2019 (5) TMI 423 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income received by the assessee on investments made with District Co-operative Banks, Other Banks etc. - assessee is a primary agricultural credit societies, registered under the Kerala Co-operative Societies Act, 1969 - whether interest income received by the assessee on investments with sub-treasuries and banks was liable to be assessed under the head income from other sources or income from business ? - HELD THAT - In the instant case the assessee had made investments with sub-treasuries, District Co-operative Banks, other Banks in the course of its business of banking / providing credit facilities to its members. Therefore, it was entitled to deduction u/s 80P(2)(a)(i) in respect of interest income that was received on such investments in view of the above judicial pronouncements. Since we have found that the interest income was earned in course of carrying on business of banking and entitled to deduction u/s 80P(2)(a)(i), the claim u/s 80P(2)(d) is not considered. See THE VAVVERU CO-OPERATIVE RURAL BANK LTD. VERSUS THE CHIEF COMMISSIONER OF INCOME TAX, VIJAYAWADA 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT - Decided against revenue.

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 District Co-operative Banks and other Banks.

Detailed Analysis:

Background and Context:
The appeals were filed by the Revenue against the orders of the CIT(A) for the assessment years 2013-2014 and 2014-2015. The common issue in these appeals was whether the CIT(A) was justified in allowing the deduction u/s 80P(2)(a)(i) of the I.T. Act for interest income received by the assessee, a primary agricultural credit society, on investments made with District Co-operative Banks and other Banks.

Issue 1: Deduction u/s 80P(2)(a)(i) for Interest Income:
The core issue was whether the interest income received 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 assessee would be entitled to the deduction u/s 80P(2)(a)(i).

The CIT(A) had directed the Assessing Officer to grant the deduction, following the precedent set by the Cochin Bench of the Tribunal in the case of Kizhathadiyoor Service Co-operative Bank Ltd. The CIT(A) held that the interest income was part of the banking activity of the assessee and thus eligible for deduction.

Tribunal's Consideration:
The Tribunal noted that an identical issue had been considered in the case of The Azhikode Service Co-operative Bank Ltd., where it was decided in favor of the assessee. The Tribunal referred to the judicial pronouncements, including the judgment of the Hon’ble Karnataka High Court in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO, which clarified that a primary agricultural credit society or a primary cooperative agricultural and rural development bank without an RBI license is not a cooperative bank as per section 80P(4) and is eligible for deduction u/s 80P(2)(a)(i).

The Tribunal also distinguished the facts from the Supreme Court judgment in the case of Totgars Cooperative Sales Society Ltd., noting that in Totgars, the interest income was from surplus funds not immediately required for business, whereas in the present case, the interest income was from funds invested as part of the banking activity.

Judicial Precedents:
1. Kizhathadiyoor Service Co-operative Bank Ltd. - The Tribunal upheld the deduction u/s 80P(2)(a)(i) for interest income from investments, considering it part of the banking activity.
2. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO - The Karnataka High Court held that primary agricultural credit societies are eligible for deduction u/s 80P(2)(a)(i) as they are not considered cooperative banks under section 80P(4).
3. Tumkur Merchants Souharda Credit Cooperative Ltd. - The Karnataka High Court distinguished the Totgars case and held that interest income from investments not immediately required for business is deductible u/s 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the assessee, being a primary agricultural credit society engaged in providing credit facilities to its members and not holding an RBI banking license, was entitled to the deduction u/s 80P(2)(a)(i) for the interest income received on investments with District Co-operative Banks and other Banks. The appeals filed by the Revenue were dismissed.

Order:
The appeals filed by the Revenue are dismissed. The assessee is entitled to deduction u/s 80P(2)(a)(i) of the I.T. Act in respect of interest income received on investments made with District Co-operative Banks and other Banks. Order pronounced on 02nd May 2019.

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