2014 (2) TMI 1184 - AT - Income Tax

Eligibility of deduction u/s. 80P(2)(a)(i) - CIT(A) allowed claim - the assessee is a cooperative bank - whether profits derived by it from the business of providing credit facilities to its members? - Held that - As relying on case of CIT Vs. Jafari Momin Vikas Co-op Credit Society Ltd. 2014 (2) TMI 28 - GUJARAT HIGH COURT subsection( 4) of section 80P will not apply to an assessee which is not a co-operative bank. In the case clarified by CBDT, Delhi Coop Urban Thrift & Credit Society Ltd. was under consideration. Circular clarified that the said entity not being a cooperative bank, section 80P(4) of the Act would not apply to it. In view of such clarification, we cannot entertain the Revenue s contention that section 80P(4) would exclude not only the cooperative banks other than those fulfilling the description contained therein but also credit societies, which are not cooperative banks. In the present case, respondent assessee is admittedly not a credit co-operative bank but a credit cooperative society. Exclusion clause of sub-section(4) of section 80P, therefore, would not apply. - Decided against revenue. Entitlement to interest on deposits with banks u/s. 80P(2)(a)(i) denied - Held that - In the present case, as stated above, assessee-society regularly invests funds not immediately required for business purposes. Interest 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 ineligible for deduction under s. 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as investment . Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this retained amount which was payable to its members, 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)(i) of the Act or 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 income, indicated above, under s. 56 of the Act. - Decided against assessee.

Summary

Issues Involved:
1. Deduction under Section 80P(2)(a)(i) for profits derived from providing credit facilities.
2. Applicability of Section 80P(4) to cooperative societies.
3. Taxability of interest income on deposits with banks.

Issue-wise Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for profits derived from providing credit facilities:
The revenue contended that the assessee, being a cooperative bank, is not entitled to the deduction under Section 80P(2)(a)(i) of the Act, as per Section 80P(4). The AO concluded that the assessee's activities, though registered as a credit cooperative society, are akin to a banking institution. The CIT(Appeals) allowed the deduction by following previous ITAT decisions, asserting that Section 80P(4) applies only to cooperative banks and not to credit cooperative societies. The Tribunal upheld this view, stating that the intention of the legislature was to bring cooperative banks on par with commercial banks, and since the assessee is a cooperative society and not a cooperative bank, it is entitled to the deduction under Section 80P(2)(a)(i).

2. Applicability of Section 80P(4) to cooperative societies:
The Tribunal, referencing the decision in ACIT v. M/s. Bangalore Commercial Transport Credit Co-operative Society Ltd., clarified that Section 80P(4) is applicable only to cooperative banks and not to credit cooperative societies. The Tribunal emphasized the distinction between cooperative banks and cooperative societies, noting that Section 80P(4) does not define "cooperative society" and is intended to exclude only cooperative banks from the deduction. This interpretation was supported by the CBDT Circular No.133/06/2007, which clarified that Section 80P(4) does not apply to entities that are not cooperative banks.

3. Taxability of interest income on deposits with banks:
The assessee claimed deduction under Section 80P(2)(a)(i) for interest earned on bank deposits, arguing that these deposits were made to ensure funds were available to meet members' demands. The AO and CIT(Appeals) rejected this claim, citing the Supreme Court's decision in The Totgars Co-operative Sale Society Ltd. v. ITO, which held that interest income from bank deposits is taxable under Section 56 as "Income from other sources" and not attributable to the business of providing credit facilities. The Tribunal upheld this view, stating that there must be a direct nexus between the interest income and the business of the society. Interest earned on bank deposits does not have such a nexus and is therefore taxable under Section 56, not eligible for deduction under Section 80P(2)(a)(i).

Conclusion:
The appeals by both the revenue and the assessee were dismissed, affirming that the assessee, being a cooperative society, is entitled to deduction under Section 80P(2)(a)(i) except for the interest income on bank deposits, which is taxable under Section 56.