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The Income Tax Officer, Ward – 1, Panvel Versus M/s. Kundalika Nagari Sahakari and Vica-Versa

2016 (2) TMI 879 - ITAT PUNE

Deduction claimed under section 80P(2)(a)(i) - interest income earned on investment / deposits with other banks -assessee is a credit co-operative society, which is accepting deposits from its members and using the same for giving loans to its members - Held that:- The surplus amount which was on account of amount received from its members only, which had not been advanced to any of the members was invested in the banks, against which the said investment was made out of surplus funds available w .....

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In the absence of the same and following the same parity of reasoning laid down by the Hon’ble High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO ([2015 (2) TMI 995 - KARNATAKA HIGH COURT]) and the facts of the present case being at variance to the facts before the Hon’ble Supreme Court in Totgar’s Co-operative Sale Society Ltd. Vs. ITO (2010 (2) TMI 3 - SUPREME COURT) we hold that the assessee is entitled to the claim of deduction under section 80P(2)(a)(i) - .....

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28,820/- and service charges of ₹ 4,48,431/-, cheque return charges of ₹ 68,680/- and charge and DD commission of ₹ 93,131/-, processing fees of ₹ 10,38,970/-, loan form fees of ₹ 10,780/- and interest received account of ₹ 24,15,280/-. As against the receipt of ₹ 44,21,523/- + other receipt from MSEB of ₹ 32,356/- and ₹ 4,65,343/-, totalling ₹ 50,21,759/-, proportionate expenditure relatable to such receipts at ₹ 43,01,457/- has .....

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er of CIT(A) in view of the nature of receipts in the hands of assessee being not covered by the provisions of section 80P(2)(a)(i) of the Act. The interest from savings bank account and the other receipts are not eligible for the aforesaid deduction under section 80P(2)(a)(i) of the Act. Accordingly, we reverse the order of CIT(A) in this regard - Decided in favour of revenue - ITA No.900/PN/2014, CO No.34/PN/2015, ITA No.898/PN/2014, CO No.32/PN/2015 - Dated:- 29-1-2016 - MS. SUSHMA CHOWLA, JM .....

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ls filed by the Revenue. 2. Both the appeals filed by the Revenue and Cross Objections filed by different assessees were heard together and are being disposed of by this consolidated order for the sake of convenience. However, reference is being made to the facts and issues in ITA No.900/PN/ 2014 and CO No.34/PN/2015 to adjudicate the issues. 3. The Revenue in ITA No.900/PN/2014 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, and in law, the Id. .....

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Thane has erred in deleting the addition of ₹ 25,786/- made on account of profit from other activities and services, overlooking the fact that the receipts have no direct nexus with the assessee society's normal course of business of providing credit facilities to it's members. 3. The appellant prays the order of the Ld. CIT(A)-I, Thane, may be vacated and that of the Assessing Officer be restored. 4. The appellant craves leave to add, amend or alter any ground/grounds, which may b .....

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sessee. 2. The assessee submits that it has incurred expenditure to earn the interest income of ₹ 37,16,147/- and therefore, only the net interest income after reducing the proportionate expenditure can be taxed as an income of the assessee and not the gross interest income of ₹ 37,16,147/-. 3. The respondent craves leave to add, alter, amend or delete any of the above cross objections. 5. The assessee has also raised an additional cross objection, which reads as under:- 1. The asses .....

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osits with other banks. 7. Briefly, in the facts of the present case, the assessee was a Credit Cooperative Society and the Banking Regulations Act, were not applicable to the assessee. For the year under consideration, the assessee had furnished return of income at gross total income of ₹ 19,13,150/- and after claiming the deduction under section 80P(2) of the Act, the total income was declared at Rs.Nil. The sources of income earned by the assessee society were interest on loan given to .....

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The Assessing Officer was of the view that the said income did not qualify for deduction under section 80P(2) of the Act and consequently, show cause notice was issued to the assessee. Out of total receipts of ₹ 1,57,98,465/-, the receipts on account of providing credit facilities to the members were ₹ 1,11,85,582/- only. Further, the assessee had credited sum of ₹ 4,86,506/ - on account of receipts from other activities and services and interest income earned and receivable on .....

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ttributable to its business activity and hence, eligible for deduction under section 80P(2) of the Act. Further, objection of the Assessing Officer was that in view of the recent decision of Hon ble Apex Court in To tgar Cooperative Sale Society Ltd. Vs. ITO (2010) 322 ITR 283 (SC), the Apex Court had held that the interest earned by the assessee on the surplus fund of the members could not be considered as business income and therefore, deduction under section 80P of the Act, was not allowable. .....

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redited at ₹ 37,16,147/- was not allowed as deduction and was taxed in the hands of the assessee. The Assessing Officer computed the income of the society at loss of ₹ 18,02,998/- by recasting Profit & Loss Account. 8. In respect of other receipt of ₹ 4,86,506/-, the Assessing Officer accepted the contention of the assessee that part of income had direct or indirect nexus with the activity of providing credit facility to members, hence, balance sum of ₹ 2,12,936/- was .....

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her services at ₹ 25,786/- and assessed the total income at ₹ 37,41,933/- as against the income which was to be eligible for deduction under section 80P(2) of the Act, the same was determined at loss of ₹ 18,02,998/- to which the disallowance of ₹ 10 lakhs was added and the balance income eligible for deduction under section 80P(2)(a)(i) of the Act was worked out at loss of ₹ 8,28,784/-. 10. The CIT(A) noted that the assessee was a Co-operative Credit Society engage .....

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posits with other financial institutions on which it earns interest income. During the year under consideration, sum of ₹ 37,16,146/- was earned as interest on such deposits and which was claimed to be eligible for deduction under section 80P(2)(a)(i) of the Act. The Assessing Officer had held that such interest to be income from other sources and hence, the deduction was denied. The CIT(A) held that since the assessee was making the investment in deposits with other financial institutions .....

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upra), the CIT(A) noted that the facts of the case were different from the assessee s case, wherein the assessee was engaged in the business of marketing of agricultural produce of its members and the sale proceeds were kept as deposits by the society and the interest income earned on such deposits was held by the Hon ble Supreme Court as income from other sources. Reliance was placed on the decision of Pune Bench of Tribunal in ITO Vs. Niphad Nagari Sahakari Patsanstha Ltd. in ITA No.1336/PN/20 .....

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Ltd. (supra) were similar to the facts of the assessee, deduction under section 80P was allowed to the assessee on the interest income of ₹ 37,16,146/-. The alternate plea of the assessee was rejected. Further, on the net receipts of ₹ 25,786/- also, the deduction under section 80P(2)(a)(i) of the Act was allowed to the assessee. However, the disallowance of ₹ 10 lakhs being the provision for building fund was confirmed by the CIT(A). 11. The present appeal is filed by the Reve .....

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s with continuing pages. The learned Authorized Representative for the assessee pointed out that the details of interest on investment is placed at page 32 of the Paper Book, in which dividend of ₹ 87,087/- was received from UTI Mutual Funds and ₹ 88,519/- from Sundaram Finance and rest of the interest was on FDs which totalled to ₹ 37,16,146/-. The first plea raised by the learned Authorized Representative for the assessee was that the said interest income of ₹ 37,16,146 .....

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ce, the business element in the transaction. 13. The learned Departmental Representative for the Revenue after the factual aspects were brought to our notice, pointed out that the provisions of section 80P(4) of the Act were overriding provisions and the said provisions were applicable to Primary Agricultural Credit Societies, Primary Cooperative Agricultural and Rural Development Banks. The case laws relied upon by the assessee were not relevant, as per the learned Departmental Representative f .....

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s to its members and was not carrying on the business of banking. Reliance in this regard was placed on the ratio laid down by the Pune Bench of Tribunal in ACIT Vs. M/s. Janata Grahak Madhyavarti Sah. Sangh Maryadit in ITA No.573/PN/2013 , relating to assessment year 2009-10, order dated 27.11.2013. Further, it was pointed out by the learned Authorized Representative for the assessee that the Assessing Officer had placed reliance in the decision of Totgar Co -operative Sale Society Ltd. Vs. ITO .....

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Souharda Credit Cooperative Ltd. Vs. ITO had referred to the decision of Hon ble Apex Court in Totgar Co-operative Sale Society Ltd. Vs. ITO (supra) and distinguished the same. Reliance was placed on the decision of Pune Bench of Tribunal in ITO Vs. Niphad Nagari Sahakari Patsanstha Ltd. (supra) and the ratio laid down by the Hon ble High Court of Karnataka in Guttigedarara Credit Co-operative Society Ltd. Vs. ITO (2015) 377 ITR 464 (Karn). The learned Authorized Representative for the assessee .....

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ncome. The learned Authorized Representative for the assessee further pointed out that the third aspect of the issue is in case, the assessee is not entitled for deduction under section 80P(2)(a)(i) of the Act, then the said interest received from co-operative banks was entitled to the deduction under section 80P(2)(d) of the Act. He further pointed out that the said issue was raised before the CIT(A), but the same was not decided by the CIT(A) as the assessee was held to be eligible for deducti .....

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2012) 24 taxmann.com 127 (Pune). 15. The learned Departmental Representative for the Revenue in rejoinder pointed out that in the case before the Hon ble High Court of Karnataka (supra) amounts invested were not due to any member and which was not the liability of the assessee and hence, receipts were held to be business income. In respect of the interest received on savings account, it was pointed out by the learned Departmental Representative for the Revenue that the provisions of section 80P( .....

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is whether the interest income earned by the assessee on such investments is liable for deduction under section 80P(2) of the Act in the hands of the assessee. The Assessing Officer relying on the ratio laid down by the Hon ble Supreme Court in Totgar Co -operative Sale Society Ltd. Vs. ITO (supra) was of the view that the said interest earned by the assessee was not eligible for deduction under section 80P(2)(a)(i) of the Act. The alternate plea of the assessee for claiming the deduction under .....

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e other hand, is that the decision of the Hon ble Apex Court in Totgar Co -operative Sale Society Ltd. Vs. ITO (supra) is clearly applicable. In the alternate, reliance was placed on newly inserted section 80P(4) of the Act, which was inserted by the Finance Act, 2006 w.e.f. 01.04.2007 and it was pointed out that the said section had overriding provisions and hence, the same was applicable. 17. In order to adjudicate the issue, first reference is made to the decision of Hon ble Supreme Court in .....

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ome from other sources . The claim of the assessee was that it had invested the funds on short term basis as these were not required immediately for business purposes and consequently, interest received by the assessee was eligible for deduction under section 80P(2)(a)(i) of the Act. Further, the contention of the assessee before the Court was that under regulations 23 and 28 r.w.s. 57 and 58 of the Karnataka Co -operative Societies Act, 1959, a statutory obligation was imposed on co-operative c .....

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t term deposits and securities, which surplus was not required for business purpose, was to be taxed under section 56 of the Act. The Hon ble Apex Court further noted that the assessee markets the produce of its members whose sale proceeds at times were retained by it and the tax treatment of such amount was the issue before them. The Hon ble Apex Court held that where the interest on deposits / securities, where the funds were not immediately required for business purposes, was invested in spec .....

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embers. The Hon ble Apex Court further reiterated that where the assessee markets the agricultural produce of its members and it retains the sale proceeds in many cases and where the retained amount which was payable to its members, from whom the produce was bought, was invested in short term deposits / securities, the said amount was liability of the assessee and it was shown in the balance sheet on the liabilities side, therefore, to that extent, the Hon ble Supreme Court held that such intere .....

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le High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (supra), the assessee cooperative society was engaged in the activity of carrying on of business of providing credit facilities to its members and it had earned interest income on its deposits. Another fact noted by the Hon ble High Court of Karnataka was that the amount which was invested in banks to earn interest was not the amount due to any members and it was not the liability of the assessee. In fact, t .....

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nsertion of section 80P(4) of the Act, which was applied by the Assessing Officer to deny the deduction under section 80P(2)(a)(i) of the Act. The Hon ble High Court of Karnataka referred to the judgment of Hon ble Apex Court in Totgar Co -operative Sale Society Ltd. Vs. ITO (supra) and pointed out that in the facts of the said case, the amount which was retained by the assessee was a liability and it was shown in the balance sheet on liabilities side. Where the interest income was earned on suc .....

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equired by the assessee for lending money to the members as there were no takers and hence, was deposited in the banks so as to earn interest, such interest income earned by the assessee was held to be attributable to carrying on the business and therefore, same was liable to be deducted in terms of section 80P(1) of the Act. 19. Another decision referred to by the learned Authorized Representative for the assessee is Guttigedarara Credit Co-operative Society Ltd. Vs. ITO (supra), wherein the as .....

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ts members and was not carrying on any other business, then the surplus funds which it had earned as profits of its business when temporarily not required were invested in banks to earn interest was attributable to carrying on the business of banking and therefore, liable to be deducted under section 80P(1) of the Act. 20. Further, the Pune Bench of Tribunal in ITO Vs. Niphad Nagari Sahakari Patsanstha Ltd. (supra) had laid down the similar proposition as by the Hon ble High Court of Karnataka. .....

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d Authorized Representative for the assessee made an alternate proposition that in case the interest earned by the assessee is held to be assessable as income from other sources, then the proportionate expenditure relatable to such investments is to be allowed in the hands of the assessee and then only balance interest income is to be taxed as income from other sources. Another proposition raised by the learned Authorized Representative for the assessee was that where the investments were made w .....

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the balance sheet as on 31.03.2010 reflects the assets in the form of bank balance, cash, investments and other deposits along with the loan advanced to members, property held by the assessee and interest receivable on investments and outstanding loan. On the liabilities side, the assessee has declared share capital, share capital fund of the assessee society, the deposits received from its members and other deposits and thereafter, provision of ₹ 41,62,699/-. The break-up of the investme .....

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pages 69 to 75 of the Paper Book. The claim of the assessee before us is that it was engaged in the business of providing credit facilities to its members, out of loan received from its members itself. The surplus amount which was on account of amount received from its members only, which had not been advanced to any of the members was invested in the banks, against which the said investment was made out of surplus funds available with the assessee, which in turn, were amounts advanced by the me .....

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oning laid down by the Hon ble High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (supra) and the facts of the present case being at variance to the facts before the Hon ble Supreme Court in Totgar s Co-operative Sale Society Ltd. Vs. ITO (supra), we hold that the assessee is entitled to the claim of deduction under section 80P(2)(a)(i) of the Act. In the alternate, we find merit in the plea of the assessee that at best the income which can be assessed in the h .....

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e is not entitled to the deduction under section 80P(2)(a)(i) of the Act relating to dividend received from UTI Mutual Funds and Sundaram Finance of ₹ 87,087/- and ₹ 88,519/-, which are to be included as income from other sources, on which the assessee is entitled to proportionate expenditure. Similarly, the profit of ₹ 25,786/- from other activities and services is not entitled to the claim of deduction under section 80P(2)(a)(i) of the Act. Accordingly, we partly uphold the o .....

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e in ITA No.900/PN/2014. The learned Authorized Representative for the assessee fairly admitted that out of interest on bank deposits declared at ₹ 61,01,910/-, the interest on reserve fund totalling ₹ 4,15,751/- is not eligible for deduction under section 80P(2)(a)(i) of the Act. Accordingly, in view of the admission of the learned Authorized Representative for the assessee, we hold that the balance interest income earned by the assessee is eligible for deduction 80P(2) of the Act. .....

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ls of various receipts and their nature are reproduced in the submissions made by the assessee before the CIT(A), which are available at pages 5 to 8 of the appellate order. Thereafter, the assessee has claimed that certain receipts on account of services were having direct nexus with the activity of the society, the said receipts are totalled to ₹ 44,21,523/-, as per the tabulated details available at page 9 of the appellate order. In respect of balance items, the assessee claimed that th .....

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im of the assessee observing that the receipts had direct nexus with the assessee s business of banking / providing credit facilities to its members except for the receipt of ₹ 32,536/- received as interest on deposits from MSEB, ₹ 4,65,343/- received as commission from MSEB and ₹ 2,017/- shown as stationary stock. Therefore, the CIT(A) on proportionate basis held that the amount of ₹ 6,34,206/- was eligible for deduction under section 80P(2)(a)(i) of the Act. 26. The per .....

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8,970/-, loan form fees of ₹ 10,780/- and interest received account of ₹ 24,15,280/-. As against the receipt of ₹ 44,21,523/- + other receipt from MSEB of ₹ 32,356/- and ₹ 4,65,343/-, totalling ₹ 50,21,759/-, proportionate expenditure relatable to such receipts at ₹ 43,01,457/- has been allowed by the Assessing Officer. The CIT(A) on the other hand, had upheld the order of Assessing Officer in respect of interest / commission from MSEB and had worked out .....

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