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2016 (2) TMI 152 - AT - Income TaxDenial of claim of deduction u/s. 80P being interest received from other co-operative societies - Held that - Section 80P(2)(c) of the Act exempts income of co-operative societies to the extent mentioned therein if the profits or gains are attributable to the activity in which the co-operative society is engaged. The expression attributable to is much wider than the expression derived from and it covers receipts from sources other than the actual conduct of the business of the assessee. In this view of the matter, interest earned by a cooperative society, which was carrying on the business of supplying surgarcane on statutory investment in Government securities, was held profit attributable to the carrying on of the activity of supplying sugarcane (CIT vs. Co-operative Cane Development Union Ltd. (1979 (2) TMI 91 - ALLAHABAD High Court ) The profits and gains from such investments were connected with or incidental to the carrying on of the actual business. Where, however, the assessee as owner of certain property lets out that property and receives rental income, the income thus received cannot partake of the character of profits and gains attributable to an activity carried on by the society. The building let out is not a commercial asset or the rent received is not profit or gain arising from the exploitation of a business asset. The word activity is wider than the word business . It connotes a specified form of supervised action or 0field of action. Read in the context of the profit earning activity of a co-operative society, it means the corporate activity of the society, that is to say, whether or not they amount to a business, trade or profession in the ordinary sense. Clause (c) of section 80P(2) is intended to cover receipts from sources other than the actual conduct of the business but attributable to an activity which results in profits and gains. Letting out of surplus space in the building owned and used by the assessee is not such an activity falling under clause (c). The rent thus received by the assessee is not eligible for the exemption provided thereunder. In this view, assessee s claim is correctly rejected - Decided against assessee.
Issues Involved:
1. Deletion of addition of Rs. 2,79,63,652/-. 2. Denial of claim of deduction u/s. 80P amounting to Rs. 33,85,886/-. 3. Classification of loans and their purposes. 4. Application of Section 80P(4) of the Income Tax Act. 5. Concept of mutuality in taxation. Comprehensive, Issue-Wise Detailed Analysis: 1. Deletion of Addition of Rs. 2,79,63,652/- The Revenue contested the deletion of Rs. 2,79,63,652/- by the CIT(A), arguing that this amount should be assessed under "other sources" and not be eligible for deduction under Section 80P. The CIT(A) deleted the addition, stating that the interest income credited to the Profit and Loss account was not idle or surplus funds but part of the regular business activities of the assessee. The Tribunal, however, found that the assessee's activities did not primarily involve agricultural loans and that the assessee was functioning more like a primary cooperative bank. Consequently, the Tribunal reversed the CIT(A)'s decision, reinstating the addition of Rs. 2,79,63,652/- as taxable under "other sources." 2. Denial of Claim of Deduction u/s. 80P Amounting to Rs. 33,85,886/- The assessee claimed a deduction of Rs. 33,85,886/- under Section 80P(2)(d), arguing that the interest income received from other cooperative societies should be exempt. The CIT(A) upheld the disallowance, referencing a prior ITAT decision which stated that such interest income does not qualify for exemption under Section 80P. The Tribunal concurred with this view, maintaining the disallowance of the deduction. 3. Classification of Loans and Their Purposes The Revenue argued that the majority of loans given by the assessee were for non-agricultural purposes, such as gold loans, housing loans, and trade loans, which were charged at higher interest rates (12% to 15.5%). The Tribunal noted that only a small percentage of loans were for agricultural purposes and that the assessee's primary business was not agricultural lending. This classification influenced the Tribunal's decision to deny the deduction under Section 80P. 4. Application of Section 80P(4) of the Income Tax Act The Tribunal examined whether the assessee fell under the purview of Section 80P(4), which excludes cooperative banks from the benefits of Section 80P. The Tribunal found that the assessee functioned as a primary cooperative bank, not a primary agricultural credit society, and therefore, was not eligible for the deduction under Section 80P. This finding was consistent with previous ITAT decisions and the provisions of the Banking Regulation Act, 1949. 5. Concept of Mutuality in Taxation The assessee argued that its income should be exempt under the concept of mutuality, as it provided credit facilities to its members. However, the Tribunal dismissed this argument, citing Supreme Court and High Court rulings that mutuality does not apply when profits are distributed to shareholders without them contributing to the funds. The Tribunal concluded that the assessee's operations resembled those of a banking company, making the mutuality concept inapplicable. Conclusion The Tribunal dismissed the appeals of both the Revenue and the assessee, upholding the disallowance of the deduction under Section 80P and the addition of Rs. 2,79,63,652/- to the taxable income. The Cross Objection filed by the assessee was also dismissed as it was supportive in nature and did not introduce new arguments. The Tribunal's decision was consistent with previous ITAT rulings and the legal framework governing cooperative societies and banks.
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