rule 8D, and confirmed the other disallowances.

Before the Tribunal, the assessee contended that it was a co-operative society and not a co-operative bank, as it had not been granted a banking licence by the RBI. It argued that once the CIT(A) accepted the interest on fixed deposits as business income, deduction under Section 80P(2)(a)(i) could not be denied. Reliance was placed on the Supreme Court decision in The Mavilayi Service Co-Operative Bank Ltd. and Another v. CIT (2021) 431 ITR 1. The Revenue maintained that interest earned on investments with Bank of Baroda was not business income derived from lending to members and therefore was not eligible for deduction under Section 80P(2).

The Tribunal observed that the assessee accepted deposits from and lent money to its members, and surplus funds not immediately required for lending were invested in fixed deposits with Bank of Baroda. Referring to conflicting High Court decisions on the eligibility of such interest income for deduction under Section 80P(2)(a)(i), the Tribunal followed the earlier decision of the Pune Bench in M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit v. ITO, which had relied on the Karnataka High Court judgment in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO. Accordingly, it held that interest earned on investment of surplus funds with banks was eligible for deduction under Section 80P(2)(a)(i). On the same reasoning, the Tribunal also held that interest earned on securities held with RBI qualified for deduction under Section 80P(2)(a)(i).

With respect to the remaining disallowances, the Tribunal held that any disallowance made by the Assessing Officer would increase the business profits of the co-operative society, and the enhanced business income would also qualify for deduction under Section 80P(2)(a)(i). Consequently, the Tribunal allowed the assessee’s grounds relating to the various disallowances.

On the issue of lending to nominal and extraordinary members, the Tribunal noted that the expression “members” is not defined in the Income-tax Act and referred to the Supreme Court’s decision in U.P. Co-operative Cane Union Federation Ltd. v. CIT, which held that the expression must be construed in the context of the relevant State Co-operative Societies Act. Since the Maharashtra Co-operative Societies Act, 1960 includes nominal and extraordinary members within the definition of “members”, the Tribunal held that the CIT(A) was not justified in denying deduction under Section 80P(2)(a)(i) on the ground that loans had been advanced to nominal members. The appeal was accordingly allowed.

Cases Discussed:

• The Mavilayi Service Co-Operative Bank Ltd. and Another v. CIT, (2021) 431 ITR 01
• Vaveru Co-operative Rural Bank Ltd. v. CIT, (2017) 396 ITR
• Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO, (2015) 230 taxmann 309 (Kar.)
• CIT v. Southern Eastern Employees Cooperative Credit Society Ltd., 390 ITR 524
• State Bank of India v. CIT, 389 ITR 578 (Guj.)
• CIT v. Punjab State Cooperative Agricultural Development Bank Ltd., 389 ITR 68
• Mantola Co-operative Thrift & Credit Society Ltd. v. CIT, 50 taxmann.com 278
• CIT v. Punjab State Cooperative Federation of Housing Building Societies Ltd., 11 taxmann.com 448
• U.P. Co-operative Cane Union Federation Ltd. v. CIT, (1999) 237 ITR 574 / 103 Taxman 376 (SC)
• M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit v. ITO, ITA Nos. 559/560/PUN/2018, dated 11-12-2018

FULL TEXT OF THE ORDER OF ITAT PUNE

This is an appeal filed by the assessee directed against the order of ld. Commissioner of Income Tax (Appeals)-1, Nashik (‘CIT(A)’ for short) dated 01.05.2017 for the assessment year 2013-14.

2. Briefly, the facts of the case are that the appellant is a cooperative society registered under the Maharashtra Co-operative Societies Act, 1960. It is engaged in the business of providing credit facilities to its members. The return of income for the assessment year 2013-14 was filed on 19.07.2013 declaring Rs.Nil income. Against the said return of income, the assessment was completed by the Income Tax Officer, Ward-1(2), Nashik (‘the Assessing Officer’) vide order dated 19.10.2015 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) Act at a total income of Rs.48,36,400/-. While doing so, the Assessing Officer made the following additions to the returned income :

3. Being aggrieved by the above additions, an appeal was preferred before the CIT(A).

4. The CIT(A) during the course of proceedings before him held that the appellant society is a Cooperative bank and, therefore, hit by the provisions of sub-section (4) of section 80P, accordingly, denied the claim for deduction of income u/s. 80P(2)(a)(i) of the Act by giving enhancement notice. The CIT(A) also enhanced the addition under the provisions of section 14A by holding that no adhoc disallowance should be computed in accordance with the provisions of Rule 8D. The CIT(A) also confirmed the other disallowances made by the AO. Being aggrieved the appellant is in appeal before us in the present appeal.

5. Ground of appeal No. 1 & 2 challenges the decision of the CIT(A) denying the claim of exemption u/s. 80P(2)(a)(i) in respect of interest on fixed deposits with Bank of Baroda at Rs.3,18,843/-. The AO denied the exemption of interest of Rs.3,18,843/- earned on the investment made with Bank of Baroda treating it under the head ‘income from other sources’ not as ‘income from business’. On an appeal before the CIT(A), the CIT(A) upheld the contention that the said interest income should be assessed as ‘income from business’. However, he denied the claim of exemption u/s. 80P(2)(a)(i) on the ground that the assessee lends money to nominal members.

6. Being aggrieved by the above decision of the ld. CIT(A), the assessee is in appeal before us in the present appeal.

7. The ld. AR submitted that the CIT(A) having accepted that the interest earned on fixed deposits with Bank of Baroda is assessable under ‘business income’ ought not to have denied the exemption u/s. 80P(2)(a)(i) of the Act on the ground that the assessee is a Cooperative Bank. It is submitted that the appellant society was not granted licence to carry on the business of banking by RBI. It is a Cooperative society registered under the Maharashtra Cooperative Societies Act,1960. Placing reliance on the recent decision of Hon’ble Supreme Court in the case of The Mavilayi Service Co-Operative Bank Ltd. and Another Vs. CIT (2021) 431 ITR 01 submitted that the AO cannot go beyond the registration certificate granted under the Cooperative Societies and therefore, the provisions of section 80P have no application.

8. On the other hand, the ld. DR placing reliance on the orders of the lower authorities held that the interest earned on investment made in Bank of Baroda are not eligible for exemption u/s.80P(2) of the Act as it is not a ‘business income’ derived from the activity of lending money to its members.

9. We heard the rival submissions and perused the material on record. Admittedly, the appellant is a Cooperative society formed under the provisions of Maharashtra Cooperative Societies Act,1960 with the objective of accepting deposits and lending money to its members. The money which is not immediately required for the purpose of lending to the members is deposited with Bank of Baroda in the form of Fixed Deposit. The question is whether the interest so earned qualifies for exemption u/s. 80P(2)(a)(i) of the Act. The AO as well as the CIT(A) were of the opinion that the interest earned from third parties or non-members does not quality for exemption u/s.80P. It is an admitted position that the interest so earned should be taxed as ‘income from other sources’ There is a cleavage of judicial opinion among several High Courts on the issue of eligibility of this kind of income for exemption u/s. 80P(2)(a)(i) of the Act. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Punjab State Cooperative Federation of Housing Building Societies Ltd. 11 taxmann.com 448, the Hon’ble Gujarat High Court in the case of State Bank of India Vs. CIT 389 ITR 578 (Guj.), the Hon’ble Delhi High Court in the case of Mantola Co-operative Thrift & Credit Society Ltd. Vs. CIT 50 taxmann.com 278, the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Punjab State Cooperative Agricultural Development Bank Ltd. 389 ITR 68 and the Hon’ble Kolkata High Court in the case of CIT Vs. Southern Eastern Employees Cooperative Credit Society Ltd. 390 ITR 524 took a view that the income arising on the surplus invested in short term deposits and securities cannot be attributed to the activities of the society and, therefore, not eligible for exemption u/s.80P(2)(a)(i) of the Act. However, the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO (2015) 230 taxmann 309 (Kar.) and the Hon’ble Telangana and Hon’ble Andhra Pradesh High Court in the case of Vaveru Co-operative Rural Bank Ltd. v CIT [(2017) 396 ITR took a view that such interest income is attributable to the activities of the society and, therefore, eligible for exemption u/s.80P(2)(a)(i) of the Act. The Coordinate Bench of Pune Benches in the case of M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit Vs. ITO (ITA Nos.559/560/PUN/2018, dated 11-12-2018) has taken view in favour of the assessee following the judgment of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Respectfully following the decision of the Coordinate Bench, we hold that the interest income earned on the investment of surplus money with banks is also eligible for exemption u/s.80P(2)(a)(i) of the Act. Thus, the grounds of appeal No. 1 & 2 stands allowed.

10. Grounds of appeal No. 3 & 4 challenges the decision of the CIT(A) denying the claim for exemption of interest earned on the securities held with RBI. The reasoning given by us in relation to grounds of appeal No. 1 & 2 equally holds good to the issue in grounds of appeal No. 3 & 4 and, therefore, for the reasons stated therein, we allow these grounds in favour of the assessee and direct the AO to exempt the interest earned on securities held with RBI under the provisions of section 80P(2)(a)(i) of the Act.

11. Grounds of appeal No. 5 to 10 challenges the other disallowances made by the AO. Without going into the merits of the disallowances made by the AO, it would suffice to hold that the disallowances, if any, made shall increase the business profits of the cooperative society. The business profits so increased shall equally qualify for exemption u/s.80P(2)(a)(i) of the Act. Accordingly, we hold that the enhanced income on account of disallowances made by the AO should qualify for exemption 80P(2)(a)(i) of the Act. Thus, the grounds of appeal No. 5 to 10 stands allowed.

12. Ground of appeal No.11 challenges the decision of the CIT(A) holding that the appellant society is not eligible for exemption u/s. 80P(2)(a)(i) of the Act on the ground that the money is also lent to the nominal members and extraordinary members who are not members of the cooperative society. Therefore, the question that comes up for consideration is whether the nominal members are also the members of the Cooperative societies or not. The term “members” is not defined in the Income Tax Act, 1961. In U.P. Co-operative Cane Union Federation Ltd. v. CIT (1999) 237 ITR 574/103 Taxman 376 (SC), the Supreme Court considering the claim again under Section 80P(2)(a)(i) held :

The expression “members” is not defined in the Act. Since a Co-operative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in section 80P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the co-operative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in section 80P(2)(a)(i) of the Act in the light of the definition of that expression as contained in section 2(n) of the Co-operative Societies Act…”

Under the provisions of Maharashtra Cooperative Societies Act, 1960, the term “members” include nominal members and extraordinary members and in the circumstances, we hold that the CIT(A) was not justified in denying the exemption u/s.80P(2)(a)(i) of the Act. This ground is also allowed.

13. In the result, the appeal is allowed.

Order pronounced in the Open Court on 27^th December, 2021.