Section 80P & income from investments – Co-op Credit Societies- a nightmare

“Today, we don’t need good laws to restrain bad people. We desperately need good people to restrain bad laws”

Introduction:

Co-operative credit societies enjoy the deduction under section 80P in respect of the whole of their income attributable to banking business. However, the term ‘income attributable to banking business’ has become a vexed term, especially in light of recent judicial developments on the subject matter. Recently, IT department has started denying the benefit of section 80P against the income in the form of interest on investments earned by the co-operative societies in general. Is it correct approach?
Background:

A co-op. credit society, though not a co-operative Bank, but its nature of business is coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee society is required to maintain some liquid funds. That is why, generally, credit societies used to invest in fixed deposits. Furthermore, in many cases, credit societies maintain overdraft facility with nationalized banks’ to augment its day to day business needs. Furthermore, to some extent, the deposits are also required to be kept, out of operational funds, as per extant legislative requirements. Naturally, this entire activity and income arising there from is nothing but attributable to business of banking.

Section 80P reads as follows: [Relevant part only]

[Deduction in respect of income of co-operative societies.

80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely :—

(a) in the case of a co-operative society engaged in—

(i) carrying on the business of banking or providing credit facilities to its members, or

the whole of the amount of profits and gains of business attributable to any one or more of such activities.

[Note: As per section 2(19), “co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies ]

Recently, Hon’ble Supreme Court in case of The Totgars’ Cooperative Sale Society Ltd. v. ITO, [322 ITR 283 (SC)] held that, the words “the whole of the amount of profits and gains of business” in section 80P(2)(a) emphasizes that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. Accordingly, it was held that interest earned by appellant co-operative society on surplus funds invested in short-term deposits with banks and in govt. securities is not eligible for deduction u/s. section 80P.

Few cases where by following Totgars’ decision, claim u/s 80P was rejected:-

• Deduction u/s 80P will be allowed only when there is direct or proximate connection with or nexus to the income and the business carried on by the society. Interest income on deposits made with banks is not attributable to income of co-operative society and outside realm of section 80P- [Sri Basaveshwara Credit Co-operative Society Ltd. v. CIT [2014] 47 taxmann.com 189 (Bangalore – Trib.)]

• The Hon’ble Supreme Court of India in the case of Totgars’ Co-operative Sale Society Ltd. Vs Income-tax Officer [2010] 188 Taxman 282 (SC), held that fund not required immediately for business of providing credit facilities and interest earned on such fund would come under the category of ‘Income from Other Sources’ taxable u/s 56 of the Income-tax Act, 1961 and the same would not qualify for deduction as business income u/s 80P(2)(a)(i) of the Income-tax Act, 1961. In view of the decision of the Hon’ble Supreme Court (supra) Interest income on Fixed Deposit- General amounting to Rs.30,00,659/- ; Interest of Rs. 1,48,752/- on M. S.S.S., Interest on Reserve Fund of Rs.1,54,781/-, Interest on Bad Debt Fund of Rs.1,99,593/- and interest on SBF Loan of Rs. 988/- Totalling Rs.35,04,773/- is treated as ‘Income from Other Sources’ without allowing deduction u/s 80P(2)(a)(i) of the Income-tax Act, 1961. [National coal development corporation staff co-operative credit Soc. Ltd. vs. DCIT –A.Y. 08-09- ITA No.1564/Kol/2011]

Department is blatantly applying the above decision to all kind of co-op. societies including credit co-op. societies to disallow the deduction claimed u/s 80P(2)(a) against the income from investments.

Totgars’ decision explained:

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 under section 56 of the Act is the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purposes. The assessee(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…”

i) At the first instance, the ratio of the decision in case of Totgars Co-op. Sale Society (supra), as observed by Supreme Court itself, was confined only to the facts of the case before it & accordingly cannot be applied in general to all kinds of co-op. societies.

ii) In the case of Totgars, the Hon’ble Supreme Court had not spelt out anything with regard to operational funds in the hands of pure Co-operative Credit Societies and the ratio was applicable to co-operative sale societies only.

iii) Assessee in Totgars case had admitted that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits;

iv) The surplus funds arose out of the amount retained from marketing the agricultural produce of the members;

v) Assessee in Totgars case 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. Whereas, in the case of co-op. credit societies, generally, it doesn’t carry out any activity except in providing credit facilities to its members and that the funds are operational funds. The only fund available with the pure credit societies is deposits from its members and, thus, there are no surplus funds as such.

By considering all the above clinching dissimilarities, recently Hon’ble ITAT Ahmedabad bench in Jafari Momin Vikas Co-op Credit Society Ltd., vs. ITO [ITA No.1491/Ahd/2012 for A.Y. 2009-10], rightly held that ratio laid down by the Hon’ble Supreme Court in the case of Totgars Co-op Sale Society Ltd (supra) cannot be applied to the facts of the appellant credit society and accordingly deduction u/s 80P was allowed against interest income from deposits with nationalized banks.

Similar views:

Section 80P of the Income-tax Act, 1961 – Deduction – Income of co-operative societies (Credit co-operative society) – Assessee was registered as a co-operative credit society under Karnataka Co-operative Societies Act – Its main object was only to advance loan – Whether deduction under section 80P(2)(a)(i) could not be denied to assessee for investment made by it in private or public limited company – Held, yes – [Yamakanmardi Urban Co-operative Credit Society Ltd. v. CIT [2014] 45 taxmann.com 297 (Karnataka)]

Contradictory decisions are also prevailing in case of income from transactions in Mutual funds by Co-op. credit society.

Income ‘attributable’ to banking business- term explained:

To elaborate further, the decision of Hon’ble ITAT Mumbai Special Bench in The Maharashtra State Co-operative Bank Ltd. vs. ACIT [(2010) 38 SOT 325] is worth readers’ attention, wherein the phrase ‘Attributable to business of banking’ is explained authoritatively:

Deduction under s. 80P(2)(a)(i)—Business of banking—In order to categorize an income under the head ‘Profits and gains of business or profession’ it is imperative that the income should have arisen from business carried on by the assessee—what is deductible under s. 80P is the amount of ‘profits and gains’ of business attributable to carrying on of the business of banking—Expression ‘profits and gains of business’ is wider in scope and encompasses not only the income chargeable under the head ‘Profits and gains of business or profession’ but also other incomes which have some relation with the business, though not arising directly from the carrying on of the business—Further, the term ‘gain’ is of wider import then the word ‘profit’—Thus, the expression ‘profits and gains’ in s. 80P(2) also includes other items of income (as covered by ‘gains’) which have some relation with the business of banking even though they do not fall under the head of business income—Therefore, interest on refund of tax is covered within the expression “profits and gains of business” notwithstanding the fact that it falls under the head ‘Income from other sources’—Phrase ‘attributable to’ brings within its fold not only the items of income having direct nexus but also items of income having some commercial or causal connection with the source—Therefore, the assessee is entitled to deduction under s. 80P(2)(a)(i) on the amount of interest received under s. 244A on the refund of tax”

Co-operative Banks and interest income from investments – judicial views (Though not directly applicable to Co-op. credit societies):

Hon’ble Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh state co-op. Bank (2011) [200 Taxman 220 (AP)] held that Cooperative bank is entitled to claim deduction u/s. 80P(2)(a)(i) in respect of interest income derived out of investments made from the voluntary reserves. Hon’ble High Court, while deciding as above, distinguished the Totgar’s case.

Similarly, Hon’ble Allahabad High Court in case of CIT vs. Muzaffarnagar District Co-Operative Bank Ltd[2012] 28 taxmann.com 132 (All.) held as follows:

“Section 80P of the Income-tax Act, 1961 – Deductions – Income of co-operative societies – Interest on deposits of non statutory liquidity ratio funds – Assessee, a co- operative bank, earned interest on deposits of its non statutory liquidity ratio funds and claimed deduction under section 80P(2)(a)(i) in respect of interest income – Whether in view of various judgments of Supreme Court and High Courts interest income in question would qualify for deduction under section 80P(2)(a)(i) – Held, yes”

Therefore, in view of the above discussion & interpretation of various terms, Revenue’s act of blindly following the Apex court’s decision in all types of co-op societies to deny the deduction u/s 80P is not correct. Considering the language of the section and contradictory opinion of the judicial forums, the facts in each case should carefully be noted and one should not be guided merely by the judicial pronouncements.

Following are some of the recent case laws in which the Interest income from Investments are allowed to assesses under section 80P:

1. Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd. Vs DCIT (ITAT Jaipur)

During the year under consideration, assessee had received interest on FDRs placed with the Cooperative Bank on which deduction u/s 80P was claimed. AO referring to the decision of Hon’ble Supreme Court in case of Totgar’s Cooperative Sales Society Ltd. Vs. ITO held that if a society was regularly earning interest on funds (not required immediately for business purposes), such interest income was taxable u/s 56 under the head ‘Income from other sources’ and not eligible for deduction u/s 80P. Further the deduction u/s 80P(2)(d) was available on interest or dividend derived from its investment made in co-operative society and not available if interest was received from investment made in co-operative bank as per section section 80P(4). Accordingly, AO disallowed the claim of deduction u/s 80P at Rs. 1,49,40,834/-. It was held even though co-operative bank pursuant to insertion of sub-section (4) of section 80P would no more be entitled for claim of deduction under section 80P, however, for the purposes of section 80P(2)(d) of the Act, Cooperative Bank Ltd shall be treated as a co-operative society. Therefore, interest on FDRs placed by the assessee society with such cooperative society would be eligible for deduction u/s 80P(2)(d).

2. Jawala Cooperative Urban Thrift & Credit Society Ltd. Vs ACIT (ITAT Delhi)

Funds kept in bank could be said to be ready for utilization by the assessee, cooperative society, in its business of providing credit facilities to its members, and therefore, the income from such monies, kept in bank, were attributable to the business of providing credit facilities, so as to fall within the ambit of section 80P(2)(a)(i).

3. M/s. Chirayinkeezhu Service Co-operative Bank Limited Vs ITO (ITAT Cochin)

In this case the facts are that the assessee are primary agricultural credit societies. AO denied the deduction claimed u/s 80P contenting that assessee were primarily doing business of banking and in view of insertion of provisions of section 80P(4), they are not entitled to deduction u/s 80P(2). AO also treated interest income received on investments made with co-operative banks as ‘income from other sources’ and denied deduction u/s 80P(2)(a)(i) contenting that the interest income was received from co-operative banks and not from co-operative society. To conclude this case decision has passed as under – Investments made by co-operative societies with co-operative banks in the course of its banking business/providing credit facilities to its members and hence, such income will form part of banking activities of the assessees and same was entitled to deduction under section 80P(2)(a)(i)

Other Article from the Author –Section 54/54F & time limit for deposit/ reinvestment of capital gain 

Republished with Amendments