Societies earning income from FDR with other Nationalized Bank & Admissibility of deduction u/s 80P
There are various societies which do makes investment with other banks and institutions and earn interest income there-from. In all such cases which is subject to scrutiny assessment, Income Tax Officers are denying deduction u/s 80P for the reasons that the interest income is not from members but from other banks.
Even the supreme court judgment in Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer (2010) 322 ITR 283 (SC) has disallowied the deduction u/s 80P in case of income arisen to the societies on the investment of surplus fund with the baks. Almost, in all the scrutiny assessment in the country, AO attempts to follow the ratio laid down in by Apex Court in Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer (2010) 322 ITR 283.
However, the application of ratio laid down in Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer (2010) 322 ITR 283 on the particular facts of the case and is not out rightly applicable to all the societies.
The similar issues has arisen when I was arguing the matter before ITAT, Nagpur Bench in the case of ITO, Ward-5, Amravati Vs. Utkranti Nagri Sahakari Pat Sanstha (ITA No. 30/Nag/2015 which, after examining the facts of the case and also considering the judgment of in Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer (2010) 322 ITR 283 (SC), has held in favor of the assessee.
The copy of the order in the case of ITO, Ward-5, Amravati Vs. Utkranti Nagri Sahakari Pat Sanstha (ITA No. 30/Nag/2015 is enclosed herewith for the benefit of all.
During the course of hearing, the facts of the Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer was reasonably distinguished from other cases wherein 80P disallowance is done by the assessing officers.
Readers may note that the Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer was the case wherein the society was engaged in business other than banking business also.
Where society is engaged in the business of banking alone, then the ruling of Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer may not be applicable.
The present write up may help up the professionals who are representing the cases before the CIT (Appeal) or before ITAT or even HC.
Submission could be on the following lines:
- It may humbly be noted that the assessee society is not involved in any other business or activities other the business of banking. There is no sales, purchase, trading, or any other activities of any nature whatsoever except the banking activities. Entire income of assessee consists of income from the business of banking.
- That, your kind Honor may kindly appreciate that the section 80P (2) offers an exemption to co-operative society which is engaged in
(i) carrying on the business of banking
providing credit facilities to its members.
The first limb of said clause explicitly provides deduction if the society is in the business of banking. The fact that the society is in to the business of banking is never questioned by the learned AO, neither in the relevant assessment year nor in any of the past years. The same can be very well ascertained from the financial statements submitted as well.
Sir, it may humbly be noted that the society don’t have any activities other than the activities of banking and the same is duly verifiable. Since, the society is into the business of banking, entire profit may humbly be treated as eligible for deduction u/s 80P(2).
- That section 80P(2)(a) concludes with the para
“the whole of the amount of profits and gains of business attributable to any one or more of such activities.”
The word “attributable to” has been interpreted to have much wider connotation as compared to the “of”.
The income added to the returned income during the course of assessment proceeding was out of the activities of banking business and is fully attributable to it.
- That being in the business of banking, assessee is mandatorily required to maintain certain funds to meet any eventuality and contingency. Even the Co-operative societies rules doesn’t permit the lending of entire fund and stipulates the ratio of 30% for keeping it in the form of deposits. This is normally referred to as the “CD Ratio”.
- That, as far as the observation of supreme court in the case of Totgar’s Co-op. Sale Society Ltd. Vs. Income Tax Officer (2010) 322 ITR 283 (SC)is concerned, it may humbly be noted that In the present case before your Honour, there is no dispute to the fact that the assessee is a cooperative society engaged in the business activity of credit cooperative society, i.e. providing credit facility to its member.According to the Revenue the income of the society on account of interest from banks other than cooperative banks, interest on mutual funds, long term and short term capital gain on sale of mutual funds etc. are not covered by the activity of providing credit facilities to its member and hence not eligible for deduction u/s. 80p (2) (a) (i) of the income tax Act in view of the decision of Hon’ble supreme court in the case of Totagar’s cooperative sale society Ltd (supra).Decision in the case of Totagar’s cooperative sale society Ltd. (supra) is not applicable to the facts of the present case since in that case the amount invested in short term deposits and security was not out of interest bearing deposit collected from member but out of sale proceeds of agricultural produce of farmer members marketed by the society.Further, the Hon’ble Apex court has considered only the latter part of section 80P (2) (a) (i), i. e. income of a cooperative society engaged in providing credit facilities to its member is eligible for deduction and has not considered the earlier part of section 80P (2) (a) (i) i.e. income of a cooperative society engaged in carrying on the business of banking is eligible for deduction.
- That, assessee also places reliance on the following judicial pronouncements as well”a) Nagpur Bench of ITAT in the case of ITO, Ward-5, Amravati Vs. Utkranti Nagri Sahakari Pat Sanstha (ITA No. 30/Nag/2015 has at Para 19.5 held as under:19.5 Considering the above facts, we find that there is a force in the argument of the assessee that the assessee not a co-operative bank but its nature of business was coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds……”
For ease of reference, the copy of the said judgment is enclosed herewith as Annexure-I.
- b) Bombay High Court in the case ofCIT vs. Solapur Nagari Aduyogic Sahakar Bank Ltd & others(2010) 229 CTR 0073 has held that,
“Where the surplus funds not immediately required for day-to-day banking were kept in voluntary reserves and invested in KVP/IVP, the interest income received from KVP/IVP would be income from banking business eligible for deduction under s. 80P(2)(a)(i)”.
For ease of reference, the copy of the said judgment is enclosed herewith as Annexure-II.
c) Himachal Pradesh High court in the case of CIT Vs. H. P. State Cooperative Bank Ltd. 323 ITR 1 wherein assessee was a cooperative society carrying on business and was governed by the Banking Regulation Act, 1949. The assessee in the terms of the provisions of the Co-operative Societies Act and the Banking Regulation Act was bound to invest certain amounts in the manner prescribed under the aforesaid Acts. These are known as statutory liquidity reserves (SLR). The bank has also made certain investments out of its reserve fund not on the basis of any statutory directions but as investments per se. These were termed as non- SLR investments. The question was whether the interest earned on deposit made out of non-SLR funds could be said to be attributable to normal banking business/activities and, therefore, it was eligible for deduction under section 80P(2)(a)(i). In the set of facts it was held as under:
“8. Any banking institution, carrying on business will not keep its reserves uninvited where they earn no income. The question which arises is where the earned on accounts of interests on deposits made out of the non-SLR funds can be said to be attributable to the activities of the bank. There can be dispute with proposition that the word “attributable” is much wider in scope than “derived”. The Legislature has used the words attributable to” in conjunction with the phrase “any one or more of such activities”.
- The words used by the Legislature are very important. The first word used is “attributable”, which is much wider in scope than word “derived”. The second phrase used is “any one or such activities”. Any banking providing credit facilities to its members and investing the sums deposited by the members of the society is part of banking business.
- We are, therefore, of the considered view that the investment of the funds by the banks Including the non-reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also a part of the banking. Therefore, the interest earned on such deposits is directly attributable to the business of banking. The question is accordingly answered in favour of the assessee and against the Revenue. The appeals are according rejected”.
- d) That there are several judgments wherein it is clearly held that income earned by society in to the business of banking bank is eligible for deduction u/s 80P if it is attributable to such business. Few of the other judgements on which assessee places reliance are as under:CIT Vs. Ramanathapuram District Co-Op. Central Bank Ltd. (2002) 255 ITR 423 (SC)
- CIT Vs. Madhuri District Co-Op. Bank Ltd. (1991) 239 ITR 700 (Mad)
iii. Surat District Co-Op. Bank Ltd. & Ors Vs. ITO (2003) 78 TTJ 1 (Ahd, Spl. Bench) and
iv. Apex court pronouncements in the case of commissioner of income tax vs. Karnataka state Co-Operative apex bank
vii. Saraswat Co-op Bank Ltd Vs ITO (1985 11 ITD 723 (Mum)
Prayer: In view of above, Assessee humbly request you to kindly grant the treat the interest income of assessee as “Income from Business”, so as to be eligible for deduction u/s 80P.
We request your good self to please do the needful and oblige.
Hope above write-up will help all in whose case addition is done by disallowing claim u/s 80P.
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