2019 (5) TMI 407 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income received by the assessee on investments made with Sub-Treasuries, District Co-operative Banks, Other Banks etc. - assessee's are primary agricultural credit societies, registered under the Kerala Co-operative Societies Act, 1969 - whether interest income received by the assessees 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 assessees had made investments with sub-treasuries, District Co-operative Banks, other 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 . See THE VAVVERU CO-OPERATIVE RURAL BANK LTD. VERSUS THE CHIEF COMMISSIONER OF INCOME TAX, VIJAYAWADA 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT - Decided in favour of assessee.

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, District Co-operative Banks, Other Banks, etc.

Detailed Analysis:

Background:
The appeals by the Revenue and cross objections by the assessees, M/s. Postal Telecom BSNL Employees Co-op Society Ltd. and M/s. Avanakuzhy Service Co-op Society, were consolidated due to the common issue involved. 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. The Assessing Officer (AO) had treated the interest income from investments with treasury and banks as "income from other sources," thereby denying the deduction u/s 80P(2)(a)(i) of the I.T.Act.

CIT(A) Decision:
The CIT(A) followed the Cochin Bench Tribunal's decision in the case of Kizhathadiyoor Service Co-operative Bank Ltd. for the assessment year 2009-2010, which held that interest income from investments with Treasury and Banks is part of the banking activity and eligible for deduction u/s 80P(2)(a)(i).

Revenue's Appeal:
The Revenue contested the CIT(A)'s decision, arguing that the interest income should be assessed as "income from other sources" and not eligible for deduction under section 80P(2)(a)(i).

Assessee's Argument:
The assessees contended that the issue is covered in their favor by several 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)

Tribunal's Analysis:
The Tribunal considered whether the interest income from investments should be assessed under "income from other sources" or "income from business." If assessed under "income from business," the assessees would be entitled to deduction u/s 80P(2)(a)(i).

1. Judicial Precedents:
- The Tribunal referred to its previous decisions and other judicial pronouncements, including the Karnataka High Court's decision in Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO, which clarified that primary agricultural credit societies or primary cooperative agricultural and rural development banks without an RBI banking license are not hit by section 80P(4) and are eligible for deduction under section 80P(2)(a)(i).
- The Tribunal also noted the distinction made by the Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd., differentiating it from the Supreme Court's decision in Totgars Cooperative Sales Society Ltd.

2. Cochin Bench Decisions:
- The Tribunal reiterated the Cochin Bench's decisions in cases like Kizhathadiyoor Service Co-operative Bank Ltd. and Muttom Service Cooperative Bank Ltd., which supported the assessees' claim for deduction under section 80P(2)(a)(i).

3. Circular No. 18/2015:
- The Tribunal referenced the CBDT Circular No. 18/2015, which clarified that interest income from investments by banking concerns is attributable to the business of banking and falls under "Profits and gains of business and profession."

4. Telangana & Andhra Pradesh High Court Decision:
- The Tribunal cited the recent decision of the Telangana & Andhra Pradesh High Court in Vaveru Co-operative Rural Bank Ltd. v CIT, which supported the view that interest income from investments by co-operative societies engaged in providing credit facilities to members is eligible for deduction under section 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the assessees are entitled to deduction u/s 80P(2)(a)(i) for interest income received on investments made with sub-treasuries and banks. The appeals by the Revenue were dismissed, and the cross objections by the assessees were rendered infructuous or dismissed.

Final Order:
The appeals filed by the Revenue and the cross objections filed by the assessees were dismissed. The Tribunal's order was pronounced on April 30, 2019.

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