TMI Blog2019 (12) TMI 970X X X X Extracts X X X X X X X X Extracts X X X X ..... the set off of expenditure incurred ought to have been allowed by the A.O. When the interest income is charged to tax, the expenditure incurred for earning of such income would certainly be deductible. We direct accordingly. The A.O. would allow the deduction of expenditure incurred for earning of the interest income. We would like to clarify that the allowance of expenditure is restricted to the interest income, which has not been treated as a business income, in view of the discussion herein above. Both the grounds of the assessee are allowed in terms indicated herein above. Appeal of the assessee is allowed. - ITA No.422/Ind/2017, ITA No.649/Ind/2018 - - - Dated:- 17-12-2019 - BEFORE SHRI KUL BHARAT AND SHRI MANISH BORAD, JJ. Appellant by Shri Ajay Tulsiyan, A. R. Respondent by Shri R.S. Ambedkar, D.R. KUL BHARAT, J. These two appeals filed by the assessee are directed against orders of the CIT(A)-II, Indore dated 28.2.2017 3.4.2018 for the A. Ys 2013-14 2014-15 respectively. Since identical grounds have been raised, both the appeals were taken up together and are being disposed of by way of this consol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is Government Department, The appellant is cooperative society registered under Madhya Pradesh Co-operative Society Act and the primary objective is to carry on banking activities by inculcating the habit of savings amongst its members through savings accounts, receiving fixed deposits, recurring deposits, and providing credit facilities its members by way of loans and other credit facilities. 2. The appellant is engaged in the business of banking by providing credit facilities to its members and also accepting deposits from its members. The banking facilities provided to its members include maintaining Saving A/c, RD A/c, Current A/c, Term Deposit A/ c, OD A/c, providing Term loan a/c, other loan a/c etc, The major operational income of the appellant is from interest income and the major expenditure is also on account of interest. payments. Such banking facilities are provided solely to its members. The appellant society was also engaged in providing tankers services. 3. For Assessment year 2013-14- The appellant filed its return of income for the year under consideration on 05.03.2014 declaring an income of ₹ 2,09,830/-. The assessee mainly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. At the outset, it is submitted the appellant is registered a 'Primary Resource Society' u/s 10(1) of the Madhya Pradesh Co-operative Society Act. Resource Society includes a service society and a primary Credit Society, It is submitted that the assessee society is engaged in the business of banking Of taking deposits and also lending moneys solely for the benefit of its members, Considering the very basic nature of its business and during the course of such business, it has to deposit the funds with banks regularly for statutory purposes and also for its operational purposes. These funds are also deposited in the form or fixed deposits with the banks. Interest earned on such FDR's, is attributable to the core and principle activities of the society, namely, carrying on the business Of banking therefore, fall within the meaning Of the expression profits end gains Of business . 8. As per the provisions of sub. section 2 of section 43 of Madhya Pradesh/ Chhattisgarh Co-operative Societies Act, 1960, which read as under: (2)A society Shan, out of its net profits in any year (a) transfer an amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is mandatory upon the appellant to create reserve fund and LO invest the same in permissible modes as specified u/s 44. The assessee parked its funds in FDRs with Nationalised Bank, then interest income earned by the asscssee is from carrying on its business activities and the said income is assessable as 'Income from business' and the assessee is entitled to claim deduction under section 80P(2)(a)(i) of the Act- 12. Further, when the appellant society provides credit facilities to its members, it earns interest income from members and also pays interest on deposits received from the members, In the process, for complying with the requirement of transferring part Of the income to reserve fund and also for meeting the unexpected/contingent fund requirements of the members either by way of withdrawal of their deposits or by way of taking loans and also in order to have a safety net, some amounts are kept in the form of FDs on which interest is also earned. This activity is part and parcel of any banking business and is inseparable. 13. In this regard, it is necessary UO notice the relevant provision of law i.e., Section 80P(2)(a)(i): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from , as, for instance, in section80J. In our view, since the expression Of wider import, namely, attributable to , has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. 15. Therefore: the word attributable to'/ is certainly wider in import than the expression derived from'. Whenever the legislature wanted to give a restricted meaning, they have used the expression derived from . The expression attributable to being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. In the Income Tax Act, the expression attributable Ion is sometimes used with the prefix directly . The words directly attributable to would certainly narrow down the scope of the expression attributable to'. Therefore, the fact that the expression attributable is wider in scope than the expression derived from or directly attributable to . A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, the society cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits und gains of the business of providing credit facilities to its members only The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is to be deducted from the gross total income under Section 80P of the Act. Amount Which was invested in banks to earn interest was not on amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by assessee for lending money to its members, as there were no takers. Therefore they had deposited the money in a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks also. Copy or the said assessment order is enclosed at page 54 to 63 of the paper book of AY 2013-14.(Inadvertently assessment year 2011-12 was mentioned in the paper book, which may very kindly be read as assessment year 2012-13) Thus the claim of the appellant was allowed to it in some of the earlier years after detailed scrutiny and also after specifically deliberating upon present issue in hand, as evident from the above assessment orders, Various judicial pronouncements have been discussed at length in both the assessment orders of AY 2000-10 and AY 2012-13, in which the claim of the appellant has been allowed, 20. The Learned AO and the Learned CIT(A) has fried to draw support from the Judgement of Hon ble Supreme Court in the case of M/s The Totgars Co. Operative Sale Society vs. Income-Tax Officer, Karnataka 322 ITR 283- In this respect it is submitted that: (i) A copy of the said judgement is enclosed at page no. 25 to 32 of case law paper book. On perusal of the same, it can be observed that the said society was mainly engaged in marketing the agricultural produce of its members and at times the society use to retain the sale p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has observed that it is not disputed that Totgars is not doing any banking business. The said society was not involved in full fledged banking services to its members- (iii) However in the present case the appellant is engaged in marketing the agriculture produce and is in the full fledged business or banking, as also evident the statement of affairs. income and expenditure account and the receipt and payment statement of the appellant. The various items reflecting in these statements also substantiate the fact that the appellant society was engaged in the business of banking, The major source or income is interest received on loans given to members and the major expenditure is on account of interest paid to members on their deposits, saving account etc. Similarly the major funds are diploid in giving loans to the members, It is important to point out that the fact that the appellant society is carrying on the business of banking is not disputed by the Learned AO. (iv) It has been observed by the Hon ble Supreme Court that they confirm that their judgment is confined to the facts of the present case. It was also observed that to say that the source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his activity is part and parcel of any banking business and is inseparable therefore, such interest income was liable to be taxed under section 28 as business income and not under section 56 as income from other sources of the Act. 22. The Hon'ble High Court Of Andhra Pradesh In The Case Of Commissioner Of Income Tax Vs. Andhra Pradesh State Co-Operative Bank Ltd. (2011) 336 ITR 0516 Which is as under: Sec, 80P grants deduction in respect of various categories of income of a co-operative society. If any co-operative society carries on the business of the banking, the interest income received by co- operative society on its investment/deposits is attributable to banking business. The provision does not make any distinction insofar as the interest earned by deposit in a bank and interest earned on the compulsive deposit which is made as required under the relevant statute. It is no doubt true that a co-operative society may be required to earmark some portion of its capital for exclusive deposit in Government prescribed securities or banks. A co-operative society may earn profits by way of interest by parking their funds in high-yielding deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Mahanegar Cooperative Bank Ltd, deled 28.07.2011 in ITA No. 123 of 2010. In the said appeal the question of law raised by the revenue was whether Hon ble ITAT was right in holding that interest income being Interest ort Fixed Deposits placed with other banks other than cooperative banks amounting to Rs- 25,10,449/- qualifies for deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1061 It was observed that: In our opinion, there is no merit in the above contention because in the case of Totgars Cooperative Society Ltd (Supra), the Apex Court in para 11 of its judgment has held that the decisions relating to the Cooperative banks are distinguishable from the cases relating to the Cooperative Sale Society. Moreover, the Apex Court in the case of Nawanshahar Central Cooperative Bank (Supra) has held that the investments made by the Cooperative banks with a view to earn interest constitute banking business. As the income arising from investments are attributable to the business of banking assessable under the head profits and gains of business , deductible u/s 80P(2)(a)(i) of Income Tax Act, 1961 would be allowable to the assessee. Thus, decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was exempt under S. 80P(2)(a)(ii). 29. The Learned AO has also referred the decision of Honourable MP High Court in the case or Devi Ahilya New Cloth Market Co, Indore V/ s CIT 222 CTR 583 in AY 2013-14, on Which the Learned CIT(A) has also place reliance and observed that the interest earned on FDRs cannot be claimed as exempt on the ground of mutuality and that the Honourable MP High Court has upheld the same is taxable (Para 3 on page 4 of the order of AY 2013-14). In this respect it is submitted that the said decision has no relevance in the present case since Devi Ahilya New Cloth Market Co. Indore was not engaged in the business of banking and was formed to provide shops to its members and the question before the Honourable MP High Court was whether the interest received from bank is liable to income tax and the principle of mutuality is not Applicable on such interest, In this context it was held that the interest so received is taxable and cannot be exempted by giving the benefit of principle of mutuality. The issue in present appeal i.e. allowability of deduction u/s 80P(2)(a)(i) was not at all raised and considered by the Honourable High Court. Therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest earned from banks, Thus in view of the above and also considering the legal position of the issue, the appellant society most respectfully beg to submit that that deduction u/s 80P(2)(a)(i) on the interest received from the bank is allowable to it and the AO was not justified in denying the same. It is prayed that the interest earned on fixed deposits with banks be treated as income from banking business and deduction u/s 80P be now allowed on the same and oblige. 4. Ld. Counsel for the assessee placed reliance on various case laws, which are reproduced as under: 1. Guttigedarara Credit Co-operative Society Ltd. Vs. ITO (2015) 377 ITR 0464 of Hon'ble High Court of Karnataka 2. Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (2014) 90 CCH 0471 of Hon'ble High Court of Karnataka. 3. Jafari Momin Vikas Co-operation. Credit Society Ltd. of Hon'ble ITAT Ahmedabad in ITA No. 1491/Ahd/2012. 4. M/S. The Totgars Co-operative Sale Society Vs. ITO, Karnataka 322 ITR 283 (SC). 5. M/S. Totgars Co-operative Sale Society Ltd. vs. ITO (2010 322 ITR 272 of Hon'ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee society is required to deposit 25% of its profit as mandated by section 43(2) of the M.P./ Chattisgarh Societies Act, 1960. Hence, the assessee is under legal obligation to keep 25% of its profits as reserves. Any interest accrued there on would certainly, in our considered view partake character of business income of the assessee. Hence, it would be eligible for deduction. Therefore, the A.O. is directed to allow deduction on the interest earned out of amount so reserved by the assessee i.e. 25% of profit transferred to reserves. 10. Another ground of the assessee that the A.O. ought to have allowed the expenditure incurred for the earning of the interest income, when he treated the same as 'income from other sources'. We find merit into the contention of the assessee that the set off of expenditure incurred ought to have been allowed by the A.O. When the interest income is charged to tax, the expenditure incurred for earning of such income would certainly be deductible. We direct accordingly. The A.O. would allow the deduction of expenditure incurred for earning of the interest income. We would like to clarify that the allowance of expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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