2025 (6) TMI 1455 - AT - Income Tax

Denial of benefit of deduction u/s.80P - commission income earned from MSEDCL as well as interest income on deposit with MSEDCL and other Government Securities - HELD THAT - Revenue authorities failed to dispute this fact that the deposits with MSEDCL have been made by the assessee for carrying out the activity of earning commission and similarly the deposits made with the Government Securities are on account of the mandatory deposits for maintaining liquidity ratio to be maintained by the Credit Cooperative Societies in order to carry out its activity. As decided in the case of CIT Vs. Ahmednagar Dist. Coop. Bank Ltd 2003 (7) TMI 50 - BOMBAY HIGH COURT has laid down that the activity of collecting bills dues and charges for and on behalf of the Government local authority MTNL BEST MSEB etc. is akin to banking activity and is eligible for deduction u/s.80P(2)(a)(i) Thus Assessee is eligible for deduction u/s.80P for the commission income earned from MSEDCL. Similarly the interest income earned from deposits with MSEDCL as well as mandatory deposits in Government Securities by the assessee society for carrying out the activity are akin to the main objects of the assessee society and therefore since the commission income is eligible for deduction u/s.80P(2)(a)(i) of the Act being incidental in nature and not having earned interest from deposit made from surplus funds with any Scheduled Banks the same deserves to be allowable as deduction u/s.80P(2)(a)(i) of the Act. Accordingly the finding of CIT(A) is set aside and the grounds raised by the assessee are allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the assessee is entitled to claim deduction under section 80P of the Income Tax Act, 1961, in respect of commission income earned from Maharashtra State Electricity Distribution Company Limited (MSEDCL).
• Whether the interest income earned by the assessee on deposits made with MSEDCL and Government Securities qualifies for deduction under section 80P of the Act.
• The applicability and interpretation of section 80P(2)(a)(i) concerning income incidental to the main objects of a cooperative society, particularly in relation to commission and interest income earned from government or government-related entities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deduction under section 80P for commission income earned from MSEDCL

Relevant legal framework and precedents: Section 80P of the Income Tax Act provides deduction to cooperative societies on income derived from certain specified activities. Section 80P(2)(a)(i) specifically grants deduction for income earned from banking activities or activities incidental thereto. The Hon'ble Jurisdictional High Court in CIT Vs. Ahmednagar Dist. Coop. Bank Ltd. held that activities involving collection of bills, dues, and charges on behalf of government or local authorities are akin to banking activities and thus eligible for deduction under section 80P(2)(a)(i). This ratio has been followed by the Tribunal in ITO Vs. Vijkamgar Coop. Credit Society Ltd. and Panvel Peoples Nagari Sahakari Patsanstha Maryadit Vs. ITO.

Court's interpretation and reasoning: The Tribunal noted that the commission income earned by the assessee from MSEDCL falls within the ambit of activities analogous to banking functions, as it involves collection of dues on behalf of a government entity. The Tribunal relied heavily on the binding precedent of the Jurisdictional High Court and consistent Tribunal decisions, which recognized such commission income as eligible for deduction under section 80P(2)(a)(i).

Key evidence and findings: The assessee demonstrated that the commission income was earned in the course of its cooperative society's business activities and that these activities were incidental to its main objects. The revenue did not dispute that the deposits with MSEDCL were made to facilitate earning commission income. The Tribunal found no material to negate the applicability of section 80P deduction to commission income.

Application of law to facts: Applying the legal principles from the cited precedents, the Tribunal held that the commission income earned from MSEDCL qualifies for deduction under section 80P(2)(a)(i) as it is incidental to the main objects of the cooperative society and akin to banking activity.

Treatment of competing arguments: The Revenue contended that the assessee failed to provide details regarding the objects of the society and whether earning commission was within those objects. The Tribunal rejected this argument, observing that the activity of earning commission from MSEDCL was integral to the society's operations and consistent with the precedents.

Conclusion: The Tribunal allowed the deduction under section 80P for the commission income of Rs. 6,11,030 earned from MSEDCL.

Issue 2: Deduction under section 80P for interest income on deposits with MSEDCL and Government Securities

Relevant legal framework and precedents: Section 80P(2)(a)(i) also covers income incidental to the main objects of the cooperative society. Interest income earned from deposits made for carrying out the society's activities may qualify if the deposits are not merely surplus funds placed with scheduled banks but are linked to mandatory liquidity requirements or operational necessities. The jurisprudence from CIT Vs. Ahmednagar Dist. Coop. Bank Ltd. and subsequent Tribunal decisions provide guidance on this issue.

Court's interpretation and reasoning: The Tribunal observed that the deposits with MSEDCL and Government Securities were made as mandatory deposits to maintain liquidity ratios required for cooperative credit societies. Such deposits were not mere surplus funds but essential to the society's functioning and carrying out its objects. The interest earned thereon was thus incidental to the main objects.

Key evidence and findings: The assessee provided evidence that the deposits were mandatory and linked to regulatory liquidity requirements. The Revenue did not dispute these facts. The Tribunal found that the interest income was not earned from deposits made from surplus funds with scheduled banks, which would otherwise be excluded.

Application of law to facts: Applying the legal principles, the Tribunal concluded that the interest income earned from these mandatory deposits was eligible for deduction under section 80P(2)(a)(i), being incidental to the main objects of the society.

Treatment of competing arguments: The Revenue did not provide substantive evidence to counter the assessee's claim regarding the nature of deposits. The Tribunal gave precedence to the factual matrix and binding precedents.

Conclusion: The Tribunal allowed deduction under section 80P for interest income earned on deposits with MSEDCL and Government Securities.

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"The activity of collecting bills, dues and charges for and on behalf of the Government, local authority, MTNL, BEST, MSEB etc., is akin to banking activity and is eligible for deduction u/s.80P(2)(a)(i) of the Act."

"The interest income earned from deposits with MSEDCL as well as mandatory deposits in Government Securities by the assessee society for carrying out the activity are akin to the main objects of the assessee society and therefore since the commission income is eligible for deduction u/s.80P(2)(a)(i) of the Act being incidental in nature and not having earned interest from deposit made from surplus funds with any Scheduled Banks, the same deserves to be allowable as deduction u/s.80P(2)(a)(i) of the Act."

The core principles established include:

• Commission income earned by a cooperative society from government or government-related entities in the course of collecting dues is treated as income from banking activities eligible for deduction under section 80P(2)(a)(i).
• Interest income earned on mandatory deposits made to comply with liquidity requirements, which are integral to the society's objects, qualifies for deduction under section 80P(2)(a)(i), provided such income is not from surplus funds placed with scheduled banks.
• The scope of section 80P(2)(a)(i) extends to income incidental to the main objects of the cooperative society, emphasizing