The Katwa-Kalna Co-Operative Agriculture society appealed against a previous decision disallowing a tax deduction under Section 80P(2)(a)(i) on the grounds that its interest income from fixed deposits was taxable under ‘income from other sources’ rather than derived from business activities. The co-operative society argued that these deposits were made to comply with the West Bengal Cooperative Societies Act provisions, making the interest income a part of their business income and eligible for deduction.
Upon hearing the arguments, the ITAT bench found merit in the co-operative society’s plea. The bench noted that the interest income was earned on on NSC, fixed deposit/certificate of bank as a result of a mandatory business requirement as per the West Bengal Cooperative Societies Act. Therefore, the interest earned from these deposits was indeed a business income, making it eligible for deduction under Section 80P(2)(a)(i).
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal has been preferred by the assessee against the order dated 28.06.2021 of the National Faceless Appeal Centre [hereinafter referred to as ‘CIT’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’). The assessee in this appeal has taken the following grounds of appeal:
1. That on the facts and circumstances of the case, the CIT(A) erred in upholding the action of the assessing officer in disallowing deduction of Rs. 16,86,273/- under section 80P(2)(a)(i) of the Income Tax Act, 1961 on the ground that interest income of Rs. 16,86,273/- earned from fixed deposits/investments with State Bank of India is not derived from business and was taxable under the head ‘income from other sources’, which is not eligible for deduction under that section. Appellant prays for allowing the same.
2. That appellant kept its fund in term-deposit in compliance of the provisions of West Bengal Cooperative Societies Act, which is mandatory for accepting deposits from its members; hence, interest from term-deposit was ‘Income from Business and Profession and was eligible for deduction under section 80P of Income Tax Act, 1961. Appellant prays for allowing the same.
3. The Ld. CIT(A) has erred on facts and in law in not considering the interest expenditure amounting to Rs. 16,39,432/- which is corresponding to and/ or attributable to the earning of the said interest income of Rs 16,86,273/- on the FDRs and the appellant being fully entitled for such deduction and in view of the facts and circumstances it may kindly be granted.
4. The Ld. CIT(A) has erred on facts and in law in not considering the differential amount of Rs 46,841/- being the excess of Interest Income over the aforesaid corresponding expenditure as eligible for deduction u/s 8OP(2)(a)(i) of the Income Tax Act, 1961 and in view of the facts and circumstances it may kindly be granted.
5. That, the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.
2. Brief facts of the case are that assessee is a co-operative society under West Bengal Co-operative Societies Act, 1940. The main objective of the assessee is a primary co-operative Agriculture and Rural Development Bank as defined in explanation appearing u/s 80P(4) of the I.T. Act. The assessee filed its return of income for assessment year in question on 27.03.2016 declaring income of Rs. 62,254/-. Subsequent to that, the case of the assessee was selected for scrutiny and assessment was completed on 28.12.2016 u/s 143(3) of the Act. While framing the assessment, the ld. AO disallowed claim of assessee of Rs. 16,86,273/- u/s 80P of the Act by holding that since the assessee earned alleged interest amount from the SBI and same is not eligible for deduction u/s 80P of the Act.
3. Aggrieved by the above order, assessee preferred an appeal before the ld. CIT(A). However, the appeal of the assessee was dismissed.
4. Dissatisfied with the above order, assessee preferred an appeal before the Tribunal.
5. At the time of hearing, the ld. AR submitted before the bench that the ld. CIT(A) erred in upholding the action of assessee by disallowing claim of deduction u/s 80P(v)(ai) of the Act on the ground that interest income of Rs. 16,86,273/- earned from fixed deposit investment with SBI which was not derived from income and he viewed that it was taxable under the head of income from other sources. The ld. AR to substantiate his contention he submitted that the assessee has deposited such fund with SBI in order to comply with the provisions of West Bengal Cooperative Society Act which mandatory for the assessee while accepting deposit from its members. Therefore, the interest earned by the assessee is income from business of the assessee and assessee is eligible for claim of deduction u/s 80P of the Act. On the other hand, ld. DR relied on the decision of the authorities below and he supported the action taken by the ld. CIT(A).
6. We after hearing the parties note that business of the assessee is to provide credit facilities to its members and assessee received deposit from its members as margin money in respect of loan facility sanction to them. Besides that assessee also received deposit from its members in their respective savings bank account and in compliance with the order issued by Registry of Co-operative Society, Govt. of West Bengal, the present assessee is also required to deposit 70% of such deposits amount in NSC, fixed deposit/certificate of bank and in furtherance of such direction assessee had deposited those funds with SBI and generated interest income. However, the ld. AO while framing the assessment with a view to bring into tax such SBI interest earned by the assessee as income from other sources rather than treating it as business income in the hands of assessee and by doing so, he did not allow claim of the assessee u/s 80P(2)(a)(i) of the Act by treating interest income is not being business income. We further note that in the present case, assessee has not generated any surplus fund which has been invested with SBI but such deposit are made only to adhere compliance issued by Registry of Co-operative Society, Govt. of West Bengal. As per it, assessee was required to deposit 70% of total deposits, to be kept in NSC, fixed deposit/certificate of bank and by doing so, assessee earned interest income of Rs. 16,86,273/-. In view of the above, we find that alleged interest income earned by the assessee is a business income and the ld. AO erred in treating it as income from other sources. Therefore, the assessee is eligible for claiming deduction u/s 80P(2)(a)(i) of the Act. We thus set aside the finding of ld. CIT(A) and delete the disallowance of deduction u/s 80P(2)(a)(i) of the Act. Accordingly, ground no. 1 to 4 are allowed.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 22.06.2023.