Credit co-operative societies are eligible for deduction U/s 80P(2)(a)(i) in respect of interest income from its investment: Nagpur ITAT

Disallowance of deduction U/s 80P(2)(a)(i) to credit co-operative societies on investment with other bank and organization is one of the most common issues. The disallowance is done despite the fact that the same is admitted as permissible deduction by numerous ITAT & High courts across the country.

Here is one more case argued by me before Nagpur Bench of ITAT wherein I have placed an alternative argument as well in addition to the regular argument.

The alternative argument submitted was as under:

1.  That the Appellant is a credit co-operative society engaged in the business of bankingand also providing credit facilities to its members, which is eligible for deduction u/s 80P.

Scope of Section 80P:
a) The relevant part of section 80P is reproduced herewith:

80P. Deduction in respect of income of co-operative societies.
(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely :
(a) in the case of a co-operative society engaged in —
(i) carrying on the business of banking or providing credit facilities to its members, or
(ii) a cottage industry, or

The above reading may enable your kind honour to appreciate that the deduction is available to credit co-operative society if any of the two conditions are satisfied:

First Condition: carrying on the business of banking
Or
Second Condition: providing credit facilities to its members

If any of the two conditions are satisfied, the deduction u/s 80P is allowable.
Appellant is satisfying both the conditions as against its eligibility on satisfaction of even one single condition.

First Condition vs. Appellant:
The first part of the section 80P allows deduction to co-operative society engaged in the business of banking.  Neither the status of co-operative society is disputed nor is the business of banking being carried out by the Appellant questionable.
Having accepted the undisputed fact in the earlier years & current year as well that the Appellant is in the business of banking, no disallowance u/s 80P is warranted for any of its income whatsoever.

Second Condition vs. Appellant:
In the present case of the Appellant, Appellant is a credit co-operative society and is engaged in the business of banking, thereby satisfying the condition is totality for deduction u/s 80P.
In the present case, Appellant would like to submit that it does not have any other business except the activity of banking.

Appellant humbly beg to submit that, since both the condition (as against permissible single condition) stipulated by section 80P is fulfilled, deduction u/s 80P towards income may be allowed.

In addition to above, the case was distinguished from the observation in the case of Totgars Co-operative Sales Society Ltd Vs ITO (2010) 188 Taxman 282 (SC) which is often relied on by the AO for denying section 80P deduction. The following submission was made for this:

a) The facts of the case of Totgars Co-operative Sales Society Ltd Vs ITO (2010) 188 Taxman 282 (SC) were totally different and need not be applied here. Supreme Court in this case has made the following observation which is verbatim produced hereunder for your kind consideration:

“At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them.What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes.
Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act.

In this particular case, the evidence shows that the assessee- Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of “Other Income” which has been rightly taxed by the Department under Section 56 of the Act.”

 

b) With the above factual position of the case, it is respectfully submitted that the case ofTotgars Co-operative Sales Society Ltd Vs ITO (2010) 188 Taxman 282 (SC) was the case of Investment of surplus funds. In Totgars Co-operative Sales Society Ltd Vs ITO (2010) 188 Taxman 282 (SC), Assessee was having some other business activities which is not there in the case of the Assessee.

c) It is respectfully submitted that the appellant society was not having any SURPLUS or IDLE funds as such.

d) The investment is required to be done pursuant to the statutory requirements. The appellant society is not allowed to lend entire amount and has to keep the amount in the Bank as FD pursuant to the requirements of the Registrar of Co-operative societies.

e) It is very respectfully submitted that the investment done by the appellant society is not of “SURPLUS FUND” as such for investment in the Bank FDR of other banks. The investment has to be done primarily due to the statutory requirements by the Registrar of the co-operative society, which requires every society registered in the state of Maharashtra to keep a certain amount of deposits in the bank.
In short, the appellant society was not allowed to lend its entire amount of deposits to the members but to keep a certain amount as “Investment” for security purposes. Investment is further necessitated by business consideration, as the funds has to be kept in liquid forms considering the requirements of the members in near future.

f) The statutory requirements are further backed by the commercial principle as the society has to repay the amount to the depositor member as and when the same is demanded back.
This could be by way of withdrawals by such member or by way of pre-mature withdrawals of FD by such member. If all the deposit amount received by the Appellant is given as loan then it may not be possible for the Appellant the repayment obligation of the customers. Needless to say, this would result in the reputation and credential of the Appellant. One can just imagine the consequences of refusing the repayment of the deposit amount by the bank or the societies by saying that “There is no fund presently and will make repayment later”. The newspaper, social media, competitors, etc. would ensure that such an institutions die instantly in such a situation no matter howsoever fundamentally strong it may be. In short, some fund is required to be kept from the perspective of the prudence besides statutory requirements.

g) The society has to maintain a CD ratio (Current Assets vs. Deposit Ratio) i.e., ratio of Loans to Deposit as per the guidelines of the registrar of the Societies which is the regulating authorities for the societies in Maharashtra. CD Ratio means how much a society lends out of the deposits it has mobilized and remaining amount is to be kept ready to cater the needs of the depositor who may withdraw their deposits at the maturity term or on Demand basis. The CD ratio plays an important role in deciding the “Credit Rating” of the society also and the depositors often make the investment by checking the Rating of the societies.

Hence, liquidity is maintained either by keeping it invested in Deposit or in saving account with any other bank, thus it is part of working capital of the society. Appellant society is only engaged in the activity of banking only. There is no other activity or business in which the Appellant society is engaged except the business of banking.

h) Since, the Appellant society is not engaged in any other activities or business, the entire income is taxable as “Income from Business & Profession” only. There is no reason to treat the income form bank FDR as “Income from Other Source”.
Your kind honour will appreciate that the investment in the bank FDR is done in the course of the business of banking. There is no other reason for making investment in the Bank FDR.

i) The case before the Supreme Court in Totgars was in respect of a Co-operative Credit Society, which was also marketing the agricultural produce of its members i.e., the society was engaged in other business also. In the present case of the Appellant, the only activity is the activity of banking and no other activity / business is there.

j) Appellant would humbly like to submit that the judgment by Hon’ble Apex court cannot applied to the Appellant society. The case before the Supreme Court in Totgars was in respect of a Co-operative Credit Society, which was also marketing the agricultural produce of its members. As may be seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the Assessee was carrying on the business of marketing agricultural produce of the members of the Society. It is also found from Paragraph-3 of the decision of the Karnataka High Court in Totgars that the business activity other than marketing of the agricultural produce actually resulted in net loss to the Society. Therefore, it appears that the Appellant in Totgars was carrying on some of the activities listed in Clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks.
As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgars struck a different note.

k) Even Totgars Case has taxed the income from Interest as “Business Income only”:
In above judgement, a Division Bench of Karnataka High Court held that when a society not carrying on any banking business had invested its surplus funds in security term deposits, the interest accrued from such securities and deposits should be taken as relatable to profits and gains of the society.

l) The case of Totgars Co-operative Sale Society Ltd., v. ITO was well distinguished by Telangana & AP High court in the case of Vavveru Co-operative Rural Bank Ltd vs CCIT, Buchireddy Palem Co-operative Rural Bank Ltd vs CCIT. It was also distinguished by the Pune ITAT in the case of Sindhudurg Zilla Madhyamik Adhyapak Sahakari Patpedhi Maryadit,, Sindhudurg Vs. ITO.

All this judgement observed that in Totgars Co Operative society, Assessee was carrying two businesses viz. Trading and giving finance to members. The surplus funds from which activity is invested in bank deposits were not possible to be known and hence, the same may be treated as income from other source.

In the present case, the Appellant society is engaged only in one business activity of providing finance to its members and hence, the decision of Totgars is not at all applicable.

I have also filed the copy of the CBDT circular in the paper book so as to justify that the income form investment income is business income and not “Income from Other source. The following submission was done for this:

CBDT CIRCULAR ON TAXATION OF INTEREST INCOME:
Interest income form the Bank FDR has been accrued in the “course of the Business of Banking” and is “Attributable to” the business of banking as per the stipulation of Section 80P.
Appellant would humbly like to submit that the word ‘attributable to’ is certainly wider in import than the expression ‘derived from’. Whenever the Legislature wanted to give a restricted meaning, they have used the expression ‘derived from’. The expression ‘attributable to’ being of wider import, the said expression is used by the Legislature whenever they intended to gather receipts from sources other than the actual conduct of the business.

A co-operative society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under section 80P of the Act.

The interest out of investment of the fund in other banks is also eligible for deduction u/s 80P. The same conclusion can well be drawn from the CBDT Circular No. 18/2015 Dated 02.11.2015 wherein it is rightly opined that investment is attributable to the business of banking falling under the head “Profit and gains of business and profession”.

For ease of reference, the copy of the circular is enclosed herewith.

It may be appreciated that Hon’ble Apex Body CBDT itself has clarified affirmed the view of the Supreme Court in the case of CIT Vs. Nawanshahar Central Co-op Bank ltd (2007) 160 Taxman 48 (SC) and has categorically reproduce that;
“Investment made by a banking concern” are part of the business of banking.
CBDT has very clearly and in explicit terms have concluded that
“Therefore, the income arising from such investment is attributable to the business of banking falling under the head “Profit and Gains of Business and Profession”.

The list of cases wherein the similar views was rendered as submitted as under:

 (i). M/s Solitaire CHS Ltd. Vs. Pr.CIT-26, Mumbai, ITA No. 3155/Mum/2019, dated 29.11.2019
(ii). Land and Cooperative Housing Society Ltd. Vs. ITO (2017) 46 CCH 52 (Mum.)
(iii). M/s C. Green Cooperative Housing and Society Ltd. Vs. ITO-21(3)(2), Mumbai (ITA No. 1343/Mum/2017, dated 31.03.2017.
(iv). Marvwanjee Cama Park Cooperative Housing Society Ltd. Vs. ITO-Range 20(2)(2), Mumbai (ITA NO. 6139/Mum/2014, dated 27.09.2017.
(v). Kaliandas Udyog Bhavan Pemises Co-op. Society Ltd. Vs. ITO, 21(2)(1), Mumbai.
(vi). M/s Petit Powers Co-op. Housing Society Ltd vs ITO (ITA No.549/MUM/2021)
(vii) Jai Hind Co-operative Housing Society Ltd vs ACIT-25(2) (ITA No.1762 & 1763/Mum/2020)
(viii) M/s Vadasinor Pragati Samaj Co-operative Credit Society Ltd vs PCIT-18 (ITA No.2539/Mum/2019)
(ix) M/s Doshi Palace Co-operative Hsg Soc. Ltd vs ACIT-19(1) (ITA No.2510/MUM/2019)
(x) The Salsette Catholic Co-operative Housing Ltd vs ACIT Circle-23(3) (ITA No.3870 & 3871/Mum/2019.
(xi) Mumbai ITAT in the case of Palm Court M Premises Co-operative Society Limited Vs. PCIT-30, Mumbai, ITA 561/Mum/2021
(xii) Pune ITAT in Subordinate Engineers Ass. MSEB Co-op Society Vs. ITO, Ward 2(2), Kolhapur  – [ITA No. 261/Pun/2023 Decided on 16.05.2023]

Happy to share that the  Hon’ble Nagpur bench with Hon’ble Shri V. Durga Rao Sir & Hon’ble K.M. Roy sir has accepted the submission of Assessee and allowed the appeal by 26 page detailed order.

The copy of the order is attached herewith:

 

80P - ITAT Order - Final Order of Islamiya