2023 (6) TMI 1026 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - net profit earned by the assessee from carrying on business as Co-operative Society - HELD THAT - As in the case of the assessee before us the surplus funds parked by way of short-term deposit with the co-operative bank, viz. Malavia Urban Co-operative Bank Limited are inextricably interlinked, or in fact interwoven with its business of providing credit facilities to its members, therefore, the same as claimed by the Ld. AR, and rightly so, would duly be eligible for deduction u/s.80P(2)(a)(i). We, thus, in terms of our aforesaid observations, direct the AO to allow deduction u/s. 80P(2)(a)(i) of the Act on the interest income earned by the assessee society on its deposits with the co-operative bank - Appeal of assessee allowed.

Summary

Issues Involved:
1. Interest income on FDR(s) with Malviya Urban Co-operative Bank Ltd. not considered as business income.
2. Disallowance of deduction u/s 80P(2)(a)(i) of the IT Act, 1961.
3. Rejection of alternate plea for deduction u/s 80P(2)(d).

Summary:

Issue 1: Interest Income on FDR(s)
The assessee, a cooperative society, filed its return for AY 2018-19 claiming deduction of Rs. 31,70,144 u/s 80P(2)(a)(i). The AO held that interest income of Rs. 60,75,056 from FDR(s) with Malviya Urban Co-operative Bank Ltd. was not derived from business activities but was income from other sources. Consequently, the AO denied the deduction, resulting in a business loss of Rs. 29,04,912.

Issue 2: Disallowance of Deduction u/s 80P(2)(a)(i)
The CIT(A) upheld the AO's decision, referencing the Supreme Court's ruling in Totgars Co-operative Sale Society Ltd., which stated that interest earned on funds not immediately required for business is taxable as 'Income from Other Sources' u/s 56 and not eligible for deduction u/s 80P(2)(a)(i). The CIT(A) concluded that the interest income did not qualify for deduction as it was not earned in the course of providing credit facilities to members.

Issue 3: Rejection of Alternate Plea for Deduction u/s 80P(2)(d)
The assessee argued that the interest income from FDR(s) should be deductible u/s 80P(2)(d) as it was derived from a cooperative society. The CIT(A) rejected this plea, stating that the clause applies only if the funds are invested in other societies, not cooperative banks.

Tribunal's Decision:
The ITAT Jaipur allowed the assessee's appeal, stating that the interest income from surplus funds deposited with Malviya Urban Co-operative Bank Ltd. is inextricably linked with the business of providing credit facilities to members and is eligible for deduction u/s 80P(2)(a)(i). The Tribunal emphasized that the funds were not liabilities but surplus funds, and thus, the interest income is attributable to the business activity of the cooperative society.

Conclusion:
Both appeals for AY 2018-19 and AY 2020-21 were allowed, directing the AO to allow the deduction of Rs. 31,70,144 u/s 80P(2)(a)(i) on the interest income from deposits with the cooperative bank. The Tribunal's decision was based on the interpretation that the interest income from surplus funds is attributable to the cooperative society's business activities.