2021 (12) TMI 1259 - AT - Income Tax

Exemption u/s. 80P(2)(a)(i) in respect of interest on fixed deposits with Bank of Baroda - AO denied the exemption of interest treating it under the head income from other sources not as income from business' - CIT(A) upheld the contention that the said interest income should be assessed as income from business , however he denied the claim of exemption u/s. 80P(2)(a)(i) on the ground that the assessee lends money to nominal members - AO as well as the CIT(A) were of the opinion that the interest earned from third parties or non-members does not quality for exemption u/s.80P - HELD THAT - It is an admitted position that the interest so earned should be taxed as income from other sources There is a cleavage of judicial opinion among several High Courts on the issue of eligibility of this kind of income for exemption u/s. 80P(2)(a)(i) of the Act. The Hon ble Punjab Haryana High Court in the case of CIT vs. Punjab State Cooperative Federation of Housing Building Societies Ltd. 2016 (12) TMI 560 - PUNJAB AND HARYANA HIGH COURT took a view that the income arising on the surplus invested in short term deposits and securities cannot be attributed to the activities of the society and, therefore, not eligible for exemption u/s.80P(2)(a)(i) of the Act. However, the Hon ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT took a view that such interest income is attributable to the activities of the society and, therefore, eligible for exemption u/s.80P(2)(a)(i) The Coordinate Bench of Pune Benches in the case of M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit 2018 (12) TMI 1926 - ITAT PUNE has taken view in favour of the assessee following the judgment of Hon ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Respectfully following the decision of the Coordinate Bench, we hold that the interest income earned on the investment of surplus money with banks is also eligible for exemption u/s.80P(2)(a)(i) of the Act. Thus, the grounds of appeal No. 1 2 stands allowed. Claim for exemption of interest earned on the securities held with RBI - We allow these grounds in favour of the assessee and direct the AO to exempt the interest earned on securities held with RBI under the provisions of section 80P(2)(a)(i) of the Act Denial of exemption u/s.80P(2)(a)(i) - whether the nominal members are also the members of the Cooperative societies or not? - HELD THAT - The term members is not defined in the Income Tax Act, 1961. Under the provisions of Maharashtra Cooperative Societies Act, 1960, the term members include nominal members and extraordinary members and in the circumstances, we hold that the CIT(A) was not justified in denying the exemption u/s.80P(2)(a)(i) of the Act. This ground is also allowed.

Summary

Issues:
1. Denial of exemption u/s. 80P(2)(a)(i) for interest income on fixed deposits with Bank of Baroda.
2. Denial of exemption u/s. 80P(2)(a)(i) for interest income on securities held with RBI.
3. Disallowances made by the AO and eligibility for exemption u/s. 80P(2)(a)(i).
4. Eligibility for exemption u/s. 80P(2)(a)(i) regarding nominal members of the cooperative society.

Issue 1: Denial of exemption u/s. 80P(2)(a)(i) for interest income on fixed deposits with Bank of Baroda:
The appellant, a cooperative society, appealed against the denial of exemption by the CIT(A) for interest income on fixed deposits. The AO treated the interest income as 'income from other sources' instead of 'income from business.' The appellant argued that being a cooperative society under the Maharashtra Cooperative Societies Act, it should qualify for the exemption. The Tribunal referred to various High Court judgments on similar issues and concluded that interest income earned on surplus money with banks qualifies for exemption u/s. 80P(2)(a)(i). Therefore, the grounds of appeal were allowed.

Issue 2: Denial of exemption u/s. 80P(2)(a)(i) for interest income on securities held with RBI:
Similar to the first issue, the CIT(A) denied exemption for interest income on securities held with RBI. The Tribunal, based on its decision for the first issue, allowed these grounds in favor of the appellant, directing the AO to exempt the interest earned on securities held with RBI under section 80P(2)(a)(i) of the Act.

Issue 3: Disallowances made by the AO and eligibility for exemption u/s. 80P(2)(a)(i):
The AO made several disallowances, increasing the business profits of the cooperative society. The Tribunal held that these enhanced incomes, resulting from disallowances, also qualify for exemption u/s. 80P(2)(a)(i) of the Act. Therefore, the grounds of appeal challenging the disallowances were allowed.

Issue 4: Eligibility for exemption u/s. 80P(2)(a)(i) regarding nominal members of the cooperative society:
The CIT(A) denied exemption based on the argument that money was lent to nominal members who were not part of the cooperative society. The Tribunal analyzed the definition of 'members' under the Maharashtra Cooperative Societies Act, which includes nominal and extraordinary members. As per the Act, the Tribunal held that the CIT(A) was unjustified in denying the exemption u/s. 80P(2)(a)(i) based on lending to nominal members. Therefore, this ground of appeal was also allowed.

In conclusion, the Tribunal allowed the appeal, overturning the decisions of the lower authorities and granting the appellant the exemptions sought under section 80P(2)(a)(i) for various sources of income and disallowances.