Dhanlaxmi Credit Co.Opreative Society Ltd., Mehsana V. The Income tax Officer,Ward-2, Patan

ITA 2426/AHD/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 9387 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 16-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 10-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P S CHAUDHARY
• Assessee Lawyers: D K PARIKH
• Keywords: Business income; Opportunity of being heard
• Section: 143(3); 142(1); 56; 263; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD SMC BENCH AHMEDABAD BEFORE SHRI S. S. GODARA, JM & SHRI MANISH BORAD, AM. ITA NO.2426/AHD/2013 ASST. YEAR: 2009-10 DHANLAXMI CREDIT CO-OP. SOCIETY LTD., POONAM COMPLEX, UNJHA, DIST. MEHSANA. VS. ITO, WARD-2, (PATAN). APPELLANT RESPONDENT PAN AAATD 4278-K APPELLANT BY SHRI D. K. PARIKH, AR RESPONDENT BY SHRI P. S. CHAUDHARY, SR.DR DATE OF HEARING: 16/01/2017 DATE OF PRONOUNCEMENT: 24/01/2017 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL OF ASSESSEE FOR ASST. YEAR 2009-10 IS DIRECTED AGAINST THE ORDER OF LD. CIT(A), GANDHINAGAR, AHMED ABAD, DATED 8/8/2013 VIDE APPEAL NO.CIT(A)/GNR/306/2011-12 ARIS ING OUT OF ORDER U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SH ORT THE ACT) FRAMED ON 23.12.2011 BY ITO, WARD-2, PATAN. ASSESSEE HAS R AISED FOLLOWING GROUNDS OF APPEAL :- 1. THE ASSESSING OFFICER HAS ERRED IN FACTS AND IN LAW, IN MAKING ADDITION WHOLE PROFIT OF AMT. OF RS. 14,72,940/- A ND WAS DISALLOWED AND ALSO NOT GRANTED BENEFIT OF SECTION U/S. 80-P O F I. T. ACT. BUT LEARNED COMMISSIONER OF INCOME TAX (APPEALS) GANDHI NAGAR HAS ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 2 GRANTED RELIEF OF RS. 6,17,0867-, OUT OF TOTAL FIXE D DEPOSITS INTEREST EARNED AMT. OF RS. 13,85,849/-. 2. THAT THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, T O AMEND, TO MODIFY, TO SUBSTITUTE, DELETE AND/OR RESCIND ALL OR ANY OF THE GROUNDS OF APPEALS ON OR BEFORE THE FINAL HEARING, IF NECESSAR Y SO ARISES. . 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT ASSESS EE IS A CREDIT CO-OP. SOCIETY LTD. IT FILED ITS RETURN OF INCOME O N 13.10.2010 DECLARING NIL INCOME. CASE WAS SELECTED FOR SCRUTIN Y ASSESSMENT THROUGH CASS AND NOTICE U/S 143(2) OF THE ACT DATED 24.08.2011 FOLLOWED BY NOTICE U/S 142(1) OF THE ACT DATED 15.0 2.2013 WAS ISSUED ALONG WITH QUESTIONNAIRE. NECESSARY DETAILS AS CALL ED FOR WERE DULY FURNISHED BY THE AUTHORIZED REPRESENTATIVE OF THE A SSESSEE. LD. ASSESSING OFFICER WHILE EXAMINING THE CLAIM OF DEDU CTION U/S 80P(2)(A)(I) OF THE ACT FRAMED A VIEW THAT ASSESSEE IS A PRIMARY CREDIT SOCIETY AND NOT A PRIMARY AGRICULTURAL SOCIETY AND THEREFORE, IS OUT OF THE AMBIT OF PROVISIONS OF SECTION 80P(2)(A)(I) OF THE ACT AND FALLS UNDER THE PROVISIONS OF SECTION 80P(4) OF THE ACT A ND ACCORDINGLY DENIED THE DEDUCTION U/S 80P(2)(A)(I) OF THE ACT. F URTHER DURING THE COURSE OF EXAMINATION OF INTEREST INCOME EARNED ON SHORT TERM DEPOSITS AND BANK SECURITIES, LD. ASSESSING OFFICER TREATED IT AS INCOME FROM OTHER SOURCES. LD. ASSESSING OFFICER, H OWEVER, ALLOWED DEDUCTION TOWARDS EXPENSES OF RS.2,52,607/- INCURRE D FOR EARNING INTEREST FROM BANK AND TAXED THE INTEREST INCOME U/ S 56 OF THE ACT AT RS.5,32,918/-. HOWEVER, LD. ASSESSING OFFICER DENIE D DEDUCTION U/S 80P(2)(A)(I) OF THE ACT AND INCOME WAS ASSESSED AT RS.15,85,740/- AND NO SEPARATE ADDITION TOWARDS INTEREST INCOME WA S MADE. ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 3 3. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. C IT(A) AND GOT PART RELIEF AS LD. CIT(A) OBSERVED THAT ASSESSEE IS ENTITLED TO THE BENEFIT OF DEDUCTION U/S 80P(2)(A)(I) OF THE ACT BY FOLLOWING THE ORDER OF HIS PREDECESSOR. AS REGARDS TREATING OF INTEREST INCOME TAXABLE U/S 56 OF THE ACT, LD. CIT(A) HELD THAT INTEREST INCOME OF RS.8,55,854/- BEING THE TOTAL OF INTEREST FROM DEPOSIT ON NATIONA LIZED BANK OF RS.7,35,277/-, INTEREST FROM SCHEDULED BANK AT RS.1 ,08,852/- AND RS.11,725/- AS TDS FALL UNDER THE HEAD INCOME FROM OTHER SOURCES U/S 56 OF THE ACT AND DO NOT QUALIFY FOR DEDUCTION U/S 80P(2)(A)(I) OF THE ACT BY OBSERVING AS UNDER :- 5.2 I HAVE GONE THROUGH THE FACTS OF THE CASE, ASSE SSMENT ORDER, AND THE SUBMISSION MADE BY THE APPELLANT. SIMILAR DISALLOWA NCE WAS MADE IN THE ASSESSMENT YEAR 2008-09 BY THE AO AND THE APPELLANT HAD OBJECTED THE MATTER BEFORE THE CIT(A). THE CIT(A) VIDE ORDER NO.CIT(A)/ GNR/186/2010-11 DATED 9/07/2012 HELD AS UNDER; 'I HAVE GONE THROUGH THE FACTS OF THE CASE, THE AS SESSMENT ORDER :7AND THE SUBMISSIONS, AS PER THE DEFINITION OF BANKING AS PE R SEC 5(B) OF BANKING REGULATION ACT, 'BANKING' MEANS THE ACCEPTING FOR THE PURPOSE OF LENDING OR INVESTMENT, OF DEPOSITS OF MONEY FROM THE PUBLIC, REPAYABLE ON DEMAND OR OTHERWISE, AND WITHDRAWAL BY CHEQUE, DRAFT, ORDER OR OTHERWISE. TH E DEFINITION IS BASIC LAW TO BE CONSIDERED TO DECIDE WHETHER A CREDIT SOCIETY IS A CO-OPERATIVE BANK OR NOT. ONLY, THOSE CREDIT SOCIETIES WHICH ARE ALLOWED TO TAKE DEPOSITS OF MONEY FROM THE PUBLIC AND DO OTHER BANKING ACTIVITIES AS DEFINED IN THE SEC 5(B) OF BANKING REGULATION ACT WOULD QUALITY TO BE A CO-OPERATIVE BANK. I AGREE THAT TAK ING DEPOSITS FROM PUBLIC CANNOT BE EQUIVALENT TO TAKING DEPOSITS FROM MEMBERS OF THE S OCIETY ONLY WHICH HAS GOT A MUCH RESTRICTED MEANING AND THE RELATIONSHIP BETWEEN A S OCIETY AND A PUBLIC HAS TO BE UNDERSTOOD IN A MUCH LARGER SENSE, THIS HAS BEEN MA DE CLEAR BY THE HON'BLE JURISDICTIONAT HIGH COURT IN THE CASE OF BARODA PEO PLES CO-OP. BANK LTD (SUPRA). TO UNDERSTAND THE ISSUE BETTER, I WENT THROUGH THE RBI WEBSITE AND FOUND THAT IT HAS BEEN EXPLAINED IN A REPORT OF A HIGH LEVEL COMMITTE E APPOINTED BY THE RESERVE BANK OF INDIA IN MAY 1999 UNDER THE CHAIRMANSHIP OF SHRI K. MADHAVA RAO, EX-CHIEF SECRETARY, GOVERNMENT OF ANDHRA PRADESH TO REVIEW T HE PERFORMANCE OF URBAN COOPERATIVE BANKS (UCBS) AND SUGGEST NECESSARY MEAS URES TO STRENGTHEN THIS SECTOR. THE REPORT WAS PUBLISHED ON 14/01/2000 AND IN PARA, 7.1 & 7.2 OF THE REPORT, THE FOLLOWING HAS BEEN NARRATED: ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 4 '7.1 COOPERATIVE CREDIT STRUCTURE IN INDIA IS CHARA CTERIZED BY A PLETHORA OF INSTITUTIONAL SEGMENTS. LEAVING ASIDE THE AGRICULTURAL COOPERATIV E CREDIT INSTITUTIONS, IN THE URBAN COOPERATIVE CREDIT FOLD ITSELF, THERE ARE 3 TYPES O F INSTITUTIONS RECOGNIZED' BY THE BANKING REGULATION ACT 1949 (AS APPLICABLE TO COOPERATIVE S OCIETIES). AS DISCUSSED ELSEWHERE IN THE REPORT, THESE ARE (I) PRIMARY CREDIT SOCIETIES/ WHO VIRTUALLY FUNCTION LI KE BANKS, BUT WHOSE NET WORTH IS LESS THAN RS.L LAKH; WHO ARE NOT MEMBERS OF THE PAYMENT SYSTEM AND TO WHOM DEPOSIT INSURANCE IS NOT EXTENDED, (II) PRIMARY COOPERATIVE BANKS, POPULARLY CALLED UR BAN COOPERATIVE BANKS, WHOSE NET WORTH IS RS.L LAKH AND ABOVE; WHO ARE RECOGNIZED AS BANKS, ARE MEMBERS OF PAYMENT SYSTEM AND WHO ENJOY DEPOSIT INSURANCE (III) COOPERATIVE CREDIT SOCIETIES, WHO CONFINE THEIR ACT IVITIES TO THEIR MEMBERS ALONE AND WHO DO NOT PERFORM BANKING FUNCTIONS. IN THIS CHAPTER, THE COMMITTEE DEALS WITH THESE COOPERATIVE CREDIT SOCIETIES. 7.2 UNDER THE PROVISIONS OF SECTION 5(CCII) OF BAN KING REGULATION ACT, 1949 (AACS ), A COOPERATIVE CREDIT SOCIETY IS DEFINED AS A COOPERAT IVE SOCIETY, 'THE PRIMARY OBJECT OF WHICH IS TO PROVIDE FINANCIAL ACCOMMODATI ON TO ITS MEMBERS AND INCLUDES A COOPERATIVE LAND MORTGAGE BANK.' THIS TY PE GF INSTITUTIONS ARE THRIFT SOCIETIES. THE DISTINCTION BETWEEN A PRIMARY CREDIT SOCIETY AND A COOPERATIVE CREDIT SOCIETY IS WITH REFERENCE TO THEIR NATURE OF BUSINESS. THE PRIMARY OBJECT OR PRINCIPAL BUSINESS OF A PRIMARY CREDIT SOCIETY IS THE TRANSACTION OF BANKING BUSINESS, WHEN ITS PAID UP CAPITAL AND RESERVES ATTAIN THE LE VEL OF RS.L LAKH, A PRIMARY CREDIT SOCIETY AUTOMATICALLY BECOMES A PRIMARY COOP ERATIVE BANK. HOWEVER, EVEN AFTER A PRIMARY CREDIT SOCIETY BECOMES A COOPERATIVE BANK , IT HAS TO APPLY TO RBI FOR A LICENSE TO CARRY ON BANKING BUSINESS. BUT IT CAN CA RRY ON BANKING BUSINESS UNTIL IT IS GRANTED A LICENSE OR NOTIFIED THAT A LICENSE CANNOT BE GRANTED TO IT. THE ABOVE REPORT CLEARLY DEFINES THE CIRCUMSTANCES IN WHICH A CREDIT SOCIETY CAN BE ALLOWED TO CARRY ON BANKING BUSINESS, THESE ARE 'PR IMARY CREDIT SOCIETY', WHICH CAN CARRY ON BUSINESS OF BANKING UNTIL IT IS GRANTED A LICENS E OR NOTIFIED THAT A LICENSE CANNOT BE GRANTED TO IT. THESE CREDIT SOCIETIES WOULD NOT GET THE BENEFIT OF THE DEDUCTION U/S 80P(2)(A)(I). CONSIDERING THE ABOVE FACTS, IT IS DEAR THAT THE AP PELLANT IS NOT ALLOWED TO DO BANKING BUSINESS AS DEFINED UNDER BANKING REGULATION ACT AN D THEREFORE, IS NOT A COOPERATIVE BANK. THEREFORE, IT IS NOT EXCLUDED FROM THE BENEFI T OF DEDUCTION U/S 80P(2)(A)(I) OF THE IT ACT AS IT DOES NOT FALL UNDER THE EXCEPTIONS AS PRO VIDED U/S 8QP(4). I HAVE ALSO NOTED THE DECISION OF HONORABLE TTAT MUMBAI BENCH IN THE CASE OF SALGAON SANMITRA SAHAKARI PATHPED LTD. 12 TAXMANN.CORN 246; WHERE BOTH THE CI T (APPEALS) AND THE ITAT HAVE HELD THAT THE CORPORATIVE CREDIT SOCIETY IN THAT CA SE WAS NOT A COOPERATIVE BANK , I ALSO RESPECTFULLY AGREE WITH THE DECISION OF THE ITAT BA NGALORE 'B' BENCH IN THE CASE OF ACIT VS M/S. BANGALORE COMMERCIAL TRANSPORT CREDIT CO-OP ERATIVE SOCIETY LTD IN ITA NO.L069/BANG/2010 FOR AY 2007-08 DATED 08/04/2011 W HICH HAS DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT. THEREFORE, IT IS HELD THAT THE APPELLANT IS ENTITLE D TO THE BENEFIT OF DEDUCTION U/S 80P(2)(A)(I) OF THE IT ACT. 5,1 HOWEVER, NOT THE ENTIRE INCOME IS EXEMPTED; AND IT IS TO BE EXAMINED WHETHER THERE WAS ANY OTHER INTEREST INCOME ON THE SHORT TERM BAN K DEPOSITS AND SECURITIES INCLUDED IN THE TOTAL INCOME OF THIS SOCIETY WHICH HAS BEEN CLA IMED BY THEM AS EXEMPT. THE ISSUE ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 5 WAS DECIDED BY THE HON'BLE SUPREME COURT IN THE CAS E OF TOTGARS CO-OP. SALE SOCIETY LTD VS ITO, KARNATAKA, IN THE AFOREMENTIONED JUDGEM ENT, THE ISSUE FOR DETERMINATION WAS WHETHER INTEREST INCOME ON THE SHORT TERM BANK DEPO SITS AND SECURITIES WOULD BE QUALIFIED AS BUSINESS INCOME U/S. 80P(2)(A)(I) OF T HE IT ACT, 1961. THE HON'BLE SUPREME COURT HAD DECIDED THE ISSUE . AS UNDER: 'AT THE OUTSET AN IMPORTANT CIRCUMSTANCE NEEDS TO BE HIGHLIGHTED. IN THE PRESENT CASE, THE INTEREST HELD NOT ELIGIBLE FOR DEDUCTION U/S. 8 0P(2)(A)(I) OF THE INCOME TAX ACT IS NOT THE INTEREST RECEIVED FROM THE MEMBERS FOR PROVIDIN G THE CREDIT FACILITIES TO THEM. WHAT IS SOUGHT TO BE TAXED U/S, S 36 OF THE ACT IS THE I NTEREST INCOME ARISING ON THE SURPLUS INVESTED IN SHORT TERM DEPOSITS AND SECURITIES WHIC H SURPLUS WAS NOT REQUIRED FOR BUSINESS PURPOSE. ASSESSEE MARKETS THE PRODUCE OF I TS 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 RETENTI ON WAS NOT REQUIRED IMMEDIATELY FOR BUSINESS PURPOSES, IT WAS INVESTED IN SPECIFIED SECURITIES. THE QUESTION BEFORE US, IS WHETHER INTEREST ON SUCH DEPOSITS/SECURITIES WHICH STRICTLY SPEAKING ACCRUES TO THE MEMBERS ACCOUNT COULD BE TAXED AS BUSINESS INCOME U NDER SECTION 28 OF THE ACT. AN IMPORTANT POINT.NEEDS TO BE MENTIONED. THE WORDS THE WHOLE OF THE AMOUNT OF PROFITS AND GAINS OF BUSINESS EMPHASIS THAT THE INCOME IN R ESPECT OF WHICH DEDUCTION IS SOUGHT MUST CONSTITUTE THE OPERATIONAL INCOME AND NOT THE OTHER INCOME WHICH ACCRUES TO THE SOCIETY. IN THE PARTICULAR CASE, THE EVIDENCE SHOWS THAT THE ASSESSEE SOCIETY EARNS INTEREST ON FUNDS WHICH ARE NOT REQUIRED FOR BUSINESS PURPOS ES 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 T AXED BY THE DEPARTMENT UNDER SECTION 56 OF THE I. T. ACT' IN THE LIGHT OF THE ABOVE, THE INTEREST INCOME IF A NY, EARNED FROM KEEPING THE SURPLUS FUND IN BANKS WOULD BE TAXABLE U/S 56 AND WILL NOT QUALIFY FOR DEDUCTION U/S SOP. IT IS SEEN THAT THE TOTAL INTEREST EARNED FROM DEPOSITS WITH OTHER BANK S' (OTHER THAN CO-OP, SOCIETIES, WHICH IS EXEMPT) FD ETC IS RS.10,44,394/-. THE APPELLANT HAS MIXED F UNDS WHEREIN THE MEMBERS' INTEREST FREE CONTRIBUTION AND ACCUMULATED PROFITS ARE MIXED WITH INTEREST BEARING FUNDS. THE INTEREST EARNED FROM MEMBERS ETC., IS RS, 41,14,002 7-AND TOTAL INTEREST PAID IS RS.29,79 ; 405/-. THEREFORE, FOR EARNING TOTAL INTEREST OF RS.51,58,3 96/- THE APPELLANT HAS SPENT RS.29,79,405/-, TAKING ON PRO-RATA BASIS, THE INTEREST EXPENSES ON EARNING THE INTEREST FROM BANK TAXABLE U/S 56 WOULD BE RS. 6,03,224/-( 10,44,394 X 29, 79,405/ 51,58,396). THEREFORE, THE INTEREST INCOME WHICH IS TAXABLE U/S 56 AND IS NOT EXEMPT WOULD BE RS.4,41,170/- (RS. 10,44,394- RS. 6,03,224/-). THE GROUND OF APPEAL IS DECIDED A CCORDINGLY.' THE FACTS OF THE CASE DURING THE YEAR UNDER CONSIDE RATION ARE SUBSTANTIALLY SAME AS IN EARLIER YEAR WHERE ADDITION WAS MADE DIS ALLOWING DEDUCTION U/S. SOP OF THE ACT. THE ADDITION MADE BY THE AO HAS BEEN DELET ED WITHOUT ALLOWING INTEREST INCOME TAXABLE U/S. 56 OF THE ACT. IN VIEW OF THE C ONTENTIONS OF APPELLANT AND ABOVE DISCUSSION, AND RELYING ON THE ORDER OF MY PREDECES SOR FOR AY 2008-09, IT IS HELD THAT THE APPELLANT IS TO THE BENEFIT OF DEDUCTION U/S 80 P(2)(A)(I) OF THE IT ACT. HOWEVER, THE INTEREST INCOME IF ANY, EARNED FROM KE EPING THE SURPLUS IN BANKS WOULD BE TAXABLE U/S 56 AND WILL NOT QUALIFY FOR DEDUCTIO N U/S 80P OF THE ACT. THE ISSUE WAS DECIDED BY THE HON'BLE SUPREME COURT IN THE CASE OF TOTGARS CO-OP. SALE SOCIETY LTD VS ITO, KARNATAKA-(2010) 188 TAXMAN 0282. IN TH E AFOREMENTIONED JUDGEMENT, THE ISSUE FOR DETERMINATION WAS WHETHER INTEREST IN COME ON THE SHORT TERM BANK DEPOSITS AND SECURITIES WOULD BE QUALIFIED AS BUSIN ESS INCOME U/S.80P(2)(A)(I) OF THE IT ACT, 1961. THE HON'BLE SUPREME COURT HAD DECIDED THE ISSUE AS UNDER; ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 6 'AT THE OUTSET AN IMPORTANT CIRCUMSTANCE N EEDS TO BE HIGHLIGHTED. IN THE PRESENT CASE, THE INTEREST HELD NOT ELIGIBLE FOR DEDUCTION U/S. 80P(2)(A)(I) OF THE INCOME TAX ACT IS NOT THE INTER EST RECEIVED FROM THE MEMBERS FOR PROVIDING THE CREDIT FACILITIES TO THEM . WHAT IS SOUGHT TO BE TAXED U/S. S 36 OF THE ACT IS THE INTEREST INCOME A RISING ON THE SURPLUS INVESTED IN SHORT TERM DEPOSITS AND SECURITIES WHIC H SURPLUS WAS NOT REQUIRED FOR BUSINESS PURPOSE. ASSESSEE 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 SU CH AMOUNT. SINCE THE FUND CREATED BY SUCH RETENTION WAS NOT RE QUIRED IMMEDIATELY FOR BUSINESS PURPOSES, IT WAS INVESTED IN SPECIFIED SECURITIES. THE QUESTION BEFORE US, IS WHETHER I NTEREST ON SUCH DEPOSITS/SECURITIES WHICH STRICTLY SPEAKING ACCRU ES TO THE MEMBERS ACCOUNT COULD BE TAXED AS BUSINESS INCOME UNDER SEC TION 28 OF THE ACT. AN IMPORTANT POINT NEEDS TO BE MENTIONED. THE WORDS THE WHOLE OF THE AMOUNT OF PROFITS AND GAINS OF BUSINESS EMPHASIS TH AT THE INCOME IN RESPECT OF WHICH DEDUCTION IS SOUGHT MUST CONSTITUT E THE OPERATIONAL INCOME AND NOT THE OTHER INCOME WHICH ACCRUES TO T HE SOCIETY. IN THE PARTICULAR CASE, THE EVIDENCE SHOWS THAT THE ASSESS EE SOCIETY EARNS INTEREST ON FUNDS WHICH ARE NOT REQUIRED FOR BUSINE SS PURPOSES AT THE GIVEN POINT OF TIME. THEREFORE, ON THE FACTS AND CI RCUMSTANCES OF THIS CASE, IN OUR VIEW, SUCH INTEREST INCOME FALLS IN TH E CATEGORY OF 'OTHER INCOME' WHICH HAS BEEN RIGHTLY TAXED BY THE DEPARTM ENT UNDER SECTION 56 OF THE I. T. ACT' IN THE LIGHT OF THE ABOVE, THE INTEREST INCOME EARN ED FROM KEEPING THE SURPLUS FUND IN BANKS OR OTHER INVESTMENTS WOULD BE TAXABLE U/S 56 AND WILL NOT QUALIFY FOR DEDUCTION U/S 80P. AS PER THE INTEREST CALCULATION SUBMITTED BY THE APPELLANT, IT HAS EARNED INTEREST FROM DEPOSITS IN NATIONALIZE D BANK AN AMOUNT OF RS.7,35,277/-, SCHEDULE BANKS RS.1,08,852/-AND RS.11,725/- AS TDS. THESE EARNINGS ARE PART OF SURPLUS FUNDS OF INTEREST ACCOUNT WHICH COMES UNDER THE PURVIEW OF SECTION 56. THUS, AS PER THE PROVISIONS OF SECTION 56, THE TOTA L AMOUNT OF RS.8,55,854/- IS TAXABLE IN THE HANDS OF THE APPELLANT AND WILL NOT QUALIFY FOR DEDUCTION U/S SOP. 4. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL; WHEREAS REVENUE HAS NOT FILED ANY APPEAL AGAINST TH E ORDER OF LD. CIT(A). 5. AT THE OUTSET LD. AR SUBMITTED THAT THE ONLY GRI EVANCE THROUGH THIS APPEAL IS AGAINST THE ORDER OF LD. CIT(A) DENY ING DEDUCTION U/S ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 7 80P(2)(A)(I) OF THE ACT FOR THE INTEREST INCOME OF RS.8,55,854/- EARNED FROM NATIONALIZED BANK, SCHEDULED BANK AND TDS ON I NTEREST I.E. INTEREST INCOME OTHER THAN DERIVED FROM INVESTMENTS WITH ANY OTHER CO-OPERATIVE SOCIETY. LD. AR APPRAISED THE BENCH BY REFERRING TO THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE C ASE OF SBI VS. CIT (2016) 389 ITR 578 (GUJ) DATED 25 TH APRIL, 2016 WHEREIN HON. HIGH COURT HAS HELD THAT IN CASE OF CREDIT CO-OPERATIVE SOCIETIES INTEREST INCOME FROM DEPOSITS WITH NATIONALIZED BANK/SCHEDUL ED BANK ARE TAXABLE UNDER SECTION 56 AS INCOME FROM OTHER SOURC ES AND DEDUCTION U/S 80P(2)(A)(I) OF THE ACT CANNOT BE CL AIMED ON SUCH INTEREST INCOME. LD. AR FURTHER CONCEDED TO THIS EF FECT THAT ON ACCOUNT OF JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE ABOVE REFERRED CASE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/S 80P (2)(A)(I) OF THE ACT ON THE INTEREST INCOME OF RS.8,55,854/-, HOWEVER, A SSESSEE SHOULD BE ALLOWED PRO-RATA EXPENSES FOR EARNING INTEREST I NCOME AS WELL AS BASIC STATUTORY DEDUCTION OF RS.50,000/- AS PER PRO VISIONS OF SECTION 80P(2)(A)(I) OF THE ACT WHICH HAS NOT BEEN ALLOWED TO THE ASSESSEE. IN SUPPORT OF THIS CONTENTION LD. AR REFERRED AND RELI ED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF KHERAVA CO-OP. CREDIT S OCIETY LTD. VS. ITO, WARD-4, MEHSANA IN ITA NO.2704/AHD/2015 FOR AS ST. YEAR 2012- 13 VIDE ORDER DATED 11/02/2016. 6. LD. DR RAISED NO OBJECTION TO THE CONTENTIONS OF LD. AR TO THE EXTENT THAT ASSESSEE WILL NOT BE ENTITLED FOR DEDUC TION U/S 80P(2)(A)(I) OF THE ACT TOWARDS INTEREST INCOME OF RS.8,55,854/- , IN PRO-RATA EXPENSES FOR EARNING INTEREST INCOME AS WELL AS STA TUTORY DEDUCTION U/S 80P(2)(A)(I) OF THE ACT. ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 8 7. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED ON RECORD AND GONE THROUGH THE JUDGMENT AND DECISION QUOTED BY LD. AR. AFTER GOING THROUGH THE GROUNDS AND THE SUBMISSIONS MADE BY LD. AR AND AFTER CONSIDERING THE ISSUE IN THE LI GHT OF RATIO LAID DOWN IN THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT I N THE CASE OF SBI VS. CIT (SUPRA), THE GRIEVANCE REMAINS TO BE ADJUDI CATED IS TOWARDS ALLOWING OF PRO RATA EXPENSES FOR EARNING INTEREST INCOME OF RS.8,55,854/- EARNED FROM DEPOSITS WITH NATIONALIZE D/SCHEDULED BANKS AND ALSO ALLOWING STATUTORY DEDUCTION OF RS.5 0,000/- U/S 80P(2)(C) OF THE ACT. 8. WE OBSERVE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS LD. ASSESSING OFFICER DENIED THE CLAIM U/S 80P(2)(A )(I) OF THE ACT AND ALSO OBSERVED THAT INCOME FROM INTEREST ON DEPOSIT OTHER THAN THOSE HELD WITH CO-OP. SOCIETY ARE LIABLE TO BE TAXED AS INCOME FROM OTHER SOURCES U/S 56 OF THE ACT. THEREAFTER WHEN THE MATT ER WAS CARRIED BEFORE LD. CIT(A) ASSESSEES APPEAL WAS PARTLY ALLO WED TO THE EFFECT THAT ASSESSEE WAS HELD TO BE ELIGIBLE FOR CLAIMING DEDUCTION U/S 80P(2)(A)(I) OF THE ACT, BUT INTEREST EARNED FROM D EPOSITS WITH SCHEDULED/NATIONALIZED BANKS WAS HELD TO BE TAXABLE U/S 56 OF THE ACT. ASSESSEE CAME UP IN APPEAL BEFORE THE TRIBUNAL AGAINST THE ACTION OF LD. CIT(A) DENYING DEDUCTION U/S 80P(2)(A )(I) OF THE ACT ON THE INTEREST OF RS.8,55,854/-. 9. THEREAFTER IN DUE COURSE OF TIME HON. JURISDICTI ONAL HIGH COURT IN THE CASE OF SBI VS. CIT (SUPRA) DECIDED TH E ISSUE IN THE CASE ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 9 OF CREDIT CO-OPERATIE SOCIETY ABOUT TREATMENT OF IN TEREST INCOME FROM DEPOSITS OF SURPLUS FUNDS IN BANK TO BE TAXED U/S 5 6 OF THE ACT AS INCOME FROM OTHER SOURCES. HON. COURT WHILE DECIDIN G SO OBSERVED AS FOLLOWS :- HELD, DISMISSING-THE APPEALS, (I) THAT THE ASSESSEE HAD C LAIMED DEDUCTION UNDER SECTION 80P AND NOT SPECIFICALLY UNDER SECTIO N 80P(2)(A)(I). THE ASSES- SEE HAD ALSO NOT SHOWN ANY BIFURCATION OF THE INCOM E DERIVED FROM PROVIDING CREDIT FACILITIES TO ITS MEMBERS AND THE INTEREST E ARNED BY DEPOSITING SURPLUS FUNDS WITH THE BANK. IN RESPONSE TO THE NOTICE UNDE R SECTION 263, THE ASSESSEE HAD CONTENDED THAT THE REASON FOR TREATING THE INTEREST INCOME RECEIVED FROM DEPOSITS AS BUSINESS INCOME WAS THAT THE FUNDS OF THE BUSINESS WERE KEPT IN INTEREST EARNING ACCOUNT WITH FACILITY TO WITHDRAW THE FUND AS AND WHEN NECESSARY TO EARN INTEREST FOR AND ON BEHA LF OF ITS MEMBERS AND THAT IT WAS ONE OF ITS ACTIVITIES AS PROVIDED IN SE CTION 80P(2)(A) AND THAT THE GAINS OF BUSINESS ATTRIBUTABLE TO SUCH ACTIVITY WER E EXEMPTED FROM TAXABLE INCOME. THE CONTENTION OF THE ASSESSEE THAT THE COM MISSIONER HAD NOT HELD THAT THE INTEREST DERIVED FROM THE DEPOSITS IN THE BANK WAS INCOME FROM OTHER SOURCES DID NOT MERIT CONSIDERATION FOR THE REASON THAT IT WAS FOR THE ASSESSING OFFICER, PURSUANT TO THE ORDER UNDER SECT ION 263 TO EXAMINE THE NATURE OF THE INCOME AND TAX IT ACCORDINGLY. HAVING REGARD TO THE STAND ADOPTED BY THE ASSESSEE IN RESPONSE TO THE NOTICE U NDER SECTION 263, IT COULD NOT BE SAID THAT THE COMMISSIONER HAD TRAVELLED BEY OND THE SCOPE OF THE NOTICE UNDER SECTION 263, INASMUCH AS, HE HAD ONLY DEALT WITH THE CONTENTION RAISED BY THE ASSESSEE. THE APPELLATE TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE INVOCATION OF POWERS UNDER SECTION 263 OF THE ACT BY THE COMMISSIONER AND THAT THE ORDER DID NOT SUFFER FROM ANY LEGAL INFIRM ITY. ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 10 (II) THAT THE ASSESSEE DID NOT CARRY ON ANY BANKING BUSINESS AND ITS OBJECTS DID NOT CONTEMPLATE INVESTMENT OF SURPLUS FUNDS REC EIVED FROM ITS MEMBERS. THE BUSINESS OF A CREDIT SOCIETY LIKE THAT OF THE A SSESSEE WAS LIMITED TO PROVIDING CREDIT TO ITS MEMBERS AND THE INCOME THAT WAS EARNED BY PROVID- ING SUCH CREDIT FACILITIES TO ITS MEMBERS WAS DEDUC TIBLE UNDER SECTION 80P(2)(A)(I). THE CHARACTER OF INTEREST WAS DIFFERE NT FROM THE INCOME ATTRIBUTABLE TO THE BUSINESS OF THE ASSESSEE-SOCIET Y PROVIDING CREDIT FACILITIES TO ITS MEMBERS. THE INTEREST INCOME DERIVED FROM IN VESTING SURPLUS FUNDS WITH THE BANK MUST BE CLOSELY LINKED WITH THE BUSIN ESS OF PROVIDING CREDIT FACILITIES FOR IT TO BE HELD ATTRIBUTABLE TO THE BU SINESS OF THE ASSESSEE. THEREFORE, THE PROFITS AND GAINS COULD BE SAID TO B E DIRECTLY ATTRIBUTABLE TO THE BUSINESS OF PROVIDING CREDIT FACILITIES TO ITS MEMBERS IF THERE WAS A DIRECT AND PROXIMATE CONNECTION BETWEEN THE PROFITS AND GA INS AND THE BUSINESS OF THE ASSESSEE. THERE WAS NO OBLIGATION ON THE ASSESS EE TO INVEST ITS SURPLUS FUNDS WITH THE BANK. INVESTING SURPLUS FUNDS IN A B ANK WAS NO PART OF THE BUSINESS OF THE ASSESSEE PROVIDING CREDIT FACILITIE S TO ITS MEMBERS AND HENCE IT COULD NOT BE SAID THAT THE INTEREST DERIVED FROM DEPOSITING ITS SURPLUS FUNDS WITH THE BANK WAS PROFITS AND GAINS OF BUSINESS ATT RIBUTABLE TO THE ACTIVITIES OF THE ASSESSEE. IT WAS ONLY THE INTEREST INCOME DE RIVED FROM THE CREDIT PROVIDED TO ITS MEMBERS WHICH WAS DEDUCTIBLE UNDER SECTION 80P(2)(A)(I) AND THE INTEREST INCOME DERIVED BY DEPOSITING THE S URPLUS FUNDS WITH THE BANK NOT BEING ATTRIBUTABLE TO THE BUSINESS CARRIED ON BY THE ASSESSEE COULD NOT BE DEDUCTED UNDER SECTION 80P(2)(A)(I). THERE W AS NO INFIRMITY IN THE ORDERS OF THE APPELLATE TRIBUNAL WARRANTING INTERFE RENCE. 10. WE FURTHER OBSERVE THAT DURING THE COURSE O F HEARING HEFORE US, LD. AR ACCEPTED THAT ASSESSEE IS NOT ELIGIBLE TO CL AIM DEDUCTION U/S ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 11 80P(2)(A)(I) OF THE ACT ON THE INTEREST EARNED ON S URPLUS DEPOSITS/INVESTMENTS HELD WITH SCHEDULED/NATIONALIZ ED BANK BUT URGED FOR ALLOWING DEDUCTION ON PRO RATA EXPENSES I NCURRED FOR EARNING THE INTEREST INCOME AND ALSO FOR ALLOWING S TATUTORY DEDUCTION OF RS.50,000/- U/S 80P(2)(C)(II) OF THE ACT. LD. AR ALSO SUBMITTED THAT A TOTAL EXPENSES INCURRED FOR THE YEAR STOOD AT RS. 28,60,298/- AND PRO RATA EXPENSES FOR EARNING INTEREST INCOME OF RS.8,5 5,854/- AS AGAINST TOTAL INTEREST INCOME OF RS.42,39,515/- WILL BE CAL CULATED AT RS.5,77,423/-. 11. WE OBSERVE THAT LD. AR HAS REFERRED TO THE DECI SION OF THE CO-ORDINATE BENCH IN THE CASE OF KHERAVA CO-OP. CRE DIT SOCIETY LTD. VS. ITO, WARD-4, MEHSANA IN ITA NO.2704/AHD/2015 FO R ASST. YEAR 2012-13 WHEREIN SIMILAR ISSUE OF ALLOWING PRO RATA EXPENSES AND ALLOWING STATUTORY DEDUCTION OF RS.50,000/- U/S 80P (2)(II) OF THE ACT HAS BEEN ADJUDICATED BY THE CO-ORDINATE BENCH BY OB SERVING AS UNDER :- 10. FROM GOING THROUGH THE ALTERNATE SUBMISSIONS MA DE BY THE ASSESSEE WE FIND THAT MAJOR PORTION OF INTEREST INCOME IS FROM GOVERNMENT SECURITIES AND ARE NOT IN THE NATURE OF SHORT TERM DEPOSITS. THEREFORE , THE FACTS OF THE CASE ARE CLEARLY DISTINGUISHABLE FROM THE FACTS DISCUSSED IN THE CASE OF TOTAGARS CO-OP. SALE SOCIETY LTD. VS. ITO (SUPRA) AND THAT OF CO-OR DINATE BENCH IN THE CASE OF JAFARI MOMIN VIKAS CO-OP. CREDIT SOCIETY LTD. (SUPR A) AS WELL AS IN THE CASE OF DHANALAXMI CREDIT CO-OP. SOCIETY LTD. VS. ITO (SUPR A). THIS INTEREST INCOME IS ON INVESTMENTS NOT OF SHORT TERM NATURE EXCEPT BANK IN TEREST WHICH TOO INCLUDES INTEREST ON FIXED DEPOSITS. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT AS THE ASSESSEE SUO MOTO HAS GIVEN A PROPOSITION OF TAXING THE INTEREST AND COMMISSION INCOME ON INVESTMENTS TO BE TAXED U/S 56 OF THE ACT AND HAS ALSO SHOWN THAT PROPORTIONATE EXPENSES OF RS.3,31,828/- HAVE BEEN I NCURRED TO EARN THE ABOVE INCOME AND THE SAME HAS DULY BEEN ACCEPTED BY THE A SSESSING AUTHORITY, SO WE FIND IT JUSTIFIED THAT ASSESSING OFFICER HAS RIGHTL Y TAXED THE INTEREST INCOME OF RS.2,16,689/- AS INCOME FROM OTHER SOURCES. HOWEVER , DEDUCTION U/S 80P(2)(C) ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 12 OUGHT TO HAVE BEEN ALLOWED TO THE ASSESSEE AS SECTI ON 80P(2)(C) READS AS UNDER :- SECTION 80P(2)(C) (C) IN THE CASE OF A CO- OPERATIVE SOCIETY ENGAGED IN ACTIVITIES OTHER THAN THOSE SPECIFIED IN CLAUSE (A) OR CLAUSE (B) (EITHER INDEP ENDENTLY OF, OR IN ADDITION TO, ALL OR ANY OF THE ACTIVITIES SO SPECIFIED), SO MUCH OF ITS PROFITS AND GAINS ATTRIBUTABLE TO SUCH ACTIVITIES AS 1 DOES NOT EXCEED,- (I) WHERE SUCH CO- OPERATIVE SOCIETY IS A CONSUMERS' C O- OPERATIVE SOCIETY, ONE HUNDRED THOUSAND RUPEES; AND (II) IN ANY OTHER CASE, FIFTY THOUSAND RUPEES. EXPLANATION.- IN THIS CLAUSE,' CONSUMERS' CO- OPERA TIVE SOCIETY' MEANS A SOCIETY FOR THE BENEFIT OF THE CONSUMERS;] FROM GOING THROUGH THE ABOVE PROVISIONS IT IS VERY CLEAR THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION OF RS.50,000/- U/S 80P(2)(A) (I) OF THE ACT AND THE SAME SHOULD HAVE BEEN ALLOWED BY THE ASSESSING AUTHORITY .. 11. THEREFORE, IN VIEW OF OUR ABOVE DISCUSSION, WE QUASH THE ORDER OF LD. CIT(A) ENHANCING THE ADDITION AND ALSO PARTLY ALLOW THE APPEAL OF ASSESSEE AND ACCORDINGLY THE ADDITION MADE BY ASSESSING OFFICER SHALL BE REDUCED TO RS.1,68,305/- [RS.2,16,689/- MINUS RS.50,000/- DEDU CTION U/S 80P(2)(C)]. 11. RESPECTFULLY FOLLOWING THE JUDGMENT OF HON. JUR ISDICTIONAL HIGH COURT AND EXAMINING THE FACTS OF THE CASE AS ALSO I N THE LIGHT OF DECISION OF THE CO-ORDINATE BENCH DISCUSSED IN THE ABOVE PARAGRAPHS, WE ARE OF FOLLOWING VIEW :- (1) ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 80P( 2)(A)(I) OF THE ACT ON THE INTEREST INCOME EARNED FROM SURPLUS DEPOSITS HELD WITH NATIONALIZED/SCHEDULED BANKS. (2) ASSESSEE WILL BE ELIGIBLE TO STATUTORY DEDUCTIO N OF RS.50,000/- U/S 80P(2)(II) OF THE ACT. (3) ASSESSEE WILL ALSO BE ELIGIBLE TO CLAIM PRO RAT A EXPENSES FOR EARNING INTEREST INCOME OF RS.8,55,854/- ASSESSEE S CLAIM OF PRO RATA EXPENSES OF RS.5,77,423/- AGAINST THE INTEREST INCO ME OF RS.8,55,854/- AFTER DUE VERIFICATION BY THE LEARN ED ASSESSING OFFICER. ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 13 WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO VERI FY ASSESSEES CLAIM OF PRO RATA EXPENSES BY EXAMINING THE RECORD TO BE SHOWN FOR VERIFICATION BY THE ASSESSEE. NEEDLESS TO MENTION P ROPER OPPORTUNITY OF BEING HEARD IS TO BE GIVEN TO THE ASSESSEE. WE O RDER ACCORDINGLY. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR ST ATISTICAL PURPOSES. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2017 SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 24/01/2017 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD ITA NO. 2426/AHD/2013 ASST. YEAR 2009-10 14 1. DATE OF DICTATION 23/01/2017 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 24/01/2017 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 25/1/17 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: