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COMMISSIONER OF INCOME TAX, KOLKATA-X Versus SOUTH EASTERN RAILWAY EMPLOYEES CO-OP CREDIT SOCIETY LTD

Deduction u/s 80P - whether ITAT allowing deduction on income earned by the assessee from investment in banks and other financial institutions has rendered the provisions of Section 80P(2)(a)(i) nugatory as the said section of the Act allows deduction to a cooperative Society engaged in carrying on business of banking or providing credit facilities to its members ? - Held that:- We are prepared to agree with Mr. Khaitan to the extent that the interest earned from out of the investments made unde .....

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ative and in favour of the revenue to the extent as indicated above. The appeal is allowed. The matter is, however, remanded to the Assessing Officer (a) to work out the interest earned under Sections 63 and 64 of the Multi State Cooperative Societies Act, 2002 and to allow benefit under Section 80P and (b) to ascertain the interest paid to the members for the purpose of earning the sums of ₹ 99 lakhs and 1.2 crores on account of interest from investments. Such interest shall be deducted f .....

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l is a judgement and order dated 29th December, 2006 passed by the learned Income Tax Appellate Tribunal B Bench, Kolkata in ITA 1758 and 1759/ Kol/2006 pertaining to the assessment years 2003-04 and 2004-05 by which an appeal preferred by the assessee was allowed. The aggrieved revenue has come up in appeal. The following question of law was formulated on 11th September, 2007 when the appeal was admitted. Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal by a .....

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l income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely :- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members or (ii) a cottage industry or [(iii) the mar .....

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or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,] the whole of the amount of profits and gains of business attributable to any one or more of such activities : [Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:- (1) the individuals who contribute their labour or, .....

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7 Crores approximately and income arising from investments was ₹ 1.12 Crores approximately. The Assessing Officer was of the opinion that the income arising from investments was not deductible under sub-section (2) of Section 80P of the Income Tax Act. The same view was taken by the CIT (A). The learned Tribunal was, however, of the opinion that the assessee is entitled to the deduction of interest income earned on the investment in banks and other financial institutions amonting to ₹ .....

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ended that it is now firmly established by a long line of judicial decisions that the word attributable is of wider amplitude. He submitted that the assessee in this case takes deposits from its members which are utilized for the purpose of lending money to the members. While accepting deposits, the assessee promises to pay interest at a specified rate. When money is lent to the members, interest is recovered also at a specified rate. The difference between the two rates is the income earned by .....

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what the assessee has done. He drew our attention to the details of investments for the purpose of establishing that the major investments were for a period between 15 and 91 days which is a pointer to show that the money was invested only when the money was not in demand by the members. Therefore, the interest earned from such investments has to be treated as an income attributable to the business of providing credit facilities to the members of the assessee. In support of his submissions Mr. .....

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amount of not less than 35% of its profits to the reserve fund. Section 64 provides for investments of such funds. He contended that the obligation on the part of the assessee, statutorily imposed, has to be performed by the assessee, in the absence of which it is not possible for the assessee to carry on its business. Therefore, any income arising out such investment is also attributable to the business of providing credit facilities to the members of the assessee. Mr. Saraf, learned advocate a .....

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rve is about ₹ 1.22 crores whereas the investment made for the purpose of earning interest is to the tune of ₹ 25 crores. We have not been impressed by the first submission advanced by Mr. Saraf. If the Multi State Co-operative Societies Act, 2002 does not provide for the consequences of an omission to act in accordance with Section 63 thereof, that is no valid reason why the mandate of law should not be followed. When law requires a business to be done in a particular manner, the bu .....

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ngaged in carrying on the business ……………….. providing credit facilities to its members ……………. the whole of the amount of the profits and gains of business attributable to any such activity shall be deducted . But there is a caution appearing in sub-section (1) which provides that the gross total income of a cooperative society may include income from various activities. It is only an income falling under sub-section(2), .....

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he interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created 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 d .....

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0P indicates that the said section deals with deductions in respect of income of co-operative societies. Sec. 80P(1), inter alia, states that where the gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities in s. 80P(2) of the Act, would be eligible for ded .....

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nterest on such investments, therefore, cannot fall within the meaning of the expression profits and gains of business . Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as inelig .....

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s, from whom produce was bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-society, was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in s. 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the AO was right in taxing the interest .....

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g credit facilities to its members. We have not been impressed by the judgements cited by Mr. Khaitan. We are unable to agree with the views of Patna High Court in the case of Bihar State Housing Coop Federation Ltd. (supra). The Division Bench in that case relied on the judgement of the Apex Court in the case of CIT vs. Karnataka State Co-operative Apex Bank reported in (2001) 251 ITR 194. That was a case of a co-operative bank. A co-operative bank and a co-operative society do not stand on the .....

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ment cited by Mr. Khaitan in the case of Guttigedarara Credit Co-operative Society Ltd. (supra) is not applicable because the caution appearing in sub-section (1) of Section 80P, that only an income referred to in sub-section (2) was deductible, was not taken into account. The sub-section (2) provides for only the income attributable to the business of advancing credit facilities to its members. Income arising from any other source including investment of capital if not immediately required to b .....

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impression that the income arising out of investments is also attributable to the business of providing credit facilities to its members and on that basis, the assessee did not separately provide for the expenditure incurred for the purpose of earning ₹ 99 lakhs during the assessment year 2003-04 and ₹ 1.12 crores during the assessment year 2004-05, from investments. Those investments were obviously made from out of the funds deposited by the members and for such deposits, interest h .....

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ed to the Assessing Officer for the purpose of working out the amount of expenditure incurred in earning the approximate sums of ₹ 99 lakhs and ₹ 1.12 crores respectively. The expenditure incurred for earning those two amounts of income is the amount of interest paid for that money to the members which has to be ascertained and that has to be deducted from the expenditure of the eligible business so that the eligible amount of deduction can be worked out. At the same time, the Assess .....

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