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TMI Blog2024 (5) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant the same should not be allowed as deduction u/s 80P of the Act. We further note that the revenue authorities have treated the entire income as income from other sources. The entire interest income cannot be taxed if the assessee has incurred expenses towards earning of such income. We further note from the financial statement as on 31.03.2016 that FD with SBI is Rs. 4,36,328,811, however the internal fund is Rs. 5,17,72,069/- which is more than investments made with SBI, it shows that the assessee has not utilized external funds for investment with SBI. Therefore, relying on the judgment of Totgars Co-operative Sales Society Ltd [ 2015 (4) TMI 829 - KARNATAKA HIGH COURT] the assessee is eligible for claim of its expenditure towards earning of such interest income. Accordingly, the assessee is directed to provide the details of expenditure for earning interest income before the assessing officer. Therefore for allowing expenditure, we are remitting this issue to the assessing officer for determining the cost of funds for earning interest income. Appeals of the assessee are partly allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of interest income earned on deposits of Rs. 23,14,626. The AO relying on judgment of Karnataka High Court in the case of Totgars Co-operative Sale Society, 395 ITR 611 held that interest received on deposits with banks is not eligible for deduction u/s. 80P of the Act and treated it as income from other sources and taxed Rs. 23,14,626 u/s. 56 of the Act. 6. Aggrieved from the above order, the assessee filed appeal before the First Appellate Authority (FAA) and also relying on various judgments partly allowed the appeal of the assessee and held as under:- " 5.10 It's also further pointed out that the Hon'ble Supreme Court in the aforesaid case of Mavilayi Service Co-operative Bank; has held that profits attributable to the non-member are not eligible for deduction u/s 80P(2)(a). In this context its hereby held that the Interest Income earned from Scheduled Banks & Cooperative banks are also from non-member category and hence cannot be considered for deduction u/s 80P(2)(a) nor u/s 80P(2)(d), and would be appropriate to be annexed u/s 56 only. 5.11 Thus, under these circumstances as discussed from the Supreme Court decision in the case of Totagars Co-operative Sale Soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961 . [Ground No. 2.2] 1.3 The appellant society would like to state that, the appellant has earned interest income from its investments with State Bank of India, out of its own funds i.e. share capital, reserves & surplus, profits of the current and previous years and various funds, which are attributable to business income earned by the society by providing credit facility to its members and thereby, as it is not funds which are not immediately required by the society attributable to a liability payable by the society. Hence, interest income from State Bank of India earned during the relevant years would be attributable to business income earned by the society by providing credit facility to its members and thereby eligible for deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961. 1.4 The appellant society would like provide the following details which are extracted from the audited balance sheet of the society Own Funds Particulars Amount in ₹ F.Y. 2015-16 F.Y. 2017-18 Share Capital 2,28,82,490 2,87,44,485 Reserve Fund 1,08,78,579 1,35,89,476 Building fund 18,73,033 19,73,033 Common good fund 9,227 9,526 Bad debts fund 14,09,632 16,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights to the following classes of its members, namely:-- (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government; 1.7 The appellant would like to state that, the funds which were invested in State Bank of India are funds which were part of the its activity of providing credit facility to its members. It is very much undisputed fact that the appellant is a co-operative society carrying on activity of providing credit facility to its members. 1.8 It can be clearly seen from the provisions of section 80P(2)(a)(i) that, the whole of the amount which is attributable to the carrying on activity of providing credit facility to its members will be eligible for deduction. Further, the words 'attributable' has been interpreted categorically by the Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. cited in 55 taxmann.com 447. 1.9 The Hon'ble Karnataka High Court in the in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. cited in 55 taxmann.com 447, whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2023 and 14-12-2023, had upheld the decision of the Hon'ble CIT(A), wherein CIT(A) has allowed the interest earned from own funds which were not liability as deduction u/s 80P(2)(a)(i) by following the decision of Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Copy of these two decisions has been enclosed herewith as ANNEXURE 5 & 6 for your ready reference. 1.13 Considering the above, the appellant prays that, the interest income earned from State Bank of India are sourced out of funds which are attributable to business of the society of providing credit facility to its members and it is not sourced out of liability to be paid to members. Hence, the said interest would be chargeable to tax under the head "Income from business or profession" and thereby it is eligible for deduction u/s 80P(2)(a)(i) as decided in the above decisions. 2.0 Without prejudice to the above grounds, the learned CIT(A) has erred on facts and in circumstances of the case and in law by not allowing deduction of the proportionate interest paid by the appellant to the members on deposits received from them as well as proportionate administrative expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits.' 2.2 Considering the above, the appellant earnestly request the Hon'ble Tribunal to pass such an order allowing us with eligible deductions u/s 57(iii) of proportionate cost of funds and administrative expenditure from the interest earned from State Bank of India. In view of the above and in the interest of justice and fairness, we most humbly and respectfully request your honours to consider our above submission positively and allow the deduction claimed u/s 80P and oblige." 9. The Ld.DR relied on the order of the Ld.CIT(A) and he submitted that the interest income received by the assessee is not to be considered as a operational income since the Hon'ble Jurisdictional High Court of Karnataka has settled this issue in the case of Totgars' Co-operative Sales Society Ltd. reported in (2017) 395 ITR 611 (Karnataka) dated 16.06.2017 which is latest judgement of the jurisdictional Hon'ble High Court. He also submitted that the Hon'ble Gujarat High Court in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. reported in (2022) 140 taxmann.com 602 (Gujarat) dated 04.01.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " As per the above section it is clear that the reserve fund created by the assessee shall be utilized only for intended unforeseen losses. The ld. AR of the assessee also unable to demonstrate that the Registrar has granted by any general or special order to invest for its own business purpose. 11. From the above facts and submissions, we note that assessee has received interest from scheduled commercial bank (SBI) on the surplus funds. The Hon'ble jurisdictional Hight court had decided this issue as under:- "23. Thus, the aforesaid judgments supports the view taken by this Court that character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified Clauses of Section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under Section 80P(2) of the Act. The case in Udaipur Sahakari Upbhokta Thok Bhandar Ltd. (supra) was that of Section 80P(2)(e) of the Act, whereas in the present case, it is under Section 80P(2)(d) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gar Co-operative Sale Society Limited itself rendered on 08th February 2010, in Tot-gar's Co-operative Sale Society Limited v. ITO, reported in MANU/SC/0095/2010: (2010) 322 ITR 283 SC : (2010) 3 SCC 223 for the preceding years, namely Assessment Years 1991-1992 to 1999-2000 (except Assessment Year 1995-1996) holding that such interest income earned by the assessee was taxable under the head 'Income from Other Sources' under section 56 of the Act and was not 100% deductible from the Gross Total Income under section 80P of the Act, is not applicable to the present Assessment Years 2007-2008 to 2011-2012 involved in the present appeals and therefore, whether the Income-tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100 percent deductible under section 80P(2)(d) of the Act?" That while holding the aforesaid issues in favour of the revenue department, the Court followed the decision of the Hon'ble Supreme Court in the case of same assessee which was later on followed by this Court in the case of State Bank of India v. CIT [2016] 72 taxmann.com 64/241 Taxman 163/389 ITR 578, relevant paras are reproduced as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant, cannot be deducted under section 80P(2)(a)(i) of the Act. If the appellant wants to avail of the benefit of deduction of such interest income, it is always open for it to deposit the surplus funds with a co-operative bank and avail of deduction under section 80P(2)(d) of the Act. 17. Section 71 of the Gujarat Co-operative Societies Act, 1961 permits a society to invest or deposit its fund in the State Bank of India. Therefore, while investment in the State Bank of India is permissible under section 71 of that Act, there is no statutory obligation cast upon the appellant to deposit funds as a part of its business. The said provision also permits investment of funds in any co-operative bank or any banking company approved for this purpose by the Registrar on such conditions as the Registrar may from time to time impose. However, insofar as the provisions of the Income-tax Act are concerned, under section 80P(2)(d) thereof, it is only the income by way of interest or dividends derived by a cooperative society from its investments with any other cooperative society which is required to be deducted while computing the total income of the assessee." Thus, following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as deduction u/s 80P of the Act. We further note that the revenue authorities have treated the entire income as income from other sources. The entire interest income cannot be taxed if the assessee has incurred expenses towards earning of such income. We further note from the financial statement as on 31.03.2016 that FD with SBI is Rs. 4,36,328,811, however the internal fund is Rs. 5,17,72,069/- which is more than investments made with SBI, it shows that the assessee has not utilized external funds for investment with SBI. Therefore, relying on the judgment of Hon'ble Jurisdictional High Court in case of Totgars' Co-operative Sales Society Ltd. vs ITO Sirsi, reported in (2015) 58 taxmann.com 35 (Karnataka), the assessee is eligible for claim of its expenditure towards earning of such interest income. Accordingly, the assessee is directed to provide the details of expenditure for earning interest income before the assessing officer. Therefore for allowing expenditure, we are remitting this issue to the assessing officer for determining the cost of funds for earning interest income. 13. In the result, both the appeals of the assessee are partly allowed for statistical purposes. P ..... X X X X Extracts X X X X X X X X Extracts X X X X
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