2024 (9) TMI 1733 - AT - Income Tax

Deduction u/s 80P(2)(a)(iii) - Interest received on Investments held with Banks in form of FDR s - basic object of the assessee cooperative was the welfare of cane growers. The assessee was registered under the U.P. Sahkari Samiti Adhiniyam 1965 and was providing facilities to cane growers HELD THAT - The principle that interest income arising from investments in statutory reserve funds and other funds as per the provisions of sections 58 and 59 of the U.P. Cooperative Societies Act is attributable to the main activities of that Society has been accepted by the Revenue. The assessee is governed by the same U.P. Cooperative Societies Act and Rules as the Cooperative Cane Development Council Lakhimpur and therefore in its case also it must be held that interest earned from investment made by it as per sections 58 and 59 of the U.P. Cooperative Societies Act r.w.r.173 of the U.P. State Cooperative Rules is attributable to the activity in which the assessee is engaged and therefore is eligible to be deducted u/s 80P(2)(a) of the Act. As in the case of K. 2058 Saravanampatti Primary Agricultural Co-Operative Credit Societies Ltd. 2020 (2) TMI 214 - MADRAS HIGH COURT after considering that the Societies was required to maintain a statutory reserve of 25% under the Tamilnadu Cooperative Societies Act held that the same could not be regarded as the surplus funds of the Society as decided in M/s Totgars Cooperative Sale Society Limited 2010 (2) TMI 3 - SUPREME COURT and therefore it set aside the assessment of the ld. Assessing Officer in the light of the decision of Nawanshahar Central Cooperative Bank Ltd. 2005 (8) TMI 28 - SC ORDER Therefore investment in fixed deposits and other securities or on account of the provisions of sections 58 and 59 of the U.P. Cooperative Societies Act 1965 and section 173 of the U.P. Cooperative Societies Rules 1968 it is quite clear that since it has been held that interest on such investment is attributable to the main activity of the assessee cooperative society the interest earned from such investments ought not to be regarded as a surplus within the meaning of Totgar s Case but an interest attributable to the main activity of the assessee cooperative and therefore deductible under section 80P. The assessee has submitted copies of its byelaws and the detailed breakup of investments and interest arising on the same. However we observe that AO has not examined the breakup of such investments and the interest earned on the same with reference to the byelaws or sections 58 and 59 of the U.P. Cooperative Societies Act 1965 and 173 of the U.P. Cooperative Societies Rules 1968 as he was of the view that no such interest was deductible in view of the decision of Hon ble Supreme Court in the case of Totgars (supra). Now that the position with regard to such investments has been clarified in the case of Cooperative Cane Development Council Lakhimpur 2022 (9) TMI 1597 - ITAT LUCKNOW and accepted by the Revenue in the consequent assessment we deem it appropriate to restore the matter in all three cases back to the file of the ld. Assessing Officer for the limited purpose of re-computing the admissible deduction under section 80P with reference to the interest earned on investments made in accordance with sections 58 and 59 of the U.P. Cooperative Societies Act 1965 and 173 of the U.P. Cooperative Societies Rules 1968 . Ground numbers 1 to 5 are accordingly allowed. Adding back the interest on PF balance of the seasonal employees of the society - As we observe that the same cannot be considered to be the investments of the society and accordingly the interest accruing on the said amount cannot be said to be income of the society. Therefore any adding back of such interest income to the income of the society is not maintainable and accordingly additions made on this account in A.Ys. 2017-18 and 2020-21 are deleted. Appeal of assessee is partly allowed.

2025 (5) TMI 503 - AT

The core legal questions considered by the Tribunal in these appeals pertain to the eligibility of deduction under section 80P(2)(a)(iii) of the Income Tax Act, 1961, on interest income earned by a cooperative society from investments made in fixed deposits (FDRs) with banks. Specifically, the issues include:

1. Whether the interest income earned on investments held with banks in the form of FDRs is deductible under section 80P(2)(a)(iii) of the Income Tax Act.

2. The applicability and interpretation of the Hon'ble Supreme Court's decision in the case of Totgars Cooperative Sale Society Ltd. vs. ITO, particularly whether it is distinguishable on facts from the present case.

3. Whether the Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in not demonstrating that the interest income was on account of surplus funds of the society, which affects the applicability of section 80P.

4. The interpretation of the term "attributable" in section 80P(2)(a)(iii) and whether income from sources other than the actual conduct of business can be included.

5. The legal significance of statutory reserve funds and share capital maintained by the society under the U.P. Cooperative Societies Act and whether investments made from these funds can be considered as surplus funds.

6. Whether interest accrued on provident fund balances of seasonal employees held by the society can be treated as income of the society.

7. Whether proportionate deductions for management expenses and interest paid should be allowed against the gross interest income.

8. Whether only real income/profit can be taxed, implying expenses incurred to earn the income must be deducted.

9. Whether the addition made by the authorities was excessive and violated principles of natural justice.

Issue-wise Detailed Analysis:

1. Deduction under section 80P(2)(a)(iii) on interest income from FDRs:

The legal framework involves section 80P(2)(a)(iii) of the Income Tax Act, which allows deduction of profits and gains attributable to certain cooperative activities. The Hon'ble Supreme Court in Totgars Cooperative Sale Society Ltd. vs. ITO held that interest income earned on funds not required for immediate business purposes is "other income" and not deductible under section 80P, but taxable under section 56. The A.O. relied on this precedent to disallow deduction on interest income from FDRs.

The assessee contended that the interest income was earned on investments mandated by statutory provisions under sections 58 and 59 of the U.P. Cooperative Societies Act, 1965, which require maintenance of reserve funds and investment of surplus in banks. The society's activities primarily involved welfare of cane growers, providing credit facilities, and other related services. The interest income on statutory reserves was thus "attributable" to the business and eligible for deduction.

The Tribunal noted that the Hon'ble Supreme Court's decision in Totgars was fact-specific, involving a sale society that retained marketing proceeds as surplus funds invested in short-term deposits. In contrast, the present society was statutorily required to maintain reserves and invest funds accordingly.

Further, the Tribunal referred to the decision of the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-op. Ltd., which held that the Totgars decision was confined to its facts and did not lay down a broad principle. The Tribunal also relied on the Hon'ble Allahabad High Court's decisions in CIT vs. Krishak Sahkari Ganna Samiti and CIT vs. Cooperative Cane Development Union Ltd., which recognized that interest income earned on statutory reserve investments is attributable to the cooperative's business and deductible under section 80P.

The Tribunal also considered the recent order of the Hon'ble Supreme Court in PCIT vs. Cooperative Cane Development Council, which remanded the issue to the Tribunal for fresh consideration in light of additional statutory documents, underscoring the importance of statutory reserves in attributing income to the cooperative's business.

On remand, the A.O. examined the society's by-laws, the U.P. Cooperative Societies Act provisions, and the statutory requirement to maintain reserves, concluding that interest income from statutory reserve funds deposited in cooperative and nationalized banks was attributable to the society's main activities and eligible for deduction under section 80P(2)(a).

2. Distinguishability of Totgars decision:

The Tribunal emphasized that the Totgars decision was rendered on facts where the society's investment income was not connected to the core business activities but was surplus income from marketing operations. In contrast, the present society's statutory obligation to maintain reserves and invest funds as per the Cooperative Societies Act makes the interest income integral and attributable to its business.

The Tribunal also noted that the Hon'ble Supreme Court in the Cooperative Cane Development Council case remanded the matter for fresh adjudication, implicitly recognizing that statutory provisions and by-laws may alter the applicability of the Totgars ruling.

3. Demonstration of surplus funds by the A.O. and CIT(A):

The CIT(A) had held that the A.O. failed to demonstrate that the interest income was from surplus funds, a prerequisite to applying the Totgars principle. The Tribunal agreed that the A.O. did not sufficiently examine the breakup of investments and interest income in light of statutory reserves and by-laws initially. However, on remand, the A.O. accepted that funds invested were statutory reserves and interest income was attributable to business activities.

4. Interpretation of "attributable" under section 80P:

The Tribunal relied on the Hon'ble Allahabad High Court's decision in Krishak Sahkari Ganna Samiti, which held that "attributable" includes income from sources other than the actual conduct of business, if connected with or incidental to the business. The statutory requirement to invest reserves was a condition precedent to carrying on business, making the interest income attributable to the cooperative's activities.

5. Statutory reserve funds and share capital investments:

The society was required under section 58 of the U.P. Cooperative Societies Act to transfer not less than 25% of its profits to a reserved fund and invest such funds in banks as per section 59 and Rule 173 of the U.P. Cooperative Societies Rules. These funds were not surplus funds but statutory reserves, and investments made therefrom were integral to the business. The Tribunal held that interest income on such investments is deductible under section 80P.

6. Interest on provident fund balances of seasonal employees:

The Tribunal observed that provident fund balances of seasonal employees held as deposits were not investments of the society but funds held in trust, and interest accrued thereon did not constitute income of the society. Accordingly, additions made on account of such interest were deleted.

7 & 8. Proportionate deduction for management expenses and interest paid:

Since the Tribunal allowed grounds 1 to 5 relating to the deductibility of interest income, grounds concerning proportionate deductions of management expenses and interest paid became infructuous and were dismissed.

9. Excessiveness of additions and principles of natural justice:

The Tribunal did not find merit in the contention that additions were excessive or violative of natural justice, as the matter was remanded for fresh adjudication and the assessee was given adequate opportunity to present its case.

Significant Holdings:

"The investment of the statutory percentage of its profits in Government securities was a condition for carrying on the business and the profits or gains from such investments were connected with or incidental to the carrying on the actual business. Therefore, they were 'attributable' to the activity carried on by the assessee, within the meaning of Clause (c) of section 80P (2)(a)."

"The interest income arising from investments in statutory reserve funds and other funds as per the provisions of sections 58 and 59 of the U.P. Cooperative Societies Act is 'attributable' to the main activities of that Society and hence eligible for deduction under section 80P(2)(a)."

"Interest accrued on provident fund balances of seasonal employees, held by the society as custodian, is not income of the society and cannot be taxed under section 56."

"The decision of the Hon'ble Supreme Court in Totgars Cooperative Sale Society Ltd. is distinguishable on facts and does not apply to cases where investments are made pursuant to statutory requirements integral to the cooperative's business."

Consequently, the Tribunal partly allowed the appeals, directing remand to the Assessing Officer for recomputation of deductions under section 80P with reference to interest earned on investments made in accordance with statutory provisions, and deletion of additions relating to interest on provident fund balances.

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