2017 (3) TMI 1757 - AT - Income Tax

Deduction u/s 80P - HELD THAT - In the instant case, the assessee is a cooperative credit society providing credit facility to its members and the same is evident from the loans disbursement and it is part of the banking activity of the assessee s cooperative bank. Therefore, the said income is eligible for deduction u/s 80P(2)(a)(i) . Moreover, the Board Circular no 18 of 2015 dated 2.11.2015 had clearly states that interest on deposits on non SLR securities is taxable under the head income from business and are eligible for deduction u/s 80P(2)(a)(i), in the case of Cooperative banks carry on the business of banking. As mentioned earlier, in this case, the assessee is a cooperative credit society providing credit facility to its members, which is akin to the banking activity. Therefore, we are of the view that the CIT(A) had correctly deleted the addition made by the Assessing Officer. Hon ble Kerala High Court in the case of Chirakkal Service Co-op Bank Ltd 2016 (4) TMI 826 - KERALA HIGH COURT had clearly held that primary agricultural societies registered under the Kerala Cooperative Society Act and classified so, under that Act, are entitled to the benefit of deduction u/s 80P(2) In the instant case, admittedly, the Joint Registrar (General) Kottayam, by certificate dated 23.12.2011 had certified that the assessee is a primary agricultural credit cooperative society. This fact also admitted by the Assessing Officer at page 2 of the assessment order. In view of the clear finding of the Hon ble jurisdictional High Court, we are of the view that the assessee is entitled to the benefit of deduction u/s 80P(2) . As per section 80P(2)(d) interest income received by the cooperative society from its investment from another cooperative society, is eligible for exemption from taxation. The whole of interest income was received from other cooperative society/banks and hence, as per provisions of section 80P(2)(d) of the Act, the same is to be allowed as deduction. By virtue of section 80P(2)(a)(i) in the case of cooperative society carrying on the business of banking or providing credit facilities to its members, whole of the profits and gains attributable to such activities is eligible for deduction. If the income is derived by a cooperative society from the business of banking or providing credit facility to its members it will fall within the exemption. The Hon be Supreme Court, in the case of CIT vs Karnataka State Cooperative 2001 (8) TMI 9 - SUPREME COURT held that interest from surplus funds kept as deposits in banks, being ancillary and incidental to the carrying on of the business of providing credit facility by the assessee cooperative society to its members, is entitled to deduction u/s 80P(2)(a)(i). We hold that the Assessing Officer is not justified in denying the benefit of deduction u/s 80P - Decided in favour of assessee.

Summary

Issues Involved:
1. Eligibility of interest income on loans for deduction under Section 80P of the Income Tax Act.
2. Eligibility of interest income on short-term deposits for deduction under Section 80P of the Income Tax Act.

Detailed Analysis:

1. Eligibility of Interest Income on Loans for Deduction under Section 80P:

The primary issue was whether the interest income amounting to ?2,79,63,652/- received on various loans disbursed by the assessee, a primary agricultural credit society, is eligible for deduction under Section 80P of the Income Tax Act. The Assessing Officer (AO) had disallowed the deduction, arguing that the majority of the loans were for non-agricultural purposes, such as gold loans, housing loans, and trade loans, and thus the interest income should be assessed under Section 56 as "income from other sources."

The Tribunal examined the details of the loans and found that the interest income was indeed part of the banking activities of the cooperative society. The Tribunal referenced the Cochin Bench's decision in the case of Muttom Service Cooperative Bank Ltd., which had distinguished the Supreme Court's judgment in Totgar’s Cooperative Sales Society Ltd. The Tribunal noted that the assessee was engaged in providing credit facilities to its members, akin to banking activities, making the interest income eligible for deduction under Section 80P(2)(a)(i).

Furthermore, the Tribunal cited the Hon’ble Kerala High Court’s judgment in Chirakkal Service Co-op Bank Ltd, which held that primary agricultural societies registered under the Kerala Cooperative Society Act are entitled to the benefit of deduction under Section 80P(2). Given that the assessee was certified as a primary agricultural credit cooperative society, the Tribunal concluded that the interest income on loans was eligible for deduction under Section 80P(2)(a)(i).

2. Eligibility of Interest Income on Short-term Deposits for Deduction under Section 80P:

The second issue was the eligibility of interest income amounting to ?33,85,886/- earned from short-term deposits with other cooperative banks for deduction under Section 80P. The AO had denied the deduction, treating the interest income as "income from other sources."

The Tribunal noted that under Section 80P(2)(d), interest income received by a cooperative society from investments in other cooperative societies is eligible for exemption. The Tribunal referenced its decision in the case of Kizhathadiyoor Service Cooperative Bank Ltd, which held that interest income from other cooperative societies qualifies for deduction under Section 80P(2)(d).

Additionally, the Tribunal cited the Supreme Court’s judgment in CIT vs Karnataka State Cooperative Apex Bank, which held that interest from surplus funds kept as deposits in banks, being ancillary to the business of providing credit facilities, is eligible for deduction under Section 80P(2)(a)(i).

Based on these precedents, the Tribunal concluded that the interest income of ?33,85,886/- from short-term deposits with other cooperative banks was eligible for deduction under Section 80P(2)(d).

Conclusion:

The Tribunal upheld the CIT(A)’s decision to delete the addition of ?2,79,63,652/- and allowed the deduction under Section 80P(2)(a)(i) for the interest income on loans. It also allowed the deduction under Section 80P(2)(d) for the interest income of ?33,85,886/- from short-term deposits with other cooperative banks. Consequently, the appeal filed by the revenue was dismissed, and the appeal filed by the assessee was allowed. The cross-objection filed by the assessee was dismissed as infructuous.

Order Pronouncement:

The order was pronounced in the open Court on 22nd March 2017, dismissing the revenue's appeal and the assessee's cross-objection, while allowing the assessee's appeal.