VSP Employees Co-op Thrift and Credit Society Ltd., Visakhapatnam V. DCIT Circle-5(1), Visakhapatnam

ITA 14/VIZ/2012

• Counselvise Citation: 1425314 RSA 2012
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 26-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 20-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K SINGH
• Keywords: Business income; Bad and doubtful debts
• Section: 133A; 147; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI J.SUDHAKAR REDDY, AM AND SHRI SAKTIJIT DEY, JM ITA NOS.12, 13 & 14/VIZAG/2012 ASST.YEARS 2003-2004, 2004-2005 & 2008-2009 VSP EMPLOYEECO - OP THRIFT AND CREDIT SOCIETY LIMITED, C/O.B.V.RAO & CO., CAS F.F-1, 49-28-12, SATYA LAKSHMI VINAYAKA TOWERS, MADHURANAGAR VISAKHAPATNAM 530 016 PAN : AAATV7533M. VS. THE DY.COMMISSIONER OF INCOME - TAX CIRCLE 5(1) VISAKHAPATNAM. ( APPELLANT) (RESPONDENT) APPELLANT BY : SHRI G.V.N.HARI RESPONDENT BY : SHRI R.K.SINGH, ADDL.CIT DATE OF HEARING : 26 . 02 .201 4 DATE OF PRONOUNCEMENT : 28 .02.2014 O R D E R PER J.SUDHAKAR REDDY (AM) : THESE THREE APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), VISAKHAPA TNAM, DATED 30.11.2011. 2. THE FACTS OF THE CASE ARE BROUGHT OUT AT PAGE 2 OF THE ORDER OF THE LEARNED CIT(A), WHICH ARE EXTRACTED FOR READY REFERENCE :- THE ASSESSEE IS A CO-OPERATIVE THRIFT AND CREDIT S OCIETY ACCEPTING DEPOSITS FROM EMPLOYEES OF VISAKHAPATNAM STEEL PLAN T. DURING THE COURSE OF SURVEY U/S 133A IT WAS FOUND THAT THE SOC IETY IS MAINTAINING DEPOSITS FROM THESE BANKS TO TAX. AS TH E AO HAD REASONS TO BELIEVE THAT THE INCOME CHARGEABLE TO TA X ESCAPED ASSESSMENT, PROCEEDINGS U/S 147 WERE INITIATED. DUR ING THE ASSESSMENT PROCEEDINGS, ASSESSEE WAS ASKED TO FURNI SH THE DETAILS OF ALL DEPOSITS AND INTEREST EARNED THEREON IN THE BANKS OTHER THAN CO-OPERATIVE BANKS U/S 80P AND WAS ASKED TO EXPLAIN HOW THIS INCOME WAS EXEMPT U/S 80P. ASSESSEE SUBMITTED THAT THE INTEREST INCOME DERIVED FROM THE INVESTMENTS IS PART AND PAR CEL OF ASSESSEES BUSINESS AND THEREFORE IT IS ELIGIBLE FO R DEDUCTION U/S 80P(2)(A)(I). ASSESSEE FURTHER SUBMITTED THAT THE I NVESTMENT IN ITA NOS.12, 13 & 14/VIZAG/2012. VSP EMPLOYEE CO-OP. THRIFT AND CREDIT SOCIETY LTD. 2 NATIONALIZED BANKS ARE IN ACCORDANCE WITH RULE 37 O F A.P.CO-OP. SOCIETIES RULES AND THEREFORE THESE INVESTMENTS AR E IN COMPLIANCE TO STATUTORY PROVISIONS AND NOT A VOLUNTARY CHOICE OF THE ASSESSEE. FURTHER IT IS STATED THAT THE ASSESSEE SOCIETY MADE THESE INVESTMENTS IN COMPLIANCE WITH THE PROVISIONS OF SE CTION 45 & 46 OF AP CO-OP. SOCIETIES ACT. ASSESSEE RELIED ON THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. KARNATA KA STATE CO- OPERATIVE APEX BANK 251 ITR 194(SC). AO AFTER CAREFULLY CONSIDERING THE ARGUMENTS OF TH E ASSESSEE AND AFTER IN-DEPTH ANALYSIS OF SECTION 45, 46 AND RULE 37 OF AP CO-OP SOCIETIES ACT/RULES, CONCLUDED THAT THE DEPOSITS I N SCHEDULES BANK IS NEITHER MANDATORY NOR NECESSARY FOR THE CONDUCT OF THE BUSINESS OF THE SOCIETY. IT IS FURTHER STATED BY THE AO THAT COOPERATIVE SOCIETIES ACT IS VERY FLEXIBLE IN GIVING A CHOICE TO THE ASSESSEE SOCIETY TO DEPOSIT THE SURPLUS FUNDS IN EITHER NATI ONALIZED / SCHEDULED BANKS OR CONCERNED DISTRICT CO-OP. CENTRA L BANKS. RULE 37 IS ALSO FLEXIBLE IN LAYING DOWN DIRECTIONS FOR I NVESTMENT OF RESERVE FUND. THUS AO HELD THAT THERE IS NO MERIT IN ASSESS EES CONTENTION THAT DEPOSITS IN SCHEDULED BANKS ARE NON-VOLUNTARY AND ARE MANDATORY FOR CONDUCT OF BUSINESS OF THE SOCIETY. A O PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF TOTGARS COOPERATIVE SALE SOCIETY LIMITED VS. IT O 322 ITR 383 WHEREIN IT IS HELD BY THE HONBLE COURT THAT THE IN COME MUST RELATE TO THE OPERATIONAL INCOME OF THE COOPERATIVE SOCIET Y PROVIDING CREDIT FACILITIES TO MEMBERS OR MARKETING AGRICULTURAL PRO DUCE OF ITS MEMBERS. IT IS HELD BY THE APEX COURT THAT THE INVE STMENT OF SURPLUS IN SHORT-TERM DEPOSITS AND SECURITIES IS NOT BUSINE SS ACTIVITY AND INTEREST ON SUCH DEPOSITS IS NOT BUSINESS INCOME BU T INCOME FROM OTHER SOURCES AND HENCE THE ASSESSEE IS NOT ELIGIBL E FOR DEDUCTION U/S 80P(2) ON SUCH INCOME. FOLLOWING THIS DECISION AO HELD THAT IT IS NOT MANDATORY FOR THE CONDUCT OF BUSINESS OF ASSESS EE TO INVEST IN DEPOSITS OF SCHEDULED BANKS AND HENCE THE INTEREST INCOME EARNED BY THE ASSESSEE ON DEPOSITS IN NATIONALIZED / SCHED ULED BANKS IS ADDED AS TAXABLE INCOME IN THE HANDS OF THE SOCIETY . 3. THE SHORT POINT FOR THE CONSIDERATION IN THESE A PPEALS IS WHETHER THE INCOME ARISING FROM INTEREST EARNED ON STATUTORY INVESTMEN TS, IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS OR UNDER THE HEAD INCOME FR OM OTHER SOURCES. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A) HAVE APPLIED THE DECI SION OF THE APEX COURT IN THE ITA NOS.12, 13 & 14/VIZAG/2012. VSP EMPLOYEE CO-OP. THRIFT AND CREDIT SOCIETY LTD. 3 CASE OF TOTGARS COOPERATIVE SALE SOCIETY LTD. V. I TO [322 ITR 283] AS WELL AS THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF A.P.STATE CO-OPERATIVE BANK LTD. [336 ITR 516] AND CAME TO THE CONCLUSION THAT THE INCOME IN QUESTION EARNED FROM STATUTORY INVESTMENTS IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. HE SUBMITTED THAT THE FACTS OF THE CASE A RE DISTINGUISHABLE AS IN THESE CASE LAWS BOTH THE HONBLE HIGH COURT AS WELL AS TH E HONBLE SUPREME COURT HAD STATED THAT WHEN SURPLUS FUNDS ARE AVAILABLE, THEN ONLY INVESTMENTS MADE FROM SUCH SURPLUS FUNDS, EITHER AS VOLUNTARY INVESTMENT OR STATUTORY INVESTMENT, THE INCOME IS ASSESSABLE AS INCOME FROM OTHER SOURCES AND NOT UNDER THE HEAD INCOME FROM BUSINESS AND WHEREAS IN THE CASE ON H AND THE ASSESSEE HAD NO SURPLUS FUNDS WHATSOEVER AND THIS IS EVIDENT FROM T HE HUGE BORROWINGS REFLECTED IN THE BALANCE SHEET AS ON 31.03.2009 AND UNDER THOSE CIRCUMSTANCES THE INTEREST INCOME IN QUESTION IS ASSESSABLE ONLY UNDER THE HEA D INCOME FROM BUSINESS. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, RELIED UPON THE ORDERS OF THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A) AND SUBMITTED THAT THE DECISIONS OF THE JURISDICTIONAL HIGH COURT AS WELL AS SUPREME COURT ARE BINDING AND IN ACCORDANCE WITH THE RATIO LAID DOWN THEREIN, THE INCOME IN QUESTION IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOUR CES. 6. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERAT ION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD AND ORDERS OF THE AUTHORITIES BELOW, CASE LAWS CITED, WE HOLD AS FOLL OWS. 6.1 ON FACTS WE FIND THAT THE ASSESSEE CREATED RESE RVES FOR BAD DEBTS AS WELL AS MAINTAINED A STATUTORY RESERVE FUND. IN COMPLIANCE WITH THE PROVISIONS OF THE A.P.CO-OPERATIVE SOCIETY ACT, 1964, THE ASSESSEE HA D INVESTED CERTAIN FUNDS IN DEPOSITS OF NATIONALIZED BANKS AND DISTRICT CO-OPER ATIVE CENTRAL BANKS. IT WAS SUBMITTED THAT THE DEPOSIT OF THE RESERVE FUNDS WAS MADE IN TERMS OF RULE 37 R.W.S. 46 AND NON-COMPLIANCE INVITES SUPERSESSION OF THE M ANAGEMENT COMMITTEE, IN ITA NOS.12, 13 & 14/VIZAG/2012. VSP EMPLOYEE CO-OP. THRIFT AND CREDIT SOCIETY LTD. 4 TERMS OF SECTION 34(1) OF THE AP CO-OPERATIVE SOCIE TY ACT, 1964. THE SUBMISSION OF THE ASSESSEE IS THAT INVESTMENT OF FUNDS AS REQUIRE D BY THE STATUTE, WAS NOT MADE OUT OF SURPLUS FUNDS AND THAT FACT WAS THAT THE ASS ESSEE HAD HUGE BORROWINGS AT HIGHER RATE OF INTEREST THAN THE RATE OF INTEREST E ARNED ON THE INVESTMENT, IS SUPPORTED BY THE FINANCIAL STATEMENTS. WE HAVE EXAM INED THE FINANCIAL STATEMENTS FOR 3 YEARS. THE LEARNED DR COULD NOT CONTROVERT TH IS FACTUAL CLAIMS MADE BY THE ASSESSEE. ON THIS FACTUAL POSITION, WE SHALL EXAMIN E THE LEGAL POSITION. 6.2 THE HONBLE ANDHRA PRADESH HIGH COURT IN CIT V. ANDHRA PRADESH STATE CO-OPERATIVE BANK LTD. [(2011) 336 ITR 516 (A)] HEL D AS FOLLOWS:- THE PROVISIONS OF SECTION 80P OF THE INCOME-TAX AC T, 1961 DO NOT MAKE ANY DISTINCTION BETWEEN THE INTEREST EARNED BY DEPOSIT IN A BANK AND INTEREST EARNED ON THE COMPULSIVE DEPOSIT MADE AS REQUIRED UNDER THE RELEVANT STATUTE. ALL THE INCOME FROM BANKING BUSINESS REFERRED TO UNDER SECTION 80P(2)(A)(I) OF THE ACT WOULD QUALIFY FOR DEDUCTION UNDER THE ACT. THE INCOME EAR NED BY THE CO- OPERATIVE BANK EITHER BY DEPOSIT OF THE PRESCRIBED PERCENTAGE OF ITS RESERVES OR BY DEPOSIT OF THEIR SURPLUS FUNDS IS EX EMPTED. THE INCOME FROM EITHER CATEGORY OF THE DEPOSITS IS CERT AINLY ATTRIBUTABLE TO THE BUSINESS OF BANKING. AS LONG AS THE DEPOSIT OF THE SURPLUS FUNDS IN OTHER BANKS FOR THE PURPOSE OF EARNING INT EREST IS NOT UNAUTHORIZED OR NOT BARRED BY ANY OF THE APPLICABLE STATUTES, THE INCOME IS CERTAINLY ATTRIBUTABLE TO THE BUSINESS OF BANKING. THERE IS NO CONCEPT OF VOLUNTARY OR NON-STATUTORY RESERVES. WHEN THE RESERVE FUND OF THE SOCIETY EXCEEDS 25 PER CENT. OF ITS WORKING CAPITAL, THE EXCESS COULD BE UTILIZED IN THE BUSINE SS OF THE SOCIETY WITH THE SANCTION OF THE REGISTRAR OF CO-OPERATIVE SOCIETIES. FURTHER, WHEN A SOCIETY IS PROHIBITED BY ITS BYE-LA WS FROM BORROWING EITHER FROM ITS MEMBERS OR OTHERS, THE WH OLE OF ITS RESERVE FUND MAY BE UTILIZED IN ITS BUSINESS. IF A CO-OPERATIVE BANK DERIVES INCOME BY LENDING MONEY TO ITS MEMBERS, IT BEING BUSINESS OF BANKING, IS ELIGIBLE FOR DEDUCTION. THE STATUTOR Y LIQUIDITY RATIO, CASH RESERVE OR RESERVE FUND REQUIRED TO BE MAINTAI NED BY A SCHEDULED BANK OR A CO-OPERATIVE BANK UNDER THE PRO VISIONS OF THE RESERVE BANK OF INDIA ACT, 1934, OR THE BANKING REG ULATION ACT, 1949, ARE ALL ACTIVITIES WHICH ARE PART OF THE BUSI NESS OF BANKING. IF SECTION 80P(2)(A) OF THE ACT IS GIVEN A RESTRICTIVE MEANING AS ITA NOS.12, 13 & 14/VIZAG/2012. VSP EMPLOYEE CO-OP. THRIFT AND CREDIT SOCIETY LTD. 5 INCLUDING THE INTEREST EARNED ONLY ON THE STATUTORY DEPOSITS MADE BY A CO-OPERATIVE SOCIETY, IT WOULD AMOUNT TO SUPPL YING A CASUS OMISSUS AND HAS TO BE AVOIDED BY THE COURT. INVESTM ENT OF FUNDS BY BANKS INCLUDING THE NON-RESERVES IS PART OF BANK ING ACTIVITIES SINCE NO BANK WOULD LIKE ITS RESERVE FUNDS TO REMAI N IDLE AND NOT EARN ANY INTEREST. THEREFORE, THE INTEREST EARNED O N SUCH DEPOSITS IS DIRECTLY ATTRIBUTABLE TO THE BUSINESS OF BANKING AND, THEREFORE, EXEMPT UNDER SECTION 80P(2)(A)(I) OF THE ACT. 6.3 A PERUSAL OF THE ABOVE DECISION MAKES IT CLEAR THAT THE INCOME EARNED FROM EITHER DEPOSITS OF A PRESCRIBED PERCENTAGE OF ITS R ESERVES OR FROM DEPOSIT MADE OUT OF SURPLUS FUNDS, IS CONSIDERED AS ATTRIBUTABLE TO THE BUSINESS OF BANKING. IN THE PRESENT CASE THE DEPOSITS IN QUESTION ARE MANDATORY AND ARE DIRECTLY LINKED WITH THE BUSINESS OF THE ASSESSEE. EVEN OTHERWISE, IF IT IS HELD THAT THE DEPOSITS WERE NOT REQUIRED TO BE MADE MANDATORILY, AS THESE HAVE NOT BEEN MADE OUT OF SURPLUS FUNDS, THE INTEREST INCOME EARNED THERE FROM WOULD BE TAXABLE ONLY UNDER THE HEAD INCOME FROM BUSINESS. 6.4 THE HONBLE SUPREME COURT IN THE CASE OF TOTGAR S CO-OPERATIVE SALE SOCIETY LTD. V. ITO [(2010) 322 ITR 283 (SC)] HELD AS FOLLOWS AT PAGE 290, STATED AS FOLLOWS:- IN THIS CASE, WE ARE ONLY CONCERNED WITH INTEREST WHICH ACCRUES ON FUNDS NOT REQUIRED IMMEDIATELY BY THE ASSESSEE(S) F OR ITS BUSINESS PURPOSES AND WHICH HAVE BEEN ONLY INVESTED IN SPECI FIED SECURITIES AS INVESTMENT. FURTHER, AS STATED ABOVE, THE ASSE SSEE(S) MARKETS THE AGRICULTURAL PRODUCE OF ITS MEMBERS. IT RETAINS THE SALE PROCEEDS IN MANY CASES. IT IS THIS RETAINED AMOUNT WHICH WAS PAYABLE TO ITS MEMBERS, FROM WHOM PRODUCE WAS BROUG HT, WHICH WAS INVESTED IN SHORT-TERM DEPOSITS / SECURITIES. S UCH AN AMOUNT, WHICH WAS RETAINED BY THE ASSESSEE-SOCIETY, WAS A L IABILITY AND IT WAS SHOWN IN THE BALANCE-SHEET ON THE LIABILITIES-S IDE. THEREFORE, TO THAT EXTENT, SUCH INTEREST INCOME CANNOT BE SAID TO BE ATTRIBUTABLE EITHER TO THE ACTIVITY MENTIONED IN SE CTION 80P(2)(A)(I) OF THE ACT OR IN SECTION 80P(2)(A)(III) OF THE ACT. THEREFORE, LOOKING TO THE FACTS AND CIRCUMSTANCES OF THIS CASE, WE ARE OF THE VIEW THAT ITA NOS.12, 13 & 14/VIZAG/2012. VSP EMPLOYEE CO-OP. THRIFT AND CREDIT SOCIETY LTD. 6 THE ASSESSING OFFICER WAS RIGHT IN TAXING THE INTER EST INCOME, INDICATED ABOVE, UNDER SECTION 56 OF THE ACT. 6.5 AT PAGE NO.291, THE HONBLE COURT HAS HELD AS F OLLOWS:- IN THIS PARTICULAR CASE, THE EVIDENCE SHOWS THAT T HE ASSESSEE- SOCIETY EARNS INTEREST ON FUNDS WHICH ARE NOT REQUI RED FOR BUSINESS PURPOSES AT THE GIVEN POINT OF TIME. THEREFORE, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, IN OUR VIEW, SUCH INTER EST INCOME FALLS IN THE CATEGORY OF OTHER INCOME WHICH HAS BEEN RI GHTLY TAXED BY THE DEPARTMENT UNDER SECTION 56 OF THE ACT. 6.6 FROM THE ABOVE, IT IS CLEAR THAT, WHEN SURPLUS FUNDS ARE AVAILABLE THEN ONLY THE INCOME EARNED FROM INVESTMENT OF SUCH SURPLUS F UNDS WOULD BE REQUIRED TO BE ASSESSED U/S 56 OF THE ACT, AND NOT OTHERWISE. 6.7 THUS, IN OUR VIEW, THE REVENUE AUTHORITIES HAVE WRONGLY APPLIED THIS CASE LAWS TO THE FACTS OF THE CASE. 6.8 IN VIEW OF THE ABOVE DISCUSSION, AS THE INVESTM ENTS IN QUESTION ARE STATUTORY INVESTMENTS, WHICH ARE MANDATORILY REQUIRED TO BE M ADE FOR THE SOCIETY TO FUNCTION AS PER THIS STATUTE, AND AS THE INVESTMENTS ARE NOT FROM SURPLUS FUNDS NOR FROM FUNDS WHICH ARE NOT IMMEDIATELY REQUIRED FOR THE PU RPOSE OF BUSINESS, THE INCOME IN QUESTION IS ASSESSABLE UNDER THE HEAD INCOME FR OM BUSINESS OR PROFESSION. 7. IN THE RESULT, THE ASSESSEES APPEALS ARE ALLOWE D. ORDER PRONOUNCED ON THIS 28 TH DAY OF FEBRUARY, 2014. SD/- SD/- ( SAKTIJIT DEY ) ( J.SUDHAKAR REDDY ) JUDICIAL MEMBER ACCOUNTANT MEMBER VISAKHAPATNAM; DATED : 28 TH FEBRUARY, 2014. DEVDAS* ITA NOS.12, 13 & 14/VIZAG/2012. VSP EMPLOYEE CO-OP. THRIFT AND CREDIT SOCIETY LTD. 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT, VISAKHAPATNAM . 4. CIT(A) VISAKHAPATNAM . 5. DR, ITAT, VISAKHAPATNAM. 6. GUARD FILE. BY ORDER, //TRUE COPY// (SENIOR PRIVATE SECRETARY) ITAT, VISAKHAPATNAM