The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled that under Section 80P (2)(d), taxpayers are eligible for a deduction on interest and dividend income earned from investments with cooperative societies.
The issue to be decided was whether the assessee was eligible to claim deduction under Section 80P (2)(a)(i) and/or 80P(2)(d) on the interest income earned on its investment amount made with District co-operative banks.
The assessee filed return of income on 09.11.2020 declaring total income of Rs.11,733. The return was processed under Section 143(1). The case was selected for scrutiny under complete scrutiny. The AO issued statutory notices and the assessee uploaded details on ITBA. The AO noted that the assessee has shown business income of Rs.35,70,873 and claimed deduction under Section 80P(2)(a)(i) of Rs.35,09,140 and Rs.50,000 under Section 80G of the Income Tax Act. The AO referred to the scrutiny assessment order for AY 2018-19 and observed that Finance Act, 2006 inserted section 2(24)(viia) w.e.f. AY 2007-08 to include profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members as income.
The AO noted that the society has 3 categories of members. A class members participate in day to day affairs, B Class of members- is capital by State Government and C & D class members are (1) who does not possess A Class Shares (2) Non Members having deposits (3) Self-help Group, Commission Agents, individual Business, other businessmen etc. have no role in the management of society, have no voting rights & no entitlement for share in the assets or profits.
Further from the detail furnished it was noted that the assessee has received interest from Co-operative Banks and Scheduled Banks of idle funds on its investments which are immediately not required for lending to its members. The assessee submitted its reply on 31.12.2020 stating that the interest received from long term deposits with cooperative banks and co-operative society and from scheduled bank is business income and assessee is eligible for deduction u/s 80P(2)(a)(i). Due to oversight it was claimed under Section 80P(2)(d) & 80P(2) (c). Considering the entire submissions the deduction claimed under Section 80P was denied and assessed income at Rs. 35,20,873/-.
Mr Mahesh R. Uppin reiterated submissions made before the lower authorities and submitted that the assessee was eligible for deduction under Section 80P(2)(a)(i) as per judgment of Apex Court in Mavilayi Service Co-op. Bank Ltd. wherein it was held that primary agricultural credit societies are entitled to the benefit of deduction under Section 80P(2)(a)(i) of the Income Tax Act on interest income earned from lending to members including nominal members.
He submitted that interest income received on assessee’s investments to another co-operative society are also eligible for deduction under Section 80P(2)(d) because the co-operative banks are primarily co-operative societies as specified in section 80P(2)(d).
He further submitted that the assessee is a primary agricultural co-operative society engaged mainly in the business of providing credit facilities to its members and providing financial aids as well as agricultural implements, seeds, fertilizers, pesticides etc. The assessee has earned interest on investments out of its operational fund used in business of lending to its members and not by investing surplus funds in short term deposits.
Mr i Ganesh R. Ghale, representing the department, submitted that the assessee was not eligible for deduction as observed by the lower authorities under Section 80P (2)(a)(i). He further submitted that in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs Supreme Court has clearly held that if the payer bank holds a license from RBI for carrying out banking business, then the interest received from such bank is not eligible for deduction under Section 80P (2)(d), though the cooperative bank may be primarily formed as co-operative society and that the activity of the entity should be seen
The bench noted that the assessee has received interest from other co-operative banks/commercial banks on its investments. The revenue authorities have considered the entire interest as income from other sources under Section 56 including the interest received from co-operative bank and no expenses under Section 57(iii) has been allowed to the assessee for earning of such income.
While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. Therefore relying on the judgment of Jurisdictional High Court in case of Totgars’ Cooperative Sales Society Ltd. vs ITO, the assessee was eligible for claim of its cost of funds on the interest income received from banks. Reliance is also placed on the judgment of the Coordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souharda Credit Coop. Ltd. Accordingly, the assessee was directed to provide the details of cost of funds before the assessing officer.
Therefore the two member bench of the tribunal comprising Narendra Kumar Choudhary (Judicial member) and Laxmi Prasad Sahu (Accountant member) allowing cost of funds, ITAT remitting this issue to the assessing officer for determining the cost of funds for earning entire interest income from bank (co-operative bank and scheduled bank).In the result, the appeal of the assessee is partly allowed for statistical purposes.
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