pri Section 80P: Interest on Surplus Fund invested in Short Term Deposits is Other Income Section 80P: Interest on Surplus Fund invested in Short Term Deposits is Other Income

Case Law Details

Case Name : ITO Vs The New India Assurance Co. Ltd. Employees' Co-op. Credit Society Ltd. (ITAT Kolkata)
Appeal Number : I.T.A No. 145/Kol/2016
Date of Judgement/Order : 07/02/2018
Related Assessment Year : 2012-13

ITO Vs The New India Assurance Co. Ltd. Employees’ Co-op. Credit Society Ltd. (ITAT Kolkata)

Apex Court in the case of M/s. Totagars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing a case where the assessee-Co-operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, ‘as invested in a short-term deposit / security. Such an amount which was retained by the assessee – Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Act or under section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the Assessing Officer was right in taxing the interest income indicated above under Section 56 of the Act.

Hon’ble Supreme Court in the case of M/s. Totagars Co-operative Sale Society Ltd. is binding on the revenue authority for the proposition that the interest income arising out of surplus fund invested in short term deposits and securities is the income from other sources. It did not agree with the contention of assessee therein that the interest earned by the assessee from investment is also attributable to the business of providing credit facilities to its members.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals), 10, Kolkata dt. 09-11-2015 for the A.Y 2012-13.

2. The only issue to be decided as to whether the CIT-A is justified in allowing the deduction u/s. 80P of the Act in the facts and circumstances of the case.

3. Brief facts of the issue are that the assessee is a co-operative credit society limited, which was registered by the employees’ of the New India Assurance Co. Ltd for their mutual benefits. The assessee filed its return of income for the A.Y under consideration declaring gross total income at Rs. Nil. Under scrutiny, notices u/s. 143(2) and 142(1) of the Act were issued to assessee. In response to which, the AR of the assessee appeared and produced required information and other details as required by the AO. On verification and examination of return of income, the AO found that the assessee claimed interest income under the head ‘profit and gains’ from its business and issued show cause notice explaining why the income received on investment should not be treated as income from other sources. In reply, the assessee stated as under:-

‘In an Employee’s co-operative Credit Society, any moment huge fund may be required to meet the member’s demand for loan. There can be no prediction as to how many members would apply for loan and for how much amount. Hence, it cannot be stated that the deposits are made out of the funds not immediately required for business. Hence, we are left to maintain full liquidity of our investments for carrying on business of proving credit to our members’.

4. The AO found not satisfied with the submissions of the assessee and held that the assessee has got surplus fund in the A.Y under consideration as well as earlier years and made investments mainly with State Bank of India (SBI) and W.B. State Co-operative Bank Ltd and interest income received on such investment, which are not immediately required for its business and said interest income cannot be said as profit or gain from business and treated the same as income from other sources and added Rs.39,30,537/- to the total income of the assessee. Relevant portion of AO’s order is reproduced herein below:-

Income from investment: It was noticed from the P/L account of the society that it is receiving interest on investment (fixed deposit) of Rs 44,92,235/-. The breakup of interest was submitted by the A/R as below:

Sl. No Name of Bank Amount in Rs
1 West Bengal Co-operative Bank 5,61,698
2.   State Bank of India (Main Fund) 39,50,537
3.   State Bank of India (Welfare Fund) 11,517
TOTAL 44,92,235

Though, the above interest income was received by the assessee on its investment, it has been taken by the assessee under the head profit and- gain from business. The a/ r of the assessee was show-caused to explain vide order-sheet noting dated 18/02/2015, as to why income received on investment should not be treated as income from other source and why it should not be added to the total income of the assessee. The assessee, vide his letter dated 24/02/2015 submitted that:

‘In an Employee’s co-operative Credit Society, any moment huge fund may be required to meet the member’s demand for loan. There can be no prediction as to how many members would apply for loan and for how much amount. Hence, it cannot be stated that the deposits are made out of the funds not immediately required for business. Hence, we are left to maintain full liquidity of our investments for carrying on business of proving credit to our members’.

The above submission of the assessee was carefully examined. As per the audit report, the main object of the assessee is to meet up the credit needs of the members of the society at a reasonable rate of interest. On perusal of the Balance sheet of the assessee, it IS noticed that during the year the society has disbursed fresh loan of Rs 53,18,921/ -. On the other hand, it has received total inflow through Thrift Fund and Guarantee Fund of Rs 77,27,534/-. Hence, it may be concluded that the society had surplus fund available with them which was not immediately required for its business of providing credit facilities and was in a position to park the surplus fund in Investment. It is also observed that the society has been generating surplus fund not immediately required for business year after year. The society kept the surplus fund of this year as well as earlier years as investment mainly with State Bank of India and W.B. State Co-operative Bank Ltd. and earned interest income on this investment of Rs. 44,92,235/- As, this interest income was received on the investment made by the assessee out of the fund not immediately required for its business, the interest income cannot be said as profit or gain from business. The interest income received from investment can neither be termed as profit or gain attributable to the business activity of the assessee, as the business of the assessee was providing credit facilities to its member. Hence, the interest received by the assessee on its investment is treated as ‘income from other source’ which comes under the purview of section 56 of the Income-tax Act, 1961. And, as per section 80P(2)(a), the amount of profit and gains of business attributable to any such activity only shall be deducted from the gross total income. But, since the interest income received of Rs 44,92,235/- is income from other source, the deduction vi] s 80P(2)(a) is not allowable in respect of the same. However, as per section 80P(2)(d) any income by way of interest or dividends derived by the co-operative society from its investments with any other co­operative society will be allowed as deduction. Hence, interest received, only from co­operative bank, of Rs 5,61,698/- is allowed as deduction u/s 80P(2)(d) and remaining interest received of Rs 39,30,537/- is added to the total income of the assessee under the head Income from Other Source.”

5. Aggrieved, the assessee challenged the same before the CIT-A. Before him, the assessee contended that the main object of the society is to help its members through providing loan immediately which is not always available from other financial institutions including banks. The surplus find cannot be kept idle. Whatever income is generating that is being utilized for the credit of the society only. In support of its contention, the assessee relied on the order of ITAT Mumbai Special Bench in the case of the Maharashtra State Co­op Bank Ltd Vs. ACIT reported in (2010) 38 SOT 325, wherein it is observed that 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 business, though not arising directly from carrying on the business. The expression ‘profits and gains’ in section 80P(2) also includes other items ( 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. The assessee is entitled to claim deduction under section 80P(2)(a)(i) on the amount of interest received u/s. 244A of the Act and interest earned on FDs from bank should be assessed under the ‘profit & gains of business’.

6. The CIT-A after considering the above submissions and the case laws as relied on by the assessee of Mumbai Tribunal, allowed the claim of the assessee by observing as under:-

DECISION:

I have carefully considered the assessment order and submission of the appellant. In summary, the Assessing Officer has adjudicated that the interest’ income ‘earned by the appellant on the deposits ‘kept in’ the banks is not eligible for deduction u/s 80P (a)(i) of the Income Tax Act, 1961. The AO has’ also stated that the total interest income, amounting to Rs.44,95,235/- was being brought under Sec 56 of the Income Tax Act. Having so decided, the AO has allowed certain portions to be eligible for deduction u/s 80P(2)(d), these being those related to interest income received by the’ assessee-appellant (of, Rs.5,61,698/ -) from the West Bengal Co-operative; Bank. The Ad has not allowed the amount of interest received from the nationalized banks, being an amount of Rs.39,30,537/-.

02. After having perused the assessment order, and the various reasons recoded by” the AO while making the impugned disallowance of Rs.39,30,537/-,and analyzed the submissions of the appellant, I find that the appellant’s case.ls.slrnuar.to the’ case of the SE,SEC &. E.Co. Railways Employees’ Cooperative Credit ‘Society Vs ACIT (2014) (41 CCH 0218), adjudicated by the Hon’ble jurisdictional Kolkata High Court. The matter has been referred to by the Hon’ble. ITAT,,’ “C”- Bench Kolkata in their ‘decision in IT No 1693/Kol/ 2012 dated 30th October,2014, relevant for the A.Y 2008-09 for the same assessee, namely The S.E, S.E.C. &. E.Co Railways Employees’ Credit Society, Kolkata. In that case also the Hon’ble Apex Court judgment in the matter of Totgars Co-operative Society Ltd Vs ITO [2010] 188 Taxman 282(SC) has been referred to, and distinguished on facts of the case. Similarly, the case of Bihar Rajya Sahkari Bhoomi Bikash Cooperative Bank Ltd Vs CIT has also been referred to and distinguished. At para 7.1 of the said order, the Hon’ble ITAT has observed as under: –

‘7.1. We further find that the issue involved is covered in favour of the assesee by catena of decisions of the Tribunal in assessee’s own case. These decisions are also affirmed by the Hon’ble Jurisdictional High Court in its order for A. Yr. 2005-06. In this order the Hon’ble Jurisdictional High Court has considered all the relevant orders and has decided the issue in favour of the assessee. We may gainfully reproduce the operative order of the Jurisdictional High Court which is as under:

“We have gone through the impugned judgment and order of the Learned Tribunal. It appears that the point involved is whether interest earned out of the investment earned by the assessee cooperative can be treated to be the income arising out of business activity or from other sources in order to apply the provision of Section 80P(2)(a)(i) of the I.T. Act. It is an undisputed factual position that similar issue arose before the Commissioner of Income Tax (Appeal) in relation to the assessment year 1998-99 to 2002-2003 as also for the assessment year 1995-96 and 1996-97. Then again in relation to the assessment years 2003-04 and 2004-05 a similar point arose. The Learned Tribunal in relation to the assessment years 1998-99 to 2002-2003 by order dated 10.11.2006 in ITA Nos. 840 to 844/Kol/2006 and again by order dated 29.12.2006 in relation to assessment years 2003­04 and 2004-05 has deleted the disallowance made in those assessment years and it was held that the interest earned by the assessee cooperative society from its short term and fixed deposits with the bans and other institutions were disallowed on the ground that this income was not business profit of the assessee society but was income from other sources. The Ld. Tribunal has also held that income from investment in banks and other financial institutions is the business income of the assessee society and it is eligible to get deduction under Section 80P(2)(a) (i). The Tribunal has overruled the decisions rendered against the assessee in relation to assessment years 1995-96 and 1996-97 on the same issue in relation to subsequent years.

It was found by the Tribunal while affirming the order of the Commissioner of Income Tax (Appeal) that there is no change in the facts and circumstances of this case and it was held that the assessee was eligible for deduction under Section 80P(2)(a)(i) on interest on investment amounting to Rs.1,18,07,645/- in this assessment year also. Since the Tribunal found that this decision of the Tribunal was followed by CIT(A) there is no reason to take a different view. Under these circumstances, we feel that when the Commissioner of Income Tax (A) as well as the Tribunal has followed the earlier unchallenged decision no question of law is involved in this matter. Nothing has been produced before us to show subsequent decision of the Tribunal in relation to the assessment years 1998-99 to 2002­03 and 2003-04 have been challenged by any of the parties before this Court.

It is submitted by Mr. Bhowmick that there has been challenge of the decision in relation to assessment years 1995-96, 1996-97 and the same is pending before this Court we think that challenge of the assessee has now become redundant as the earlier view taken in both the assessment years have been reversed by the Tribunal by its subsequent decision. Hence, the pendency of that earlier matter is of no consequence in this matter. Had there been a challenge of the decision of the Tribunal in relation to the assessment years 1998-99 to 2002-03 and also 2003-04 to 2004-05 the matter would have been different. The revenue did not take any step whatsoever. Therefore, we presume the revenue has accepted the subsequent view of the Tribunal and the same now hold the field right now. “

7.2. Considering the above we find that this issue is squarely covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court in assessee’s own case. In this regard we would like to place reliance upon the decision of the Hon’ble Apex Court in the case of CIT vs Excel Industries 358 ITR 2P,5 wherein the principle of consistency has been reiterated. Hence when the issue has been decided by the Jurisdictional High Court no convincing reason has been pointed to take a different view, any deviation is not permitted:

7.3. Now we come to the case laws relied upon by the ld. CIT(A). As regards the decision of the Hon’ble Apex Court in the case of Totgars Co-operative Sales Society Ltd (supra) we find that the said decision is not applicable in the facts of the case. We find that the Hon’ble Apex Court in the said decision in para 11 has itself mentioned that “We are confining the judgment to the facts of the present case.” The facts of the case were that assessee’s business was to provide credit facilities to its members and to market their agricultural produce. In many cases assessee retained sale proceeds of members whose produce was marketed by it and since funds created by such retention were not required immediately for business purposes, it invested same in specified securities and earned interest income. In these circumstances, the Hon’ble Apex Court had held that interest earned would come in category of ‘Income from other sources’ taxable u/s 56 of the Act and would not qualify for deduction as business income u/s 80P(2)(a)(i). From the above it is amply evident in the present case the assessee has not retained any amount due to its members and instead of paying the same had invested the same and earned interest: Thus this case law is not applicable on the facts of the present case.

7.4. As regards the decision of Hon’ble Patna High Court in the case of Bihar Rajya Sahkari Bhoomi Bikash Co-op. Bank Ltd. (supra) the same is also not applicable to the facts of the present case. In that case the question was the treatment, of Interest earned on provident fund and rental income as attributable to banking business and this qualifying for deduction u/s. 80P(2)(a)(i) of the Act.

7.5 In the background of the aforesaid discussion and precedent we hold that the issue is squarely covered in favour of the assessee by the decision of the Tribunal and the Jurisdictional High Court in assessee’s own case. The decision relied upon by the ld.CIT(A) are not applicable in the facts of the case. The principle of consistency as conveyed by the Hon’ble Apex Court mandates that the Revenue does not take a different stand. Accordingly we set aside the orders of the authorities below and decide the issue in favour of the assessee.

03. Other than the judgment of the jurisdictional High –Court has followed by the Hon’ble jurisdictional ITAT, I find that there are a catena of judgments wherein the case of Totgars Co-operative Sale Society Ltd. (supra) has been clearly distinguished on facts, and it has been held that the interest earned by assessees, such as the one at hand, namely a Credit Co-operative Society that carries on the business of providing credit facilities to its members and earned interest by deposits made in nationalized banks, would be eligible for the deduction envisaged under Sec 80 P of the Income tax Act, 1961.

04. The Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. in ITA No.307 of 2014 dt.28.10.2014, wherein their Lordships after considering the judgment of the Hon’ble Apex Court in the case of Totagars Co­operative Sale Society Ltd. (supra), have held that the interest earned by a co-operative society engaged in the business of providing credit facilities to its members has to be regarded as income eligible for deduction under Section 80P(2) of the Act.

The relevant observations of the Hon’ble High Court of Karnataka at paras 6 to 10 are extracted hereunder:

From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1, 77,305 represents the interest earned form short term deposits and from savings bank account. The assessee is a co-operative society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest.

Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 8OP(2)(a)(i) :

“Deduction in respect of income of co-operative societies:

8OP (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 deduced, in accordance with and subject to the provisions of this section, the sums specified in subsection (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 co-operative society engaged in-

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

(ii) xxx

(iii) xxx

(iv) xxx

(v) xxx

(vi) xxx

(vii) xxx

the whole of the amount of profits and gains of business attributable to anyone or more of such activities. “

7. The word ‘attributable’ used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. CIT, Gujarat-II reported in ITR Vol. 113 (1978) Page 842 at page 93 as under:

” As regards the aspect emerging from the expression ‘attributable to’ occurring in the phrase ‘profits and gains attributable to the business of’ the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the legislature has deliberately used the expression ‘attributable to’ and not the expression ‘derived from’. It cannot be disputed that the expression ‘attributable to’ is certainly wider in import than the expression ‘derived from’. Had the expression ‘derived from’ teen used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression ‘derived from’, as, for instance, in section 80). In our view, since the expression of wider import, namely, ‘attributable to’, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. “

8. Therefore, the word ‘attributable to’ is certainly wider in import than the expression ‘derived from’. Whenever the legislature wanted to give a restricted meaning, they have used the expression’ derived from’. The expression ‘attributable to’ being of wider import, the said expression issued by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A co-operative society which is carrying on the business of providing credit facilities to its members, earn profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the aid amount idle. If hey deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.

9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totagars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing a case where the assessee-Co-operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, ‘as invested in a short-term deposit / security. Such an amount which was retained by the assessee – Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Act or under section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the Assessing Officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.

10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. ; the said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT Ill, Hyderabad Vs. Andhra Pradesh State Co-operative Bank Ltd., reported in (2011) 200 Taxman 220/12; In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order.

Appeal is allowed. “

05. The above reasoning has also been followed by the Hon’ble ITAT “SMC” Bench, Mumbai in ITA NO. 6627/Mum/2014 dated 10.08.2015.

In the background of the above discussion and given the fact that on identical matters, the Hon’ble jurisdiction of High Court of Kolkata has adjudicated in favour of a similarly placed assessee in a similar matter, the grounds taken by the appellant in this matter ( disputed amount of Rs. Rs.39,30,S37) are allowed.”

7. Before us in the second appeal, the ld. DR submits that the CIT-A wrongly placed his reliance on the decision of the Hon’ble High court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. The Hon’ble High Court of Karnataka in the case of supra did not consider the decision of the Hon’ble Supreme Court in the case of Totgars Co-op. Society Ltd. He further argued that the surplus fund invested in FDs in national bank is not allowable as deduction u/s. 80P(2) of the Act. In support of his contention, he relied on the judgment of the Hon’ble Jurisdictional High Court in the case South Eastern Employees’ Co-op. Credit Society and referred to page 8 and argued that the Hon’ble High Court of Calcutta did not agree with the submissions of assessee that interest earned by the assessee from investment is also attributable to the business of providing credit facilities to its members. The ld.DR further referred to pages 9-10 of the said decision and argued that the AO has rightly disallowed the claim of assessee in respect of interest earned from nationalized bank i.e. SBI. He further placed his reliance on the order of SBI Employees’ Co-op. Credit Supply Society and argued that the Hon’ble High Court of Gujarat held that investment of surplus fund in any bank were not part of business of assessee. The ld.DR further submits that the Hon’ble High Court of Gujarat in the case of supra considered the decisions of the Hon’ble Supreme Court & Hon’ble High Court of Karnataka in the cases of supra. The ld.DR also relied on the order of Ahmedabad Tribunal in the case of Shree Modpatni Co-op. Credit Society Ltd and referred to para 6 of the said order and argued that the Tribunal considering the submissions of assessee remanded the issue to the file of the AO to verify the interest expenditure, if any, incurred by the assessee for earning interest from the nationalized bank.

8. The assessee has also relied on the order of ITAT, Kolkata, Kolkata Benches, Kolkata dt. Nov., 18, 2015, ITA No. 1890/Kol/2012 for the A.Y 2009-10 in the case of The Baksara Co-op Credit Society Ltd and argued that the Kolkata Tribunal allowed the revenue’s appeal for statistical purpose with the direction to the AO to verify as to whether the assessee made investments out of its own surplus fund or out of amount payable to its members and agreed on such proposition of the ld.DR in terms of the decision of the Hon’ble High Court of Calcutta in the case of supra in remanding the issue to the file of AO for verification.

9. Heard rival submissions and perused material on record including the paper book and case laws. We find that the Hon’ble High Court of Calcutta in the case of supra held that the decision of the Hon’ble Supreme Court in the case of supra is binding on the revenue authority for the proposition that the interest income arising out of surplus fund invested in short term deposits and securities is the income from other sources. It did not agree with the contention of assessee therein that the interest earned by the assessee from investment is also attributable to the business of providing credit facilities to its members. The Hon’ble High Court of Calcutta in the case of supra remanded the issue to the file of AO only to the extent to examine whether the assessee therein incurred any expenditure in connection with earning interest income. Relevant portion of which is reproduced herein below:-

We are prepared to agree with Mr. Khaitan to the extent that the interest earned from out of the investments made under Section 64 read with Section 63 of the Multi-State Co-operative Societies Act, 2002 is attributable to the business of providing credit facilities to its members. But we are not able to agree with Mr. Khaitan that the rest of the interest earned by the assessee from the investments is also attributable to the business of providing credit facilities to its members. We have not been impressed by the judgments cited by Mr. Khaitan.

We are unable to agree with the views of Patna High Court in the case of Bihar State Housing Co­operative Federation Ltd. (supra). The Division Bench in that case relied on the judgment of the Apex Court in the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194/118 Taxman 321. That was a case of a co-operative bank. A co-operative bank and a co-operative society do not stand on the same footing. The whole of the income of co-operative bank is deductible whereas in the case of a society the income attributable to any one or more of the activities laid down in Sub-section (2) is deductible. The Division Bench did not give any independent reasoning. The Division Bench proceeded on the basis that the view taken by them was supported by the Judgment in the case of Karnataka State Co-operative Apex Bank (supra) which, with respect, was not a correct impression. The other judgement cited by Mr. Khaitan in the case of Guttigedarara Credit Co-operative Society Ltd. (supra) is not applicable because the caution appearing in sub-section (1) of Section 80P, that only an income referred to in sub-section (2) was deductible, was not taken into account. The sub-section (2) provides for only the income attributable to the business of advancing credit facilities to its members. Income arising from any other source including investment of capital “if not immediately required to be lent to the members” was not contemplated. The assessee cannot claim any deduction which is not provided for by the section. Moreover the judgment in the case of Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC) is a binding authority for the preposition that “interest income arising on the surplus invested in short-term deposits and securities. . . . . . . . . would come in the category of income from other sources.”

Realising his difficulty, Mr. Khaitan submitted that the assessee was under the impression that the income arising out of investments is also attributable to the business of providing credit facilities to its members and on that basis, the assessee did not separately provide for the expenditure incurred for the purpose of earning Rs. 99 lakhs during the assessment year 2003-04 and Rs. 1.12 crores during the assessment year 2004-05, from investments. Those investments were obviously made from out of the funds deposited by the members and for such deposits, interest has been paid to those members by the assessee. The interest paid to those members on account of such deposits should, therefore, have been separately accounted for, which exercise was not undertaken. The result thereof was that the expenditure was artificially enhanced and the income arising out of the business of providing credit facilities to its members got reduced. When the income got reduced, the amount of deduction also got reduced. He, therefore, submitted that the matter should be remanded to the Assessing Officer for the purpose of working out the amount of expenditure incurred in earning the approximate sums of Rs. 99 lakhs and Rs. 1.12 crores respectively. The expenditure incurred for earning those two amounts of income is the amount of interest paid for that money to the members which has to be ascertained and that has to be deducted from the expenditure of the eligible business so that the eligible amount of deduction can be worked out. At the same time, the Assessing Officer has to be directed, according to him, to treat the amount of interest arising out of investments of the funds created under Section 63 as an income attributable to the business.”

10. The Hon’ble Ahmedabad Bench in the case of Shree Modhpatni Co-op Credit Society Ltd held as under:-

“6.       The ld. Counsel for the assessee could not dispute the fact that the issue in dispute is covered by the decision of the Hon’ble Gujarat High Court. He alternatively contended that the matter be restored to the file of the AO with direction that only net interest income earned by the assessee from FDRs with nationalized banks should be excluded from the claim of deduction under section 80P(2) of the Act. We find force in this contentions of the ld. Counsel for the assessee, because, only net amount is always taxable for the purpose of income tax. If assessee has incurred any expenditure, which is attributable to the earning of interest income, then, the AO shall examine that aspect and exclude the interest expenditure if any incurred by the assessee for earning this interest from bank. In other words, the only net interest income is to be excluded from the claim of deduction under section 80P(2) of the Act. Appeal of the assessee is allowed for statistical purpose.

11. The Hon’ble Kolkata Bench in the case of the Baksara Co-op. Credit Society Ltd held as under:-

“12. Keeping in view the decision of the Hon’ble Supreme Court in the case of Totgar’s Cooperative Sale Society Limited (supra) cited by the ld. D.R. and the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Limited (supra) cited by the ld. Counsel for the assessee, the question that arises in the case on hand, is whether the investment, which is made by the assessee-Society and which has fetched interest income in question, is made out of its own surplus fund, as was the case in Tumkur Merchants Souharda Credit Cooperative Limited (supra) or the same is made out of the amount payable by the assessee-Society to its members, which represent its liability as was the case in Totgar’s Cooperative Sale Society Limited. In this regard, it is observed that this aspect has not been specifically considered either by the Assessing Officer or by the ld. CIT(Appeals) in their respective orders and, therefore, there is no finding specifically given by them on this relevant aspect. In this regard, a perusal of the relevant balance-sheet of the assessee as on 31.03.2009 (copy of which at pages 67 & 68 of the paper book), shows that the total investment made by the assessee-Society was Rs.22.08 crores as on 31.03.2009, whereas the Reserves & Surplus and Profit & Loss A/c. balance as on the said date were Rs.1.76 crores and 1.73 crores respectively. The major amount appearing on the liability side of the balance-sheet as on 31.03.2009 was deposit and other account aggregating to Rs.28.89 crores, which comprised of various funds and deposits. Keeping in view these facts an d figures, we are of the view that the issue as to whether the relevant investment is made by the assessee out of its own surplus funds or out of the amount payable to its members, which represent its liability, requires verification in order to determine the exact head of income under which the interest on such investment is chargeable to tax in the hands of the assessee by applying the relevant case laws. We, therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh after verifying the relevant factual position from record and after giving the assessee proper and sufficient opportunity of being heard. Ground No. 2 of the Revenue’s appeal is accordingly treated as allowed for statistical purposes.

12. In the present case, the AO found that the assessee earned interest from SBI and treated the same as income from other sources. We find that in the aforementioned decision, the Hon’ble High Court of Calcutta directed the AO to work out the interest expenses that might have been incurred by the assessee in earning the impugned amount under the head ‘interest’ from SBI. Therefore, taking into consideration the submissions of the ld.DR and the ld.AR and in the light of above judgments, we deem it proper to remand the issue to the file of the AO, to verify the expenses that may have been incurred in earning the impugned amount i.e. Rs. 39,30,537/-and whether such investments were made out of its own surplus fund or out of the amount payable to its members. Accordingly, the grounds raised by the revenue are allowed for statistical purpose.

13. In the result, the appeal of the revenue is allowed for statistical purposes.

Order pronounced in the open court on 07-02-2018

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