2018 (9) TMI 1463 - AT - Income Tax

Grant of deduction u/s 80P(2)(a)(i) - interest income received by the assessee on investments made with Sub-Treasuries, Banks etc. - whether interest income received by the assessee on investments with sub-treasuries and banks was liable to be assessed under the head income from other sources or income from business ? - Held that - In the instant case the assessee had made investments with sub-treasuries and banks in the course of its business of banking / providing credit facilities to its members. Therefore, it was entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income that was received on such investments. As in the case of Vaveru Co-operative Rural Bank Ltd. v CIT (2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT) had also decided on identical issue in favour of the assessee as held that co-operative societies engaged in providing credit facilities to its members had in course of business made investments with treasury, bank etc. and earned interest income, such income was eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the CIT(A) is justified in directing the Assessing Officer to grant deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income received by the assessee on investments made with Sub-Treasuries, Banks, etc.

Detailed Analysis:

Issue 1: Deduction under Section 80P(2)(a)(i) for Interest Income:

The primary issue in these appeals is whether the CIT(A) was correct in directing the Assessing Officer to allow the deduction under Section 80P(2)(a)(i) of the Income Tax Act for interest income received by the assessee from investments made with Sub-Treasuries and Banks.

Facts of the Case:

The assessees are primary agricultural credit societies registered under the Kerala Co-operative Societies Act, 1969, engaged in banking and providing credit facilities to their members. For the assessment years under consideration, the Assessing Officer treated the interest income received from investments with treasury and banks as income from other sources, thereby denying the claim of deduction under Section 80P(2)(a)(i).

CIT(A)'s Decision:

The CIT(A) ruled in favor of the assessees, following the Cochin Bench of the Tribunal's decision in the case of Kizhathadiyoor Service Co-operative Bank Ltd. for the assessment year 2009-2010. The CIT(A) held that the interest income earned on investments made with Treasury and Banks is part of the banking activity of the assessee and thus eligible for deduction under Section 80P(2)(a)(i).

Revenue's Appeal:

The Revenue contested CIT(A)'s decision, arguing that the CIT(A) erred in holding that the interest earned from investments in treasury and banks is part of banking activity eligible for deduction under Section 80P(2)(a)(i). The Revenue cited the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd., which held that such interest income should be classified as 'income from other sources' taxable under Section 56 and not qualify for deduction as business income under Section 80P(2)(a)(i).

Tribunal's Analysis:

The Tribunal considered various judicial pronouncements, including:

- CIT v. Karnataka State Co-operative Bank [251 ITR 194 (SC)]
- Vaveru Co-operative Rural Bank Ltd. v CIT [(2017) 396 ITR 371 (Telangana and Andhra Pradesh High Court)]
- Muttom Service Co-operative Bank Ltd. (ITA No.372/Coch/2010)
- Mundakkayam Service Co-operative Bank Ltd. (ITA No.106/Coch/2016)
- The Mangalam Service Co-operative Bank Ltd. v. ITO (ITA No.495/Coch/2017)

The Tribunal noted that the Cochin Bench had previously considered an identical issue in the case of The Azhikode Service Co-operative Bank Ltd. & Others, deciding in favor of the assessees. It was established that a primary agricultural credit society or a primary cooperative agricultural and rural development bank, which does not possess a license from the Reserve Bank of India to carry on banking business, is not a cooperative bank as per Section 80P(4) of the Act. Therefore, such societies are eligible for deduction under Section 80P(2)(a)(i).

Distinguishing Totgar's Case:

The Tribunal distinguished the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd., noting that in Totgar's, the interest income was from investments of sale proceeds retained by the society, which was shown as a liability. In contrast, in the present case, the interest income was from the society's own funds invested in the course of its banking activities.

Conclusion:

The Tribunal concluded that the assessees, being primary agricultural credit societies engaged in providing credit facilities to their members, are entitled to deduction under Section 80P(2)(a)(i) for interest income received from investments made with Sub-Treasuries and Banks. The appeals filed by the Revenue were dismissed.

Order:

The appeals filed by the Revenue are dismissed, and the CIT(A)'s direction to grant the deduction under Section 80P(2)(a)(i) is upheld.