2017 (3) TMI 1037 - AT - Income Tax

Clam of deduction u/s 80P - Held that - CIT(A) is justified in directing the AO to allow the deduction claimed by the assessee u/s 80P on the reason that the assessee, a cooperative credit society is not a bank for the purposes of section 80P(4) of the Act. Thus the orders of the Ld.CIT(A) dated 11.02.2011 and 29.11.2011 for the Assessment Years 2007-08 and 2008- 09 respectively are upheld. - Decided in favour of assessee Denial of deduction u/s.80P(2)(a)(i) - interest income arising on fixed deposit - Held that - In the instant case there is no dispute to the fact that the society is a credit cooperative society authorised by the registrar of cooperative societies for accepting deposits and lending money to its members as per license granted by the registrar of cooperative societies and the main object of the society is to provide credit facility to members who can be any person of the society. We find in the case of Mahavir Nagari Sahakari Pat Sanstha Ltd.(2000 (2) TMI 234 - ITAT PUNE ) has held that the credit society which is carrying on the business of banking activity and providing credit facility to its members is eligible for deduction u/s.80P(2)(a)(i). In view of the above discussion CIT-A justified in holding that the assessee is entitled to deduction u/s.80P(2)(a)(i) when the income of the society on account of interest from banks other than Co-op. Banks, interest on Mutual Funds, long term capital gain on mutual funds and short term capital gain on Mutual Fund - Decided in favour of assessee

Summary

Issues Involved:
1. Allowability of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Classification of the assessee as a cooperative bank or cooperative society.
3. Taxability of interest income from fixed deposits and investments.

Summary of Judgment:

1. Allowability of Deduction under Section 80P(2)(a)(i):
The primary issue was whether the assessee, a cooperative society engaged in banking activities with its members, was entitled to a deduction under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (AO) disallowed the deduction, arguing that the assessee was a primary cooperative bank and thus fell under the purview of Section 80P(4), which excludes cooperative banks from such deductions. However, the First Appellate Authority (FAA) and the Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, stating that the society did not qualify as a cooperative bank but rather as a cooperative credit society. The ITAT upheld the FAA's decision, citing precedents like Kulswami Cooperative Society and Jafari Momin Vikas Cooperative Credit Society, which clarified that cooperative societies providing credit facilities to their members are distinct from cooperative banks and are eligible for the deduction under Section 80P(2)(a)(i).

2. Classification of the Assessee:
The AO classified the assessee as a primary cooperative bank, which would disqualify it from deductions under Section 80P(2)(a)(i). The FAA and ITAT, however, determined that the assessee did not meet the criteria for a primary cooperative bank. The FAA noted that the assessee's activities were restricted to its members, and it did not conduct business with the public, a key characteristic of banking as per the Banking Regulation Act. The ITAT confirmed this view, emphasizing that the assessee did not possess a banking license from the Reserve Bank of India, a requirement for being classified as a cooperative bank. Therefore, the assessee remained a cooperative credit society, eligible for the deduction.

3. Taxability of Interest Income:
The AO argued that the interest income from fixed deposits and investments should be taxed under the head "income from other sources" and not be eligible for deduction under Section 80P. The FAA partially agreed, stating that interest income from statutory reserves, which could not be used for business purposes, should be taxed as "income from other sources." However, the FAA allowed deductions for interest income arising from business activities. The ITAT, while addressing the assessee's appeal, referred to the case of Niphad Nagari Sahakari Patsanstha Ltd., which distinguished interest income from operational funds used for business purposes from surplus funds. The ITAT concluded that the interest income from fixed deposits made to maintain liquidity was part of the business income and thus eligible for deduction under Section 80P(2)(a)(i).

Conclusion:
The ITAT upheld the FAA's decision to allow the deduction under Section 80P(2)(a)(i) for the assessee, confirming that the assessee was not a cooperative bank but a cooperative credit society. The ITAT also ruled that interest income from fixed deposits, used for maintaining liquidity and not surplus funds, was part of the business income eligible for deduction. The appeal filed by the AO was dismissed, and the appeal by the assessee was allowed, providing a comprehensive resolution to the issues raised.