2016 (2) TMI 879 - AT - Income Tax

Deduction claimed under section 80P(2)(a)(i) - interest income earned on investment / deposits with other banks -assessee is a credit co-operative society, which is accepting deposits from its members and using the same for giving loans to its members - Held that - The surplus amount which was on account of amount received from its members only, which had not been advanced to any of the members was invested in the banks, against which the said investment was made out of surplus funds available with the assessee, which in turn, were amounts advanced by the members itself. The said parking of funds with the co-operative banks was claimed by the assessee to be in the nature of its business activity as it was the requirement of Maharashtra Co-operative Societies Act, 1960, that 20 to 30% of total deposits are to be parked in the investments with co-operative banks. It is not the case of the Department that the amount invested by the assessee was out of any liabilities due by the assessee. In the absence of the same and following the same parity of reasoning laid down by the Hon ble High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO ( 2015 (2) TMI 995 - KARNATAKA HIGH COURT ) and the facts of the present case being at variance to the facts before the Hon ble Supreme Court in Totgar s Co-operative Sale Society Ltd. Vs. ITO (2010 (2) TMI 3 - SUPREME COURT) we hold that the assessee is entitled to the claim of deduction under section 80P(2)(a)(i) - Decided in favour of assessee. Profit from other activities and services - deduction under section 80P(2)(a)(i) - relief allowed by the CIT(A) - Held that - The perusal of the details filed of receipts totalling ₹ 50,21,759/-, out of which some details totalling ₹ 44,21,523/- are tabulated at page 9 of the CIT(A) s order, it reflects that the assessee has received dividend of ₹ 160/-. The assessee had received interest income from savings account totalling ₹ 3,28,820/- and service charges of ₹ 4,48,431/-, cheque return charges of ₹ 68,680/- and charge and DD commission of ₹ 93,131/-, processing fees of ₹ 10,38,970/-, loan form fees of ₹ 10,780/- and interest received account of ₹ 24,15,280/-. As against the receipt of ₹ 44,21,523/- other receipt from MSEB of ₹ 32,356/- and ₹ 4,65,343/-, totalling ₹ 50,21,759/-, proportionate expenditure relatable to such receipts at ₹ 43,01,457/- has been allowed by the Assessing Officer. The CIT(A) on the other hand, had upheld the order of Assessing Officer in respect of interest / commission from MSEB and had worked out the balance receipt eligible for deduction under section 80P(2)(a)(i) of the Act at ₹ 44,21,523/-. The proportionate expenditure on the same was allowed and the balance profit was determined as ₹ 6,34,206/- being eligible for deduction under section 80P(2)(a)(i) of the Act. We find no merit in the aforesaid order of CIT(A) in view of the nature of receipts in the hands of assessee being not covered by the provisions of section 80P(2)(a)(i) of the Act. The interest from savings bank account and the other receipts are not eligible for the aforesaid deduction under section 80P(2)(a)(i) of the Act. Accordingly, we reverse the order of CIT(A) in this regard - Decided in favour of revenue

Issues Involved:
1. Deduction under section 80P(2)(a)(i) of the Income Tax Act on interest income from investments/deposits with other banks.
2. Addition of profit from other activities and services.
3. Proportionate expenditure deduction against interest income if not eligible for deduction under section 80P.
4. Deduction under section 80P(2)(d) for interest received from cooperative banks.

Detailed Analysis:

1. Deduction under section 80P(2)(a)(i) on Interest Income:
The primary issue was whether the interest income of Rs. 37,16,147 earned on investments/deposits with other banks was eligible for deduction under section 80P(2)(a)(i). The Assessing Officer (AO) denied this deduction, arguing that the income did not have a direct nexus with the assessee's normal course of business of providing credit facilities to its members, citing the Supreme Court decision in Totgar Cooperative Sale Society Ltd. vs. ITO. The CIT(A) reversed this decision, noting that the investments were mandatory under the Maharashtra Co-operative Societies Act, 1960, and thus incidental to the business activity, making the interest income eligible for deduction under section 80P(2)(a)(i). The Tribunal upheld the CIT(A)'s view, distinguishing the facts from the Totgar case and aligning with the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO.

2. Addition of Profit from Other Activities and Services:
The AO added Rs. 25,786 to the assessee's income, which was derived from activities and services other than providing credit facilities to its members. The CIT(A) allowed the deduction under section 80P(2)(a)(i) for this amount, considering it part of the business activity. The Tribunal upheld this decision, noting that the receipts had a direct nexus with the business of providing credit facilities.

3. Proportionate Expenditure Deduction Against Interest Income:
The assessee contended that if the interest income was not eligible for deduction under section 80P(2)(a)(i), then only the net income after deducting proportionate expenditure should be taxed. The Tribunal noted the assessee's calculation of proportionate expenditure but did not adjudicate this issue since it upheld the deduction under section 80P(2)(a)(i).

4. Deduction under section 80P(2)(d) for Interest Received from Cooperative Banks:
The assessee also claimed that if the interest income was not deductible under section 80P(2)(a)(i), it should be deductible under section 80P(2)(d) for interest received from cooperative banks. The Tribunal did not adjudicate this issue as it upheld the deduction under section 80P(2)(a)(i).

Conclusion:
The Tribunal partly allowed the appeals of the Revenue, dismissing the cross objections of the assessee. It upheld the CIT(A)'s decision to allow the deduction under section 80P(2)(a)(i) for the interest income and other profits, distinguishing the facts from the Totgar case and aligning with relevant High Court decisions. The Tribunal did not find it necessary to adjudicate the alternate claims regarding proportionate expenditure and deduction under section 80P(2)(d).

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