2019 (1) TMI 948 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income received by the assessee on investments made with Sub-Treasuries, Banks etc. - income from other sources or income from business - Held that - We noticed that an identical issue was considered by the Cochin Bench of the Tribunal in the case of The Azhikode Service Co-operative Bank Ltd. & Others 2017 (7) TMI 1138 - ITAT COCHIN decided the issue in favour of the assessee by holding that interest income received on investments with sub-treasuries and cooperative banks was entitled to the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. The latest judgment in the case of Vaveru Co-operative Rural Bank Ltd. v CIT 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT had also decided on identical issue in favour of the assessees. The Hon ble High Court had held that co-operative societies engaged in providing credit facilities to its members had in course of business made investments with treasury, bank etc. and earned interest income, such income was eligible for deduction u/s 80P(2)(a)(i) - decided against revenue

Summary

Issues Involved:
1. Whether the CIT(A) is justified in directing the Assessing Officer to grant deduction u/s 80P(2)(a)(i) of the I.T. Act in respect of interest income received by the assessee on investments made with Sub-Treasuries, Banks, etc.

Detailed Analysis:

1. Background and Facts of the Case:
The assessees are primary agricultural credit societies registered under the Kerala Co-operative Societies Act, 1969, engaged in the business of banking/providing credit facilities to their members. For the assessment years under consideration, the Assessing Officer (AO) treated the interest income from investments with treasury and banks as "income from other sources," thereby denying the claim of deduction u/s 80P(2)(a)(i) of the I.T. Act.

2. CIT(A) Decision:
Aggrieved by the assessment orders, the assessees appealed to the CIT(A), who followed the precedent set by the Cochin Bench of the Tribunal in the case of Kizhathadiyoor Service Co-operative Bank Ltd. (AY 2009-2010). The CIT(A) held that the interest income earned on investments made with Treasury and Banks is part of the banking activity of the assessee and thus eligible for deduction u/s 80P(2)(a)(i) of the I.T. Act.

3. Revenue's Appeal:
The Revenue challenged the CIT(A)'s decision, arguing that the CIT(A) erred in holding that interest earned from investments in treasury and banks is part of banking activity eligible for deduction under Section 80P(2)(a)(i). The Revenue cited the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd., which held that such interest income should be categorized as "income from other sources" taxable under Section 56 and not qualify for deduction as business income under Section 80P(2)(a)(i).

4. Tribunal's Analysis:
The Tribunal considered whether the interest income received by the assessees on investments with sub-treasuries and banks should be assessed under "income from other sources" or "income from business." If assessed under "income from business," the assessees would be entitled to deduction u/s 80P(2)(a)(i).

5. Judicial Precedents:
The Tribunal referenced several judicial pronouncements favoring the assessee's position, including:
- CIT v. Karnataka State Co-operative Bank [251 ITR 194 (SC)]
- Vaveru Co-operative Rural Bank Ltd. v CIT [(2017) 396 ITR 371 (Telangana and Andhra Pradesh High Court)]
- Muttom Service Co-operative Bank Ltd. (ITA No.372/Coch/2010)
- Mundakkayam Service Co-operative Bank Ltd. (ITA No.106/Coch/2016)
- The Mangalam Service Co-operative Bank Ltd. v. ITO (ITA No.495/Coch/2017)

6. Tribunal's Findings:
The Tribunal noted that an identical issue had been considered by the Cochin Bench in the case of The Azhikode Service Co-operative Bank Ltd. & Others. The Tribunal concluded that the interest income from investments with sub-treasuries and banks is part of the banking activity and thus eligible for deduction under Section 80P(2)(a)(i).

7. Distinguishing Totgar's Case:
The Tribunal distinguished the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd., noting that the case involved a society marketing agricultural produce and retaining sale proceeds, which were invested in short-term deposits. This was not comparable to the assessees' case, where investments were made as part of the banking activity.

8. Conclusion:
The Tribunal held that the assessees are entitled to deduction u/s 80P(2)(a)(i) for interest income received on investments with sub-treasuries and banks. The appeals filed by the Revenue were dismissed.

Order Pronounced:
The Tribunal's consolidated order was pronounced on January 16, 2019, dismissing the Revenue's appeals and upholding the CIT(A)'s direction to grant the deduction u/s 80P(2)(a)(i).