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2025 (5) TMI 506 - AT - Income TaxDeduction u/s 80P(2)(d) - Assessee has earned interest income/dividend income and dividend income - HELD THAT - Totagars Co-operative Sales Society Ltd 2017 (7) TMI 1049 - KARNATAKA HIGH COURT held that the interest income earned by the Assessee cannot be said to be attributable to the activities of the Society i.e. carrying on the business of providing credit facilities to its members. The activities of the society does not include depositing/investing funds in a Co-operative Bank/commercial bank and other income such as interest earned from the deposits made with the bank are not a part of the business of the providing credit facilities to its members. The intention of the legislature to provide the exemption is to make sure that the funds collected by the Society from its Members properly utilized to the purpose for which the society is formed and not to deposit the amount in a bank and earn interest. Depositing /investing funds in a bank and the interest of earned thereupon cannot be the operational income of the Assessee Society. It is the contention of Assessee s Representative that it is not the case of surplus or un-required funds involved in the subject case however it is the contention of the Ld. Assessee s Representative that the Assessee collects subscriptions from members periodically. It invests funds to earn income and the Assessee having a common kitty which including the entire funds of the appellant and the Assessee provides the credit facilities to its members out of the whole i.e. collection from members and income earned on deposits therefore the same deserves to be treated as income from business and entitle for the exemption. We find difficult to appreciate the said contention of the Ld. Assessee s Representative. The main object of the Assessee Company is providing credit facilities to its members out of the deposits made by the other members as investment for earning the interest. However depositing the funds which was collected from the members of the society and making investment /deposits in a bank cannot be held to be business of the Assessee and the interest earned thereupon cannot be treated as operational income of the society for providing credit facilities to its members . Thus interest income earned by the Cooperative Society with the investment in the Co-operative Bank is not eligible for deduction u/s 80P(2)(d) of the Act we find no error or infirmity in the order of the Ld. CIT(A) in dismissing the Appeal. Finding no merits in the Grounds of Appeal of the Assessee the Grounds of Appeal of the Assessee are dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal are: (a) Whether the interest income earned by a Credit Co-operative Society from fixed deposits made with a Co-operative Bank qualifies for exemption under Section 80P(2)(d) of the Income Tax Act, 1961; (b) Whether such interest income forms part of the "profit and gains of business" of providing credit facilities to members, thereby entitling the Assessee to claim deduction under Section 80P of the Act; (c) Whether the interest income earned from investments in banks (including Co-operative Banks) can be treated as business income or income from other sources; (d) Whether the Assessing Officer erred in charging interest under Section 234 of the Act; (e) Applicability of judicial precedents, particularly the Supreme Court's decision in the case of Totagars Co-operative Sales Society Ltd. and subsequent High Court rulings, in determining the eligibility of exemption under Section 80P. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) & (b): Eligibility of Interest Income from Fixed Deposits with Co-operative Banks for Deduction under Section 80P(2)(d) of the Act Relevant Legal Framework and Precedents: Section 80P of the Income Tax Act provides exemption for profits and gains of business of a Co-operative Society engaged in certain activities, including providing credit facilities to members. Subsection 2(d) specifically exempts interest or dividend earned by a Co-operative Society from investments made with any other Co-operative Society. The Supreme Court in Pr. Commissioner of Income Tax vs. Totagars Co-operative Sales Society Ltd. clarified that the exemption under Section 80P(2)(d) applies only to interest or dividend earned from investments in other Co-operative Societies and excludes income from Co-operative Banks. The Court observed that Co-operative Banks, governed by the Banking Regulation Act, 1949, are distinct entities and their income is excluded from the benefit of Section 80P by virtue of Section 80P(4). A Division Bench of the Gujarat High Court further held that interest income earned by a credit society from investing surplus funds in banks is not attributable to the business of providing credit facilities to members and thus not eligible for exemption under Section 80P(2)(a)(i). However, interest earned from investments in other Co-operative Societies is exempt under Section 80P(2)(d). Court's Interpretation and Reasoning: The Tribunal examined the nature of the Assessee's business and income streams. It found that the Assessee, a Credit Co-operative Society, is engaged primarily in providing credit facilities to its members. The interest income earned from fixed deposits with the Co-operative Bank does not form part of the business of providing credit facilities but is income from investments. The Tribunal rejected the Assessee's contention that the entire corpus of funds, including interest earned from deposits, forms a common kitty used to provide credit facilities, and thus the interest income should be treated as business income. The Tribunal emphasized that depositing funds in a bank and earning interest thereon is not part of the Assessee's core business activity and cannot be treated as operational income. Key Evidence and Findings: The Assessee's return disclosed interest income of approximately Rs. 1 crore from fixed deposits with the DSE Bank. The Assessing Officer disallowed the exemption claimed under Section 80P(2)(d) on the ground that such interest income is not eligible for deduction as it does not arise from the business of providing credit facilities. Application of Law to Facts: Applying the Supreme Court's ruling in Totagars and the Gujarat High Court's decision, the Tribunal held that interest income earned from deposits with a Co-operative Bank is not exempt under Section 80P(2)(d). The legislative intent behind Section 80P is to exempt income arising from the core business activities of the Co-operative Society, not income from passive investments in banks. Treatment of Competing Arguments: The Assessee argued that all income, including interest from deposits, is part of the business corpus used for providing credit and hence exempt. The Revenue contended that interest income from deposits is income from other sources and taxable accordingly. The Tribunal sided with the Revenue, relying on judicial precedents and the statutory scheme, rejecting the Assessee's broad interpretation of business income. Conclusions: The Tribunal concluded that the interest income earned from fixed deposits with the Co-operative Bank is not eligible for exemption under Section 80P(2)(d) and must be added to the taxable income. Issue (c): Classification of Interest Income as Business Income or Income from Other Sources The Tribunal noted that the interest income earned from deposits with banks is income from other sources under Section 56 of the Act and not profits and gains of business under Section 80P. The exemption under Section 80P is confined to income directly attributable to the business of providing credit facilities to members. Since the interest income arises from passive investment activities, it cannot be treated as business income. Issue (d): Charging of Interest under Section 234 The Assessee challenged the charging of interest under Section 234 by the Assessing Officer. However, the Tribunal did not find any merit in this ground as the primary disallowance of exemption was justified. The interest under Section 234 is consequential to the addition of income and was rightly levied. Issue (e): Applicability of Judicial Precedents The Tribunal extensively relied on the Supreme Court's decision in Totagars Co-operative Sales Society Ltd. which held: "The banking business, even though run by a Co-operative bank, is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act... The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society..." Further, the Tribunal referred to the Gujarat High Court's ruling which emphasized that interest income from surplus funds invested in banks is not attributable to the business of providing credit facilities and thus not exempt under Section 80P. The Tribunal applied these precedents to the facts, affirming the disallowance of exemption claimed by the Assessee. 3. SIGNIFICANT HOLDINGS "The main object of the Assessee Company is providing 'credit facilities to its members' out of the deposits made by the other members as investment for earning the interest. However, depositing the funds which was collected from the members of the society and making investment /deposits in a bank cannot be held to be business of the Assessee and the interest earned thereupon cannot be treated as operational income of the society 'for providing credit facilities to its members'." "The interest income earned by the Cooperative Society with the investment in the Co-operative Bank is not eligible for deduction u/s 80P(2)(d) of the Act." "The intention of the legislature to provide the exemption is to make sure that the funds collected by the Society from its Members properly utilized to the purpose for which the society is formed and not to deposit the amount in a bank and earn interest." Core principles established include:
Final determinations on each issue were dismissal of the Assessee's appeals for both Assessment Years 2014-15 and 2021-22, upholding the disallowance of exemption claimed on interest income from fixed deposits with Co-operative Banks and affirming the levy of interest under Section 234.
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