2016 (1) TMI 409 - AT - Income Tax

Claim for deduction under section 80(P)(2)(a)(i) - Held that - As found by the ld. CIT(Appeals), from the perusal of the objects of the assessee-Society as extracted by him in the impugned order from the Bye-Laws, the assessee-Society is not allowed to accept deposits of money from Public for the purpose of lending or investment. As further found by him, the entire transactions of accepting deposits and giving loans have been done by the assessee-Society with its members only and there are no such transactions done by it with nonmembers. He has also found that the assessee-Society was not registered under the Banking Regulation Act, 1949 and it was registered under the West Bengal Cooperative Societies Act , 1983. On the basis of all these findings of fact recorded by him, the ld. CIT(Appeals) has held that the assessee-Society is not a Cooperative Bank, which is covered by section 80P(4) and it is, therefore, eligible for deduction under section 80P(2)(a)(i). At the time of hearing before us, ld. D.R. has not been able to rebut or controvert any of the findings of facts recorded by the ld. CIT(Appeals). He has also not been able to cite any authority where a different or contrary view is taken on this issue, which is in favour of the Revenue. We, therefore, find no justifiable reason to interfere with the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for deduction under section 80P(2)(a)(i) - Decided against revenue Direction to treat the interest income earned by the assessee on its investment as business income eligible for deduction under section 80P(2)(a)(i) by CIT(A) - Held that - a perusal of the relevant balance-sheet of the assessee as on 31.03.2009 (copy of which at pages 67 & 68 of the paper book), shows that the total investment made by the assessee-Society was ₹ 22.08 crores as on 31.03.2009, whereas the Reserves & Surplus and Prof it & Loss A/c. balance as on the said date were ₹ 1.76 crores and 1.73 crores respectively. The major amount appearing on the liability side of the balance-sheet as on 31.03.2009 was deposit and other account aggregating to ₹ 28.89 crores, which comprised of various funds and deposits. Keeping in view these facts and figures, we are of the view that the issue as to whether the relevant investment is made by the assessee out of its own surplus funds or out of the amount payable to its members, which represent its liability, requires verification in order to determine the exact head of income under which the interest on such investment is chargeable to tax in the hands of the assessee by applying the relevant case laws. We, therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the f i le of the Assessing Officer for deciding the same afresh - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Deduction under section 80P(2)(a)(i) of the Income Tax Act.
2. Treatment of interest income on investments as business income eligible for deduction under section 80P(2)(a)(i).

Detailed Analysis:

Issue 1: Deduction under section 80P(2)(a)(i) of the Income Tax Act

The Revenue challenged the deletion of the disallowance made by the Assessing Officer (AO) regarding the assessee's claim for deduction under section 80P(2)(a)(i). The assessee, a Cooperative Society providing credit facilities to its members, filed a return declaring NIL income after claiming the entire income as deduction under section 80P. The AO disallowed this claim, stating that the assessee was not eligible under section 80P(4) as it was either a primary agricultural credit society or a primary agricultural cooperative and rural development bank.

The assessee argued that it was a Cooperative Society, not a Cooperative Bank, and thus section 80P(4) did not apply. The CIT(A) agreed, citing ITAT Bangalore Bench decisions which distinguished between Cooperative Banks and Cooperative Societies, allowing the latter to claim deductions under section 80P(2)(a)(i). The CIT(A) found that the assessee's bye-laws did not permit accepting public deposits for lending or investment, and all transactions were with members only. Consequently, the CIT(A) held that the assessee was eligible for the deduction.

Upon review, the Tribunal upheld the CIT(A)'s decision, noting that the Revenue could not rebut the factual findings or provide contrary legal authority. Therefore, the Tribunal dismissed the Revenue's appeal on this ground.

Issue 2: Treatment of Interest Income on Investments as Business Income

The Revenue contested the CIT(A)'s direction to treat the interest income of Rs. 2,06,49,203 earned by the assessee on its investments as business income eligible for deduction under section 80P(2)(a)(i). The AO had taxed this interest income under "income from other sources," but the CIT(A) treated it as business income, stating that the investments were made to generate funds for the society's lending activities, aligning with its business objectives.

The Revenue argued that the Supreme Court's decision in Totgar's Cooperative Sale Society Limited mandated such interest income be taxed as "income from other sources." The assessee countered, citing the Karnataka High Court's distinction in Tumkur Merchants Souharda Credit Cooperative Limited, where interest income from surplus funds not immediately required for business was treated as business income.

The Tribunal observed that the key issue was whether the investments were made from the society's surplus funds or amounts payable to its members. This distinction was not addressed by the AO or CIT(A). The Tribunal noted that the balance sheet showed significant deposits and funds, indicating the need for verification of whether the investments were from surplus funds or liabilities.

The Tribunal set aside the CIT(A)'s order on this issue and remanded the matter to the AO for fresh consideration, directing verification of the source of the investment funds and proper determination of the head of income for the interest earned.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s decision on the first issue and remanding the second issue for further verification and fresh adjudication by the AO.