TMI Blog2023 (12) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... ain income from other sources and that only operational income would qualify for deduction u/s 80P. We hold that the assessee is not eligible for deduction u/s 80P on the interest income earned on its investments with the Co-operative Banks. Arguments of the ld. AR that the surplus funds or those funds invested by the assessee and interest income received on such deposits are eligible for deduction u/s 80P is also not sustainable because the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. Since during the course of arguments, the Ld.AR of the assessee took alternative ground that the cost of funds for earning the interest income has to be allowed, we concur with the Ld.AR of the assessee, that benefit of the cost of funds towards earning of the interest income has to be allowed. We noted that entire interest received has been taxed as income from other source. We are of the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efly stated the facts of the case are that the assessee filed return declaring Nil income after claiming deduction of Rs.18,17,300/- u/s. 80P. The case was selected for scrutiny and statutory notices were issued to the assessee. In the second round of proceedings before us, the assessee challenged the deduction u/s. 80P which was not granted by the Ld.CIT(A) on the interest received of Rs.43,47,431/- on the investment made by the assessee in co-operative banks by relying on the judgment of Hon ble jurisdictional High Court in case of Totgars Cooperative Sale Society reported in (2017) 83 taxmann.com 140 (2017) 78 taxmann.com 179. The Ld.AR of the assessee submitted that the case of the assessee is covered by the jurisdictional High Court in case of Guttigedarara Credit Co-operative Society Ltd. reported in (2015) 60 taxmann.com 215 (Karnataka) and Tumkur Merchants Souharda Credit Cooperative Ltd. reported in (2015) 55 taxmann.com 447 ( Karnataka). The assessee should be allowed deduction u/s. 80P(2)(a)(i)/80P(2)(d) of the IT Act. Alternatively he submitted that if the deduction is not allowed under Chapter VIA to the assessee, then the cost of funds for earning the interest incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act is now claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act. The reason is that now the investments and deposits after the Supreme Court's decision against the assessee Totgar's Co-operative Sale Society Ltd. (supra), the assessee has shifted the deposits and investments from Schedule Banks to Co-operative Bank and such Co-operative Bank is essentially a Co-operative Society also and Clause (d) allows deduction of income by way of interest or dividends derived by the assessee Co-operative Society from its investments with any other Co-operative Society. 12. The sheet anchor of the contention of the learned counsel for the assessee misses two essential points required for claiming the exemption or 100% deduction from gross total income for a co-operative society: (i) that the character or nature of income, namely interest on investments or deposits, does not change irrespective of the fact whether it is earned or received from a Schedule Bank or Co-operative Bank. (ii) that What the Hon'ble Supreme Court held in the case of the respondent assessee itself, against the assessee, was that such interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural credit society. The depository Kanara District Central Bank Limited in the present case is admittedly not such a primary agricultural credit society. 15. The amendment of Section 194A(3)(v) of the Act excluding the Co-operative Banks from the definition of Co- operative Society by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A of the Act also makes the legislative intent clear that the Co-operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act. 16. If the legislative intent is so clear, then it cannot contended that the omission to amend Clause (d) of Section 80P(2) of the Act at the same time is fatal to the contention raised by the Revenue before this Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon'ble Supreme Court's decision in the case of Respondent assessee itself is otherwise. 17. As stated above, it is the character and nature of income which determines its taxability or exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Co-operative Bank. Therefore, the said decision of the Co-ordinate Bench is distinguishable and cannot be applied in the present appeals, in view of the binding precedent from the Hon'ble Supreme Court. 20. In Udaipur Sahakari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 315 ITR 21/182 Taxman 287 (SC), the Hon'ble Supreme Court while dealing with a case falling under Section 80P(2)(e) of the Act also negatived the claim of this special deduction to a co-operative society, while holding that the income derived by the Co-operative Society from the letting of the godowns or the warehouses was eligible for this deduction under Section 80P(2) of the Act only if such income was derived by such letting of godowns and warehouses for storage, processing or facilitating the marketing of commodities. Where the rental income was derived by the assessee, where the income claimed as deduction under Section 80P(2)(e) of the Act was by way of netting/difference between the sale of own trade stock stored in such warehouses or godowns was claimed as deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s limited to providing credit to its members and the income that was earned by providing such credit facilities to its members was deductible under section 80P(2)(a)(i). The character of interest was different from the income attributable to the business of the assessee-society providing credit facilities to its members. The interest income derived from investing surplus funds with the bank must be closely linked with the business of providing credit facilities for it to be held attributable to the business of the assessee. Therefore, the profits and gains could be said to be directly attributable to the business of providing credit facilities to its members if there was a direct and proximate connection between the profits and gains and the business of the assessee. There was no obligation on the assessee to invest its surplus funds with the bank. Investing surplus funds in a bank was no part of the business of the assessee providing credit facilities to its members and hence it could not be said that the interest derived from depositing its surplus funds with the bank was profits and gains of business attributable to the activities of the assessee. It was only the interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its members. We do not express any opinion as to whether the appellant would be entitled to the said benefit in the event of it being held that the assessee is also engaged in carrying on the business of banking. That is an issue that the Tribunal would decide upon remand pursuant to this order. 31. Mr. Bansal relied upon the judgment of the Andhra Pradesh High Court in CIT v. A. P. State Co-operative Bank Ltd. [2011] 336 ITR 516 (AP). The judgment is distinguishable. In that case, the respondent-assessee was a co-operative society engaged in the business of banking and it was held that the assessees were subject to the regulations of the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. The Division Bench distinguished the judgment of the Supreme Court in Totgar's case (supra) on the ground that the Supreme Court was not dealing with the case relating to co-operative banks. The present appeal is not being considered on the basis that banking is the assessee's business either. 32. Mr. Bansal relied upon the judgment of the Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO [2015] 55 taxmann.com 447 (Karn). In that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om produce was brought, was invested in a short-term deposit/security. 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 can not be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Act or under section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the apex court held the Assessing Officer was right in taxing the interest income indicated above under section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law. 10. In the instant case, the amount which was invested in banks to earn interest was not an 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 the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under Section 80P of the Act, as held by the Hon'ble Supreme Court. 24. In view of the aforesaid, we are of the opinion that the appeals filed by the Revenue deserve to be allowed and the appeals filed by the assessee deserve to be dismissed. 6. Respectfully following the above judgment of the jurisdictional High Court we hold that the assessee is not eligible for deduction u/s 80P on the interest income earned on its investments with the Co-operative Banks. Further in respect of arguments of the ld. AR that the surplus funds or those funds invested by the assessee and interest income received on such deposits are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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