2018 (3) TMI 1576 - AT - Income Tax

Denial of deduction claimed u/s 80(P)(2)(a) - interest income on fixed deposits with nationalized banks - Held that - The stand of the assessee right through has been that the society is not engaged in any other activity except receiving deposits from its members and providing credit facilities to its members. The assessee has made deposits with nationalized banks in order to maintain liquidity and provide ready availability of funds for repayment of deposits on redemption/maturity. These facts have not been refuted by the department, we direct the Assessing Officer to allow deduction under section 80(P)(2)(a) of the Act on the interest income earned from fixed deposits with nationalized banks. See ITO Vs. M/s. Maharashtra Bank Employees Co-op. Credit Society Ltd. 2018 (3) TMI 1562 - ITAT PUNE - Decided in favour of assessee

Issues Involved:
1. Treatment of "Interest earned on Fixed Deposits with Nationalized Banks" as "Income from other sources."
2. Disallowance of the deduction under section 80(P)(2)(a) of the Income-tax Act, 1961, with respect to "Interest income on Fixed Deposits with Nationalized Banks."

Detailed Analysis:

1. Treatment of "Interest earned on Fixed Deposits with Nationalized Banks" as "Income from other sources":

The primary issue in the appeals was whether the interest income earned by a Co-operative Credit Society from fixed deposits with nationalized banks should be treated as "Income from other sources" or as business income eligible for deduction under section 80(P)(2)(a) of the Income-tax Act, 1961. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had treated this interest income as "Income from other sources" based on the Supreme Court's decision in Totgar’s Co-operative Sale Society Ltd. Vs. ITO (2010) 322 ITR 283 (SC), which held that interest income from surplus funds not required for business purposes should be taxed under section 56 of the Act.

2. Disallowance of the deduction under section 80(P)(2)(a) of the Income-tax Act, 1961:

The assessee, a Co-operative Credit Society, claimed that the interest income from fixed deposits with nationalized banks should be eligible for deduction under section 80(P)(2)(a) of the Act. The AO and CIT(A) disallowed this deduction, relying on the Supreme Court's decision in Totgar’s Co-operative Sale Society Ltd. Vs. ITO and the Delhi High Court's decision in Mantola Co-operative Thrift & Credit Society Ltd. Vs. CIT (2014) 50 taxmann.com 278 (Del).

Tribunal's Findings and Decision:

1. Eligibility for Deduction under Section 80(P)(2)(a):

The Tribunal noted that the issue had been considered in several cases, including ITO Vs. M/s. Maharashtra Bank Employees Co-op. Credit Society Ltd. (ITA Nos.454 to 456/PUN/2015), where it was held that interest income earned from fixed deposits with nationalized banks was eligible for deduction under section 80(P)(2)(a) of the Act. The Tribunal distinguished the facts of the present case from the Supreme Court's decision in Totgar’s Co-operative Sale Society Ltd., noting that the funds invested in fixed deposits were not surplus funds but were part of the working capital and reserve funds mandated by the Maharashtra Co-operative Societies Act.

2. Statutory Obligation and Business Income:

The Tribunal emphasized that the Co-operative Society was statutorily required to invest a portion of its profits in reserve funds, which were then invested in fixed deposits with nationalized banks. This investment was a statutory obligation and part of the business activity of the society. The Tribunal referred to the Supreme Court's decision in CIT Vs. Karnataka State Co-operative Apex Bank, which held that interest income from statutory investments was business income eligible for deduction under section 80(P)(2)(a)(i) of the Act.

3. Precedents and Consistency:

The Tribunal also referred to several other decisions, including those of the Punjab & Haryana High Court in CIT Vs. Nawanshahar Central Co-operative Bank Ltd., and the Gujarat High Court in State Bank of Income Vs. CIT, to support its conclusion that interest income from statutory investments should be treated as business income. The Tribunal noted that the facts of the present case were different from those in Totgar’s Co-operative Sale Society Ltd., as the funds invested were not surplus but were part of the statutory reserve funds.

Conclusion:

The Tribunal concluded that the assessee was entitled to claim the benefit under section 80(P)(2)(a) of the Act on the interest income earned from fixed deposits with nationalized banks. The Tribunal directed the AO to allow the deduction, setting aside the orders of the AO and CIT(A). The appeals of the assessee were allowed.

Consolidated Order:

The Tribunal issued a consolidated order for the sake of convenience, applying the same reasoning and decision to both assessment years 2013-14 and 2012-13.

Result:

Both appeals of the assessee were allowed, and the AO was directed to allow the deduction under section 80(P)(2)(a) of the Act on the interest income earned from fixed deposits with nationalized banks.

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