2017 (8) TMI 1637 - AT - Income Tax

Deduction u/s 80P (2)(a)(i) - AO denied the deduction to the assessee holding it to be co-operative bank and accordingly not eligible for the said deduction as per section 80(4) - HELD THAT - As this issue now is squarely covered in favour of the assessee in the case of the Citizen cooperative society Ltd 2017 (8) TMI 536 - SUPREME COURT wherein as expounded that if one has to go by the definition of cooperative bank the assessee does not get covered thereby. That it is also a matter of common knowledge that in order to do the business of a cooperative bank it is imperative to have a licence from the reserve bank of India which the assessee does not possess. In the present case before me also the assessee cooperative society is not licensed from the reserve bank of India to act as co-operative bank. Hence as per the ratio emanating from the aforesaid honourable apex court judgement the assessee is not affected by the provisions of section 80P(4).Thus we hold that assessee is entitled to deduction under section 80P(2)(a)(i). Assessee not entitled to treat interest income received from investment as business income by referring to honourable apex court decision in the case of Totgars cooperative society Ltd. 2010 (2) TMI 3 - SUPREME COURT - This reasoning of the assessing officer confirmed by the learned CIT-A is also flawed. The decision of honourable apex court in the decision referred by the Assessing Officer is not at all applicable on the facts of the case. The Totgars society was not engaged into the business of accepting deposit and granting credit. Rather it was engaged in the activity for marketing of agricultural produce of its members. Hence this case laws is not at all applicable on the facts of the present case In the present case assessee is engaging in to the business of accepting deposits and granting credit to its members. The assessee was utilising surplus fund in investments to earn income. This activity has direct proximate connection or nexus to the earning of the assessee society. On this reasoning this activity of the assessee has been held to be business activity and the resultant income is treated as business income. There are several decisions in support of this proposition including that from ACIT vs. Buldhana Urban Cooperative Credit society Ltd 2013 (12) TMI 237 - ITAT NAGPUR . Accordingly in the background of aforesaid discussion and precedent I hold that the interest income in this case is to be treated as business income. Other issues raised by the assessee in this appeal are now of academic interest. Hence not engaging into the same.

Summary

Issues:
1. Denial of deduction under section 80P(2)(a)(i) to the assessee.
2. Disallowance of provisions for expenses as business expenses.
3. Treatment of interest income received on investments in cooperative banks as business income.

Analysis:

Issue 1: Denial of deduction under section 80P(2)(a)(i) to the assessee:
The assessing officer and CIT-A denied the deduction under section 80P(2)(a)(i) to the assessee, categorizing it as a cooperative bank and thus ineligible for the said deduction under section 80P(4). However, the ITAT found that the assessee was not licensed by the Reserve Bank of India to operate as a cooperative bank, distinguishing it from the definition of a cooperative bank. Citing a precedent from the honorable apex court, the ITAT ruled in favor of the assessee, stating that the provisions of section 80P(4) did not apply to the assessee. Consequently, the ITAT set aside the orders of the lower authorities and held that the assessee was entitled to the deduction under section 80P(2)(a)(i).

Issue 2: Disallowance of provisions for expenses as business expenses:
The assessing officer disallowed provisions for outstanding expenses made by the appellant, such as outstanding audit fees, staff bonus fund, provident fund, and vehicle fund, on the grounds of following a mercantile basis of accounting. However, the ITAT did not delve into this issue as it was considered of academic interest after the main issue was resolved in favor of the assessee.

Issue 3: Treatment of interest income received on investments in cooperative banks as business income:
The assessing officer treated interest income received on deposits with other cooperative banks as income from other sources, not considering it as business income eligible for deduction under section 80P(2)(a)(i). In contrast, the appellant treated the interest income as business income based on a CBDT circular and sought the deduction under the relevant section. The ITAT disagreed with the assessing officer and CIT-A's stance, citing a different case law and emphasizing that the appellant's activities of accepting deposits and granting credit had a direct connection to earning income, thus qualifying the interest income as business income. The ITAT referenced previous decisions supporting this view and concluded that the interest income should be treated as business income, thereby allowing the appeal filed by the assessee.

In conclusion, the ITAT ruled in favor of the assessee on all issues, allowing the appeal and pronouncing the order in open court on 14.08.2017.