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2017 (11) TMI 1558 - AT - Income TaxDisallowance of a deduction u/s 80P(2) - whether the assessee could be considered as a co-operative bank? Held that - Nothing was brought on record by the Revenue to show that the Reserve Bank of India declared it as a co-operative bank. Neither was the assessee a primary agricultural credit society nor was it a primary co-operative agricultural and rural development bank. The hon ble Karnataka High Court in the case of CIT v. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha Bagalkot 2015 (1) TMI 821 - KARNATAKA HIGH COURT has clearly held that for a co-operative society to be considered as a co-operative bank, it was necessary that the Reserve Bank of India should have given such a classification to the said co-operative society. In the circumstances, we are of the opinion that section 80P(4) had no application in the case of the assessee. We do not find any reason to interfere with the order of the Commissioner of Income-tax (Appeals) in this regard. Appeal of the Revenue is thus dismissed. Treatment of interest under the head income from other sources instead of income from business - Held that - It has not been disputed that interest income earned by the assessee were from deposits placed by it in banks. The contention of the assessee is that such interest should be considered only as part of its business income since the deposits were placed for meeting the requirements of statutory reserves under the Multi State Co-operative Societies Act, 2002. No doubt, in the case of Totgar s Co-operative Sale Society Ltd. (2010 (2) TMI 3 - SUPREME COURT) had held that interest received on deposits created out of sale proceeds received from the members not immediately disbursed to such members, was to be considered under the head income from other sources . However, in the case before us, admittedly, the deposits were not out of sale proceeds from the members of the assessee-society. The Revenue has not rebutted the claim of the assessee that deposits on which interest was earned was for meeting investment requirement on statutory reserves under the Multi State Co-operative Societies Act, 2002. Clearly it was out of compulsions of business that the deposits were placed by the assessee in the banks. Earning of interest therefrom, in our opinion, could only be treated as income from its business. Thus we are of the opinion that the interest earned by the assessee could not have been treated under the head Income from other sources but only as a part of its business income. - Decided in favour of assessee.
Issues Involved:
1. Eligibility for deduction under section 80P(2) of the Income-tax Act, 1961. 2. Classification of interest income as "income from other sources" versus "income from business." Issue-wise Detailed Analysis: 1. Eligibility for deduction under section 80P(2) of the Income-tax Act, 1961: The Revenue challenged the deletion of disallowance of a deduction of ?90,29,958 claimed by the assessee under section 80P(2) of the Income-tax Act, 1961. The Revenue argued that the Commissioner of Income-tax (Appeals) relied on the judgment of the jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Ltd. v. CIT [2016] 384 ITR 490 (Ker), which pertained to primary agricultural credit societies registered under the Kerala Co-operative Societies Act. The Revenue contended that the assessee was a multi-State co-operative society functioning like a commercial bank, providing non-agricultural credit, and hence not eligible for deduction under section 80P of the Act. Additionally, the Revenue argued that by virtue of section 80P(4), the deduction under section 80P(1) could not be given to any co-operative bank. The assessee countered that it was not a co-operative bank under Part V of the Banking Regulations Act, 1949, but a multi-State co-operative society registered under section 7 of the Multi State Co-operative Societies Act, 2002. The assessee argued that mere acceptance of bank deposits and advancing loans to members would not convert it into a co-operative bank unless declared so by the Reserve Bank of India. The Tribunal noted that the assessee was indeed a multi-State co-operative society, as evidenced by a certificate dated March 16, 2004, from the Office of Central Registrar of Co-operative Societies. The Tribunal highlighted that the earnings of the assessee were from credit facilities given to its members. Section 80P(1) allows for the deduction of profits and gains of business attributable to providing credit facilities to members. The Tribunal emphasized that the Revenue did not provide evidence that the Reserve Bank of India had classified the assessee as a co-operative bank. The Tribunal cited the Karnataka High Court's decision in CIT v. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha Bagalkot [2014] 369 ITR 86 (Karn) and the Gujarat High Court's decision in CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. [2014] 362 ITR 331 (Guj), which held that a co-operative society must be classified as a co-operative bank by the Reserve Bank of India to be denied the deduction under section 80P(4). Consequently, the Tribunal concluded that section 80P(4) did not apply to the assessee and upheld the Commissioner of Income-tax (Appeals)'s order, dismissing the Revenue's appeal. 2. Classification of interest income as "income from other sources" versus "income from business": In the cross-objection, the assessee contested the treatment of interest income as "income from other sources" instead of "income from business." The Assessing Officer had classified interest earned on bank deposits as "income from other sources," thereby denying the deduction under section 80P(1). The assessee earned ?51,93,347 as interest on bank deposits. The Assessing Officer relied on the Supreme Court's judgment in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC). The assessee argued that the judgment in Totgar's Co-operative Sale Society Ltd. was not applicable as it pertained to interest received on deposits from retention of sale proceeds, not immediately required for business purposes. The assessee contended that its deposits were for meeting statutory reserve requirements under section 64 of the Multi State Co-operative Societies Act, 2002. The assessee also cited the Supreme Court's judgment in CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 289 ITR 6 (SC), which held that interest income from investments made by a banking concern is attributable to the business of banking. The Tribunal agreed with the assessee, noting that the deposits were not from sale proceeds but for meeting statutory reserve requirements. The Tribunal referenced the Central Board of Direct Taxes' Circular No. 18 of 2015, which clarified that interest income from investments made by a banking concern is part of the business income. The Tribunal concluded that the interest earned by the assessee should be treated as business income, not "income from other sources," and allowed the assessee's cross-objection. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, ruling that the assessee was eligible for the deduction under section 80P(2) and that the interest income should be classified as business income.
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