Interest Income of Co-Operative Bank on deposits with Co-operative Bank not eligible for Deductoion U/s. 80P

In the present case, we find that the assessee has earned interest income on fixed deposits made by the assessee with sub-treasury, Meenachili, Kadappattoor and SBI Pala totaling Rs. 20,21,909/- and the interest income earned on the surplus funds of the assessee cannot be considered as business income so as to be entitled for deduction u/s. 80p(2)(a)(i) of the I.T. Act.   Further, we came across the decision of the coordinate Bench of this Tribunal in the case of Aryad Block Small Scale Coir Fibre Mats Manufacturers Co-operative Society Ltd., in I.T.A.  No.787/Coch/2013 vide order dated 14.8.2014  wherein   it has been held that  interest income on fixed deposits made by the assessee in a Co-operative Bank and the interest income earned on the surplus funds of the assessee cannot be considered as business income so as to be entitled for deduction u/s. 80P(2)(a)(i) of the I.T. Act.     Accordingly, the  ground  raised by the  assessee is dismissed.

INCOME TAX APPELLATE TRIBUNAL,COCHIN

BEFORE S/SHRI N.R.S. GANESAN, JM & CHANDRA POOJARI, AM

ITA No.11/Coch/2014-  (Asst Year 2010-11)

 Mutholy Service Co-Operative Bank Ltd Vs The Income Tax Officer

Date of pronouncement- 24^th, Sept 2014

ORDER

PER CHANDRA POOJARI, AM:

This appeal by the assessee is directed against the order dated  21.10.2013 and relates to the AY 2010-11.

2          The only issue involved in this appeal is with regard to disallowance claim of deduction u/s 80P(2)(a)(d) of the I T Act on the reason  that  the  interest received by the assessee  was not a business income and it is  income from other source.

2.1       The facts of the case are that the assessee is a service cooperative bank registered under Travancore Cochin Cooperative Societies Act, 1951.  The assessee filed its return of income for the assessment year under consideration on 15.6.2010 returning a total income at nil after claiming deduction u/s 80P of the Act.  The assessment was originally completed us 143(1)(a) of the Act.  Thereafter, the AO taken up the assessment for scrutiny and notice us 143(2) has been issued on 29^th Aug 2011.  During the course of assessment, it was notice by the AO that the interest received by the society in respect of deposits with Sub-Treasury, and SBI has been proposed to be excluded from the deduction u/s 80P.  The assessee was asked to furnish the details of interest received on deposits with other institutions.   The assessee contended that as per sec. 80P, the income of cooperative society engaged in carrying on the business of providing credit facilities to its members shall be deducted from GTI for calculating income tax; since deposit of excess money was part and parcel of the banking business, the interest there from is eligible for the deduction u/s 80P as per the direction by the Government.  Accordingly, it was pleaded that the proposed disallowance was unsustainable.   However, the assessment has been completed and confirmed the proposal to disallow interest from the deduction u/s 80P on the ground that the same was not qualified for the deduction as per sec. 80P(2)(d)  of the Act.   On appeal the CIT(A) confirmed the action of the AO.  Aggrieved, the assessee filed the appeal before us.

3          The ld AR of the assessee submitted that  during the year under consideration the assessee received interest on deposits with sub-treasury, Meenachili, Kadappattoor and SBI Pala totaling Rs. 20,21,909/- which the AO has assessed under income from other source denying the benefit u/s 80P(2)(a)(i) of the Act. It was submitted that the AO made the addition by applying the decision of the Hon’ble Supreme Court in the case of Totgars Cooperative Sales Society reported in 322 ITR 283(SC) wherein the Hon’ble Supreme Court has held that deposits of surplus funds by the Cooperative Society is not eligible for deduction u/s 80P(2).  It was contended that the statement made by the AO was without properly understanding the facts of the case.  It was submitted that in the above referred case, the assessee was selling goods on behalf of the members and withholding that money without paying to the members by showing it as a liability in the balance sheet.  It was submitted that the assessee used this funds for short term investment and earned interest. As the funds invested were not belonging to the assessee and as the funds were not from the business of banking, the Supreme Court held that the interest earned was taxable as income from other sources.  According to the ld AR,  in the present case, the  facts are different.  It was contended that the assessee has deposited its own funds including the deposits money with the schedule banks and treasury in the normal course of carrying on the business of banking.  In support of his contention, the ld AR relied various case laws i.e. CIT vs Muzaffarnagar District Cooperative Bank Ltd (214 Taxman 498(Alld) CIT vas Gulshan Mercantile Urban Cooperative Bank td reported in 214 Taxman 510(Alld) and also the decision in the case of  CIT vas Himachal Gramin Bank  etc. wherein the hon’ble high Courts have  held that “any banking business providing credit facilities to its members and investing sums deposited by members of society is part of banking business and investment by banks including non reserves are part of banking activities since no bank would like its reserve fund to remain idle and not earn any interest.”.

3.1       On the other hand, the ld DR submitted that the assessee is a cooperative society and the AO granted deduction u/s 80P of the Act. It was submitted that  the assessee society had invested the surplus funds  by way of investment by an ordinary investor. Therefore, interest on such investment has to be taxed under the head ‘income from other sources.   Regarding the reliance placed by the ld AR of the assessee, in the case of Totgars Cooperative Sales Society, cited supra,  the ld DR submitted that the Supreme Court held that the assessee society regularly invested funds not immediately required for business purpose.  The interest on such investments, therefore, could not fall within the meaning of the expression ‘profit and gains of business.  It was further submitted that such interest income cannot be said also to be attributable to the activities of the society.  It was also submitted by the ld DR that the Supreme Court was of the view that such interest income would come in the category of income from other sources and hence such interest income would be taxed u/s 56 of the Act.  It was further submitted  by the ld DR that the Supreme Court further held that the source of income was not relevant for deciding the applicability of section 80P of the Act would not be correct because weight age need to be given to the words ‘the whole of the amount of profits and gains of the business’ attributable to one of the activities specified in section 80P(2)(a) of the act. The words ‘the whole of the amount of profits and gains of business’ emphasize that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society.  The ld DR submitted that the contention of the assessee that depositing money was part and parcel of banking business and eligible for deduction u/s 80P(2)(a)(i) was not found to be acceptable. The ld DR submitted that in the case of the assessee, the interest received form deposits cannot be treated as income from business as the assessee society had invested the surplus funds as an investment by any ordinary investor. However, the interest income derived from investment made with other cooperative societies are found to be eligible for deduction u/s 80P(2)(d) of the Act.  Accordingly, the ld DR submitted that the lower authorizes are right in disallowing the claim of the assessee.

4          We have considered the rival submissions and perused the relevant material on record.  We find no merit in the arguments of the assessee’s Counsel and the interest earned on fixed deposits with the Co-operative Bank, cannot be considered as business income.  It is to be considered as income from other sources as held by the Hon’ble Supreme Court in the case of Totgar’s Co-operative Sale Society Ltd. vs. ITO (2010) (322 ITR 283) wherein it was held that the assessee being Co-operative Society is engaged in providing credit facilities to its members or marketing agricultural produce of its members, interest earned by it by investing surplus funds in short term deposits would fall under the head “income from other sources” taxable u/s. 56 of the I.T. Act and it cannot be said to be attributable to the activities of the Society and therefore, the interest did not qualify for deduction u/s. 80P(2)(a)(i) of the I.T. Act.

5.  In the present case, we find that the assessee has earned interest income on fixed deposits made by the assessee with sub-treasury, Meenachili, Kadappattoor and SBI Pala totaling Rs. 20,21,909/- and the interest income earned on the surplus funds of the assessee cannot be considered as business income so as to be entitled for deduction u/s. 80p(2)(a)(i) of the I.T. Act.   Further, we came across the decision of the coordinate Bench of this Tribunal in the case of Aryad Block Small Scale Coir Fibre Mats Manufacturers Co-operative Society Ltd., in I.T.A.  No.787/Coch/2013 vide order dated 14.8.2014  wherein   it has been held that  interest income on fixed deposits made by the assessee in a Co-operative Bank and the interest income earned on the surplus funds of the assessee cannot be considered as business income so as to be entitled for deduction u/s. 80P(2)(a)(i) of the I.T. Act.     Accordingly, the  ground  raised by the  assessee is dismissed.

6.         In the result, the appeal filed by the assessee is  dismissed.

Order pronounced in the open Court on this 24^th, day of  Sept 2014.