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Kherava Co. Op. Credit Society Ltd Versus ITO, Ward-4, Mehsana

2016 (3) TMI 1007 - ITAT AHMEDABAD

Disallowance of deduction u/s 80P(2)(i) - addition of gross interest income treating interest received from banks and govt. securities as income from other sources u/s 56 - Held that:- Major portion of interest income is from government securities and are not in the nature of short term deposits. Therefore, the facts of the case are clearly distinguishable from the facts discussed in the case of Totagars Co-op. Sale Society Ltd. vs. ITO (2010 (2) TMI 3 - SUPREME COURT) and that of co-ordinate be .....

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incurred to earn the above income and the same has duly been accepted by the assessing authority, so we find it justified that Assessing Officer has rightly taxed the interest income of ₹ 2,16,689/- as income from other sources.

From going through the above provisions it is very clear that the assessee is eligible for deduction of ₹ 50,000/- under section 57 of the Act and the same should have been allowed by the Assessing authority. Partly allow the appeal of assessee an .....

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GNR/218/2014-15. Assessment for Asst. Year 2012-13 was framed u/s 143(3) of the Income-tax Act, 1961 (in short the Act) on 30/10/2014 by the ITO, Ward-4, Mehsana. Grounds of appeal raised by the assessee are as under :- 1. The ld. CIT(A) had erred in law and facts in confirming addition made by AO by way of disallowing claim of deduction u/s 80P(2)(i) of IT Act to the extent of ₹ 2,18,305/- in respect of interest income by treating interest income received on FD of Nationalised Banks as in .....

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way of treating Gross interest income of ₹ 5,48,517/- as income from other sources instead of ₹ 2,18,305/- as worked out by AO by calculating income on prorate basis after considering interest and other expenses on proportionate basis. 3. The appellant crave leave to add, amend, alter or delete any of above grounds of appeal. 2. Briefly stated facts are that the assessee is a Co-op. Credit Society. It e-filed its return of income on 11.9.2012 declaring total income of Rs.NIL. The ca .....

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he head income from other sources and also allowed proportionate expenditure under section 57 of the Act of ₹ 3,31,828.00 (as confirmed by assessee) and also added interest of IT refund at ₹ 1,616/- and assessed total income of the assessee at ₹ 2,18,310/-. 3. Aggrieved, assessee went in appeal before the CIT(A) who dismissed the appeal of the assessee by observing as under :- 6. I have considered the facts of the case, assessment order, submission made by the appellant and the .....

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Sale Society Ltd Vs ITO, Karnataka (2010) 188 TAXMAN 0282. In the aforementioned judgement, the issue for determination was whether interest income on the short term bank deposits and securities would be qualified as business income u/s.80P(2)(a)(i) of the IT Act, 1961. The Hon'ble Supreme Court had decided the issue as under: , "At the outset an important circumstance needs to be highlighted. In* the present case, the interest held not eligible for deduction u/s, 80P(2)(a)(i) of the In .....

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n was not required immediately for business purposes, it was invested in specified securities. The question before us, is whether interest on such deposits/securities which strictly speaking accrues to the members account could be taxed as business income under section 28 of the Act. An important point needs to be mentioned. The words the whole of the amount of profits and gains of business emphasis that the income in respect of which deduction is sought must constitute the operational income an .....

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ribunal in the case relied upon by the appellant (Jafari Momin Vikas Co-op. Credit Society Ltd) for AY 2009-10 has decided the above issue in favour of appellant with the following findings: "In overall consideration of all the aspects, we are of the considered view that the ratio laid down by the Hon'ble Supreme Court in the case of Totgars Co-op. Sale Society (supra) cannot in any way come to the rescue of either the Ld. CIT(A) or the Revenue. In view of the above facts, we are of the .....

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9;ble Supreme Court is in favour of department. The issue before the Hon'ble Supreme Court in the case of Totgars Co-op. SaJe Society Ltd Vs ITO, Karnataka was whether interest income on the bank deposits and securities would qualify as business income u/s. 80P(2)(a)(i) of the IT Act, 1961. The Hon'ble Supreme Court had decided the issue as under: "At the outset an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction u/s. .....

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ated by such retention was not required immediately for business purposes, it was invested in specified securities. The question before us, is whether interest on such deposits/securities which strictly speaking accrues to the members account could be taxed as business income under section 28 of the Act. An important point needs to be mentioned. The words the whole of the amount of profits and gains of business .emphasis that the income in respect of which deduction is sought must constitute the .....

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n'ble Supreme Court is very clear in the above land mark judgment in the case of cooperative" societies as to whether the surplus funds of members which was invested in specified securities and deposits in the nationalized banks was required to be taxed u/s 28 of the Act. The Hon'ble High Court of Gujarat is silent in its order dated 15/01/2014 in the case of Jafari Momin (supra) on the decision of Hon'ble ITAT, as regards the taxability of interest income u/s 56 of the Act. Tak .....

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st income u/s 56 on pro-rata basis. Considering the facts and following the ratio laid down by the Hon'ble Supreme Court in the case of Totgars (supra). This issue is discussed with the AR of the appellant and the entire interest income received by the appellant from nationalized bank of ₹ 5,48,517/- is required to be taxed. Therefore, I am of the firm view that the total interest income earned of ₹ 5,48,517/-from nationalized banks is required to be taxed u/s 56 of the Act. The .....

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s 57 of the Act is not in accordance with law and also following the decision of co-ordinate bench in the case of Dhanalaxmi Credit Co-op. Society Ltd. vs. ITO in ITA No.2342/Ahd/2012 dtd. 8.2.13, wherein the Tribunal has relied on the decision of co-ordinate bench in the case of ITO vs. M/s Jafari Momin Vikas Co-op. Credit Society Ltd. in ITA No.1491/Ahd/2012 for Asst. Year 2009-10 dated 31.10.2012 and held as under: - 4. With this brief background, we have heard both the sides. It was explaine .....

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ed 31/10/2012. The relevant portion is reproduced below:- "19. The issue dealt with by the Hon'ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts, as under: "What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purposes? The assessee(s) markets the produce of its members whose sale proceeds at times were ret .....

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rom other sources', hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer..." 19.1. However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon'ble Supreme Court - "(On page 286) .....

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argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence, these civil appeals have been filed by the assessee(s)." 19.2. From the above, it emerges that- (a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits; (b) that the surplus funds arose out of the amount retained from marketing the agricultural pr .....

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assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely: (1) in the case of the assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds; - in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members; (2) in the case of present assessee, it did not carry out any activity except in providing credit facilities to its members .....

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pts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds. That was why, it was submitted by the assessee that it had invested in short-term deposits. Furthermore, the assessee had maintained overdraft facility with Dena Bank and the balance as at 31.3.2009 was ₹ 13,69,955/- [source: Balance Sheet of the assessee available on record]. 19.6. In overall consideration of all the aspects, we are of the considered view .....

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that the benefit of deduction u/s.80P(2)(a)(i) was rightly granted by ld.CIT(A), however, he has wrongly held that the interest income is taxable u/s.56 of the Act so do not fall under the category of exempted income u/s.80P of the Act. The adverse portion of the view, which is against the assessee, of ld.CIT(A) is hereby reversed ITA No.2342/Ahd/2012 Dhanlaxmi Credit Cooperative Society Ltd. vs. ITO Asst.Year - 2008-09 following the decision of the Tribunal cited supra, resultantly ground is al .....

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ome treating interest received from banks and govt. securities as income from other sources u/s 56 of the Act and secondly against the enhancement made by ld. CIT(A) by not allowing the claim of incidental expenses at ₹ 3,30,212/- incurred for earning interest income. 8. From going through the records we find that assessee is a credit co-op. society. Ld. CIT(A) has relied on the ratio laid down in the decision of Hon. Supreme Court in the case of Totagars Co-op. Sale Society Ltd. vs. ITO 1 .....

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ncome and the same was decided by the Hon. Supreme Court to be taxed as income from other sources under section 56 of the Act whereas in the case of present assessee which is a credit coop. society and has not received any proceedings on behalf of the members but has invested the funds which remained idle in the process of taking and giving loans to the members and for optimum returns for society has earned interest income and for these reasons the facts of the case which we are dealing in this .....

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uidity funds used to be invested in short term deposits and interest income earned on such short term deposits were held to be income from activities of co-op. society and not to be taxed u/s 56 of the Act. 9. From going through the assessment order, we find that assessee has earned income from interest and commission at ₹ 5,48,517.00 from following :- S.S.N.Ltd. Interest 3,98,082/- U.G.V.C.L. Interest 41,836/- SBI interest 1,08,312/- UGVCL Commission 3,287/- Total 5,48,517/- Certainly fro .....

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d. and decide to follow Apex court decision of Totagaer co-op, sale society Ltd, we reiterate that the decision is regarding disallowance for deduction u/s.BQP only. Proposal of your office to consider gross receipts of interest income on investment as taxable income is incorrect income on investment is considered as income from other sources, deduction u/s.57 is available in respect of expenses incurred to earn investment income. A\\s there is no direct nexus of expense attributable to earn inv .....

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17*(6235720/1 0307727)* " ; 331828.00- 6. Income from other sources (4-5) 216689.00 Out of above income, deduction u/s 80P(2)© of ₹ 50000/- is available and so net taxable income will be of ₹ 156689/- only. If the interest income, on investment is assumed as income from other sources addition in returned income will be ₹ 156689/-.; We reiterate that above working is given only with reference to your proposal to disallow interest & commission income by applying S.C .....

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ature of short term deposits. Therefore, the facts of the case are clearly distinguishable from the facts discussed in the case of Totagars Co-op. Sale Society Ltd. vs. ITO (supra) and that of co-ordinate bench in the case of Jafari Momin Vikas Co-op. Credit Society Ltd. (supra) as well as in the case of Dhanalaxmi Credit Co-op. Society Ltd. vs. ITO (supra). This interest income is on investments not of short term nature except bank interest which too includes interest on Fixed Deposits. In thes .....

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