TMI Blog2013 (5) TMI 1010X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. We have considered the reasons given in the affidavit filed by the Chairman of the assessee society and are of the view that the delay in filing the appeal was owing to reasonable cause. The delay is accordingly condoned. 4. The circumstances under which the CIT passed the impugned order are as follows. The assessee is a credit co-operative society, providing credit facilities to its members. For the A.Y. 2006-07, it filed a return of income declaring a total income of Rs.Nil after claiming deduction of ₹ 5,94,879 u/s. 80P of the Income-tax Act, 1961 [hereinafter referred to as the Act in short ]. Out of the sum of ₹ 5,94,879, a sum of ₹ 2,43,342 was interest earned from deposits made with the banks. The Assessing Officer was of the view that the assessee was not entitled to deduction of interest earned on deposits with banks u/s. 80P(2)(d) of the Act. Accordingly the aforesaid amount was brought to tax after allowing deduction of ₹ 50,000 u/s. 80P(2)(c)(ii) of the Act. The order of the AO was passed on 17.12.2008, after directions from the Addl. CIT, Range Davangere u/s. 144 of the Act. 5. The assessee filed an application on 10.01.2009 to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 of the Act was of the view that the order dated 30.12.2010 passed by the AO u/s. 143(3) of the Act r.w.s. 264 of the Act was erroneous and prejudicial to the interests of the revenue and observed as under:- 3.0. The assessee was represented by the Manager of the Society. The Assessee filed copy of the byelaws. Register of loans examined. It is noticed that the transactions are between the members only. The Society is engaged in extending the credit facility to its members only and governed by the Co-op. Act. The Society has not been controlled by the Reserve Bank of India. Considering all above points, the claim of the society for the deduction u/s.80P is correct. Hence, the deductions allowed u/s.80P from the total income of the Assessee society. Therefore, the returned income accepted. 9. The CIT in exercise of his powers u/s.263 of the Act was of the view that the aforesaid order passed by the AO was erroneous and prejudicial to the interests of the revenue. He accordingly issued a show cause notice dated 23.11.2011, the operative portion of which reads thus: 2. On a perusal of the records for the asst. year 2006-07, it is seen that a claim of deduction u/.s 80P( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Canara Bank 25,00,000/- State Bank of India 14,00,000/- 11. Aggrieved by the order of the CIT, the assessee has preferred the present appeal before the CIT(A). 12. We have heard the rival submissions. The learned counsel for the Assessee submitted that the order that was revised by the CIT in exercise of power u/s.263 of the Act, was an order which was passed after due application of mind by the AO after specific directions from the CIT in exercise of his powers of revision u/s.264 of the Act. It was submitted that the AO when he passed the original order of assessment dated 17.12.2008 taxed the interest received on deposits with Banks on the ground that the Assessee had claimed the said interest income as exempt u/s.80P(2)(d) of the Act. The AO denied exemption by holding that Sec.80P(2)(d) Act applies only to interest on deposits with other co-operative societies. The learned counsel for the Assessee brought to our notice that in the Assessee s application before CIT u/s.264 of the Act, the Assessee specifically pointed out that exemption on interest on deposits with banks was claimed u/s.80P(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of The Totgars Cooperative Sale Society Ltd. (supra), the Assessee received Interest from bank deposits and Government securities. The Assessee was a cooperative society which markets the produce of its members and at times retained the sale proceeds. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The Hon ble Supreme Court held that Interest on such deposits/securities fell under the head Income from other sources and hence it is taxable under s. 56 and cannot fall within the expression profits and gains of business . It was held that such interest income cannot be said to be attributable to the activities of the society namely, business of providing credit facilities to its members or marketing of agricultural produce of its members. The learned counsel for the Assessee sought to distinguish the aforesaid decision by laying emphasis on the fact that the Assessee in the present case was a co-operative credit society engaged in providing credit facility to its members. It was submitted by him that the Assessee collects deposits from its members and invests the funds not required for im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sources and therefore not entitled to deduction either u/s.80P(2)(a)(i) or deduction u/s.80P(2)(d) of the Act, then the interest paid on the deposits by the various members should be allowed as deduction and only the net interest income has to be brought to tax. In this regard it was pointed out that the deposits from the various members of the society which is not lent as credit to members are invested in banks and the interest paid on deposits should be considered as expenses incurred in earning the interest income. 16. The learned DR reiterated the stand of the revenue as reflected in the order of the CIT. 17. We have given a very careful consideration to the rival contentions. The Assessee is a Society registered under the Co-operative Societies Act providing credit facilities to its members. The Assessee accepts deposits from members and lends money only to members. The income of the society is in the form of the interest that it earns on credit facilities extended to its members. Under Section 80P(2)(a)(i) of the Act, the profits and gains of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under s. 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. 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 deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under s. 28 of the Act ? In our view, such interest income would come in the category of income from other sources , hence, such interest income would be taxable under s. 56 of the Act, as rightly held by the AO. In this connection, we may analyze s. 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with Deductions in respect of certain incomes . The headnote to s. 80P 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 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated above, under s. 56 of the Act. 18. The attempt made by the learned counsel for the Assessee to distinguish the aforesaid decision of the Hon ble Supreme Court on the ground that the issue before the Court was regarding sale proceeds retained by a marketing co-operative society which sells produce of its members cannot be accepted because the principle laid down by the Hon ble Supreme Court was regarding nexus between business and the interest income. The observations of the Hon ble Supreme Court, even if it is to be consider as an obiter, is still binding and have to be followed. We are therefore of the view that the interest income in question cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members. In coming to the above conclusion, we have assumed that the Assessee would be otherwise entitled to the benefits of Sec.80P(2)(a)(i) of the Act. In fact, this aspect has not been doubted by the CIT in the order u/s.263 of the Act or the AO in his order passed u/s.143(3) r.w.s.264 of the Act. 19. For the reasons given above, the order of the AO which was revised by the CIT in his orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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