Income Tax Appellate Tribunal - Chandigarh
The Tiara Co-Operative Agricultural ... vs Ito, Dharamashala on 1 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH 'B', CHANDIGARH
BEFORE MS.DIVA SINGH, JUDICIAL MEMBER
AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA Nos.905 to 908/Chd/2017
(Assessment Years :2009-10 to 2012-13)
The Tiara Co-operative Agricultural Vs. The Income Tax Officer,
Service Society Limited, Dharamshala.
Village &PO Tiara
Tehsil & District Kangra.
PAN:AACFT6845N
(Appellant) (Respondent)
Appellant by : Shri Gagan Singh Guleria, Adv.
Respondent by : Smt.Chanderkanta, Addl.CI T
Date of hearing : 03.04.2018
Date of Pronouncement : 01.05.2018
ORDER
PER BENCH:
Al l the above a ppeal s have bee n fi l ed b y t h e s a m e a s s e s s e e a g a i ns t t h e s ep a r a t e o r de r s o f L d . Co m m i s s i o n e r o f I n co m e Ta x ( A p pe a l s ) , Pa l a m p u r, H . P . ( he r e i n af t er r e f e r re d t o a s ( ' L d . CI T( A p p e a l s ' ) a l l d a ted 8 . 3 . 2 0 1 7 & re l a t i n g t o a s s e s s m e nt y e a rs 2 0 0 9 - 1 0 , 2 0 1 0- 1 1 , 2 0 1 1 -1 2 a nd 2 0 1 2 - 13 r e s p e c t i ve l y .
2. I t was common ground that the i ssue i nvol ved i n al l the appeal s was i denti cal . Al l the appeal s were therefore heard together and are bei ng di sposed off by thi s common order.
3. The sol e i ssue i n al l the above ap peal s rel ates to deni al of deducti on cl ai med by the assessee cooperati ve soci et y u/s 2 80P( 2) ( a) ( i ) of the I ncome Ta x Ac t, 1961 ( i n short 'the Act') on i nterest earned on FDRs kept wi th bank.
4. Bri ef facts rel ati ng to the case, as emanati ng from the orders bel o w, i s that the assessee i s a pri mar y agri cul tural Servi ce Soci et y e ngaged i n accept i ng deposi ts and provi di ng credi t faci l i ti es t o i ts members a nd i n sal e and d istri buti on of PDS( Publ i c Di stri buti on System) i tems under scheme of Hi machal Pradesh Government. The assessee ha d i n al l the i mpugned years earned i ncome on FDRs kept wi th bank and cl ai med deducti on u/s 80P( 2) ( a) ( i ) of the Act on the same as under:
Assessment Year Interest earned on FDRs with bank 2009-10 Rs.7,42,295/-
2010-11 Rs.20,17,349/-
2011-12 Rs.18,25,124/-
2012-13 Rs.27,28,485/-
5. The same was deni ed by the Assessi ng Offi cer follo wi ng the rati o l ai d do wn by the Hon'bl e Ape x Court i n Totgars Cooperati ve Sal e Soci et y ( 2010) 322 I TR 283 ( S C) that the i nterest i ncome earned from i nvestment of surpl us funds in Banks and government securi ti es coul d not be attri butabl e to the acti vi t y ca rri ed out by the soci et y and henc e was not enti tl ed for deducti on u/s 80P( 2) ( a) ( i ) of the Act.
6. The L d.CI T( Appe al s) uphel d the order of the Ass essi ng Offi cer. Before the Ld.CI T( Appeal s) the a ssessee al so took up an al ternati v e pl ea that agai nst the aforestat ed i ncome of i nterest earned from FDRs wi t h banks, the de ducti on on account of i nterest pai d by i t shoul d be deducted and onl y 3 the net i nterest i ncome be su bjected to ta x. The sai d contenti on/ground rai sed by the assessee was al so di smi ssed by the Ld.CI T( Appeal s) for the reason that no ne xus had been establ i shed by t he assessee of t he interest pai d wi th the i nt erest earned by t he assessee on F DRs made wi th the banks.
7. A g g r i e v e d b y t he s a m e , t he a s se s s e e h a s co m e u p i n a p p e a l b ef o r e us , r a i s i n g t h e fo l l o w i n g e f f e ct i ve c o m m o n g r o u n d s i n a l l t he a b o v e ap p e a l s:
"1. That the order of the Assessing Officer as upheld by the Ld. Commissioner of Income Tax (Appeals) Palampur disallowing claim of the Appellant u/s 80P(2)(a)(i) in respect of the Interest income received form Nationalized Bank amounting to Rs.7,42,295/- being business income claimed and holding the same as income from other sources is bad in law and needs to be set- aside.
2. That, in alternatively and without prejudice to above, if the Interest earned on deposits maintained with the Nationalized bank is treated as Income from Other sources, the Ld ITO, Ward Dharamshala may be directed to allow proportionate deduction for Interest paid against the Interest received from the Nationalized Banks.
8. I n ground No.1, the assessee has chal l enged the acti on of the Ld.CI T( Appeal s) in uphol di ng the di sal l o wance of deducti on made by the Assessi ng Offi cer u/s 80P ( 2) (a) ( i ) of the Act on the i nterest i ncome earned by the assessee cooperati ve soci et y on account of FDRs kept i n bank.
9. We have heard rival contenti ons. Si nce the i ssue rel ates to deducti on cl ai med u/s 80P( 2) ( a ) ( i ) of the Act i t i s rel evant to reproduce the secti on as under:
80P. ( 1) Where, in the c ase of an assesse e be in g a co-o per ative s oc ie ty, the gros s to tal 4 inco me incl udes an y inco me ref erred to in sub-sec tion ( 2), there sh al l be de duc ted, in accord ance wi th and sub jec t to the prov is ions of th is sec tion, th e su ms s pec if ied in sub- sec tion ( 2), in comp u ting the to tal inco me o f the assessee.
( 2) T he su ms ref erred to in sub-sec tion ( 1)
sh al l be the f ol l owi n g, n ame l y: -
( a) In the c ase of a co-o per ative soc ie ty
eng aged in__
( i) c arr ying on the b us iness of b ank i ng
or prov id ing cre d it f ac il i ties to i ts
me mb ers.
............................................................... . . ............................................................... ...............................................................
T he whol e of the amoun t of prof its and g ains of bus iness attr ibu tabl e to any one or more of such ac tiv i ties"
10. As i s evi dent from a bare perusal of the above secti on, i ncome earned by cooperati ve soci eti es carr yi ng on busi ness of banki ng or provi di ng credi t faci l i ti es to i ts members i s enti tl ed to cl ai m deducti on under the sai d secti on, of i ncome earned from carr yi ng on the aforesai d busi ness activi ti es. Havi ng cl ari fi ed the posi ti on rel ati ng to the deducti on cl ai med by the assessee, i t i s perti nent to bri ng out the facts rel ati ng to the i ssue i n the present case. Th e busi ness acti vi t y carri ed o n by the assesse e i n the present case i s of provi di ng credi t faci l i ti es to i ts members whi ch was stated by the Ld. counsel for assessee before us and reaffi rmed on a poi nted and s peci fi c quer y as ked i n thi s rega rd to hi m. Further thi s fact emanates from the submi ssi ons made by the Ld. counsel for assessee before the l o wer authori ti es al so wherei n i t has been categori cal l y admi tted by the assessee that it was engaged in the servi ces of provi di ng credi t 5 faci l i ti es to i ts members and encouragi ng thri ft and savi ngs amongst i ts members by accepti ng deposi ts and offeri ngs and provi di ng ot her sui tabl e faci l i ti es. I t i s al so not di sputed that the i ncome i n di spute whi ch has been deni ed deducti on u/s 80P( 2) ( a) ( i ) of the Act has b een earned from FDRs kept wi th banks who are not members of the assessee cooperati ve soci et y.
11. I n the backdrop of the above facts and proposi ti on of l a w, i t has to be seen whether the i mpugned i nterest i ncome earned from FD Rs coul d be sai d to be earned from the acti vi ti es of provi di ng credi t faci l i ti es to i ts members.
12. The contenti on of the Ld. counsel for assessee consi stentl y before the l o wer authori ti es and even before us i s that the FDRs made wi th bank s were made i n t he normal course of carr yi ng out i ts acti vi ti es of col l ecti ng deposi ts from i ts memb ers. It was contended that t he amount recei ved as depo si ts from i ts me mbers, duri ng th e course of carr yi ng on busi ness, were parke d i n nati onal i zed banks to mai ntai n l i qui di t y and provi de ready avai l abi l i t y of funds for repa yment of de posi ts of the de posi tors and for redempti on of deposi ts on maturi t y. The Ld. counsel for assessee dre w our attenti on to the submi s si ons made b efore the Ld.CI T( Appeal s) reproduced at para 4.2 of the order as under:
"4.2 During appeal, the appellant filed written submissions as under:
In this context, it is submitted that, the Appellant is a Primary Co operative Agricultural Service Society registered under Section 2(19) of the Co-operative 6 Societies Act, 1912 engaged in- the services of providing credit facilities to its Members and encourages thrift and savings among its Members by accepting deposits and offerings and provide other suitable facilities and also engaged in supplying of Public Distribution system (PDS) items on behalf of State Government. The Assessee has deposited its funds with the Nationalized Banks and other Cooperative institutions/Banks in shape of LTD's and has received interest thereon. The amount deposited by the Assessee Society with the Nationalized Banks and other Cooperatives were received as deposits from its Members and Nominal Members during the course of earning on its business and the Funds parked in deposits with the Nationalized Banks is in order to maintain liquidity and provide ready availability of Funds for repayment of deposits of the depositors and for redemption of deposits on maturity. The Interest received from these deposits "with the Nationalized Banks other than Cooperatives Institutions/Banks have direct nexus to the interest paid proportionately as the Funds being Operational Funds. The Appellant maintains a cycle and rotation of funds received from the depositors invested with the Banks and on maturity are paid to the Depositors and the Interest received is successively utilized for the purpose of business as being paid to the depositors as Interest on their deposits which are maintained in shape of Saving Accounts, FDR's Account & Recurring Deposits. Hence the Funds parked -with the Bank in shape of LTD's/FDR's are not Surplus Funds and the Interest derived from these deposits is nothing but income attributable to providing credit facilities and is taxable under the head "Income from Business & Profession" and making Appellant entitled for deduction under Section 80 P(2)(a)(i) of the Act..."
13. Ld.Counsel therefore contended that the i nterest i ncome earned from banks was i n the regul ar course of carr yi ng on i ts busi ness and thus enti tl ed to deducti on u/s 80P( 2) ( a) ( i ) of the Act. The Ld. c ounsel for assessee further rel i ed upon the fol l o wi ng case l a ws in supp ort of hi s contenti on:
1. ITO, Patan Vs M/s Jafari Momin Vikas Coop Credit Society Ltd.
ITAT-Ahmedabad ITANo. 1491/Ahd/2012 C.O. No. 138/Ahd/2012
2. Shri Venkatesh Nagari Sah. Pat Sanstha Maryadit, Sangli v. ITO, Sangli ITAT-Pune ITA No. 2178/PN/2013.
3. Mahesh Nagari Sahkari Pat Sanstha Ltd. Vs Income Tax Officer, Sangli ITAT-Pune Bench ITA No. 2180/PN/2013.7
4. Shivneri Nagari Sah. Pat Sanstha Maryadit Vs Income Tax Officer, Kolhapur ITAT-Pune Bench ITA No. 2223/PN/2013.
14. Further the Ld. counsel for assessee contended that rel i ance pl aced by the l o wer au thori ti es, whi l e confi rmi ng the di sal l o wance, on the deci si on of the Hon'bl e A pe x Court i n the case of Totgars Cooperati ve Sal e Soci et y ( supra) was mi spl aced si nce i t was di sti ngui shabl e on facts. I t was contended by th e Ld. counsel fo r assessee that i n the sai d case the Hon'ble Ape x Court had hel d that the i nterest i ncome earned o n FDRs di d not qual i f y for ded ucti on u/s 80P( 2) ( a) ( i ) of the Act si nce i t wa s earned on sur pl us funds whi ch were i nve sted i n FDRs w i th banks. I n thi s factual background, i t w as poi nted out, t hat the Hon'bl e Ape x Court hel d that the sai d i nterest i ncome coul d not be said to be rel atabl e to the busi ness of provi di ng credi t faci li ti es to members and thus was not el i gi bl e for deducti on u/s 80P( 2) ( a) ( i ) of the Act. Ld.Counsel for the assessee contended that i n the present case i t was not i nvestment of surpl us funds whi ch had earned i nterest but that made in the regul ar course o f carr yi ng on th e busi ness of th e assessee, and hence the present case was cl earl y di sti ngui shabl e on facts from the c ase of Totgars ( supra) . Ld.Counsel for the assessee dre w our attenti on to thi s di sti ncti on of fact brought out i n deci si ons of the I TA T, rel i ed upon before us above.
15. The Ld. DR per contra, rel i ed upon the order of the CI T( Appeal s) stati ng that the i nterest earned on FDRs wi th banks coul d not be sai d to qual i f y by any stretch of l ogi c to 8 be i ncome earne d i n the course of carr yi ng on th e busi ness of the assessee of provi di ng cred i t faci l i ti es to it s members and the deci si on of the Hon'bl e Ape x Court i n the case of Totgars Coopera ti ve Sal e Soci ety ( supra) had been ri ghtl y appl i ed i n the present case to re ject the cl ai m of deducti on of the assessee on the sai d i nco me u/s 80P( 2) ( a ) ( i ) of the Act.
16. We are in agreement wi th the contenti on of the Ld.Counsel for the assessee that where the FDR's are made wi th Banks from the operati onal funds of the cooperati ve soci et y duri ng the course of carr yi ng out i ts acti vi t y of provi di ng credi t f aci l i ti es to i ts m embers, the i nter est earned thereon i s i nci dental to the sai d acti vi t y and can be safel y attri buted to the carr yi ng out of the sai d activi t y, Such i nterest earned is thus enti tl ed to deducti on u/s 80P( 2) ( a) ( i ) of the Act. The Hon'bl e Patna Hi gh Court i n the case of Bi har State Cooperati ve Housi ng Federati on Ltd. Vs. CI T (2009) 315 I TR 286 had an occasi on to deal wi th an i denti cal si tuati on wherei n i t was found that the nature of acti vi t y i n whi ch the asses see was i nvol ved , bei ng col l ecti n g deposi ts from i ts members and provi di ng credi t faci l i ties to i ts members, created a si tuati on where short ter m surplus funds were avai l abl e wi th i t whi c h were hence de posi ted i n banks and i nterest earned thereon. The Hon'bl e Hi gh Court hel d that thi s ac t of maki ng depo si ts i n the banks therefore was i nci dental t o the acti vi t y of the assessee of provi di ng credi t faci l i ti es to i ts members and the i ncome earned 9 therefrom, though not di rectl y relatabl e to the said acti vi t y, was i nci dental to that acti vi t y and hence was to be treated as earned i n the course of carr yi ng out that acti vit y and therefore el i gi bl e for deducti on u /s 80P( 2) ( a) ( i ) of the Act. The rel evant fi n di ngs of the Hon'bl e Hi gh Court i n thi s regard are as under:
"9. Having considered the rival submissions, I am of the opinion that the interest earned on the deposits made does not arise out of one or more of the activities specified in s. 80P(2)(a)(i) of the Act but the interest received by the assessee on the bank deposit is ancillary and incidental to carrying on the business of providing credit facility to its members and, as such, exempt under the aforesaid provisions. It may be stated herein that the assessee deposits surplus funds available with it in banks and earns interest thereon. The nature of activity in which the assessee is involved clearly creates a situation when surplus fund is available to it which it deposits in bank and earns interest thereon. The placement of such fund being incidental and ancillary to carrying on of the business of providing credit facility to its members by reason of s. 80P(2)(a)(i) of the Act, same is exempt under the aforesaid provisions.
10. The view which I have taken finds support from the judgment of the Supreme Court in the case of CIT vs. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) in which it has been held as follows :
"The question is whether we agree with the reasoning in Madhya Pradesh Co-operative Bank Ltd. (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the RBI to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of s. 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within s. 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.10
In the premises, we take the view that the decision of this Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee."
11. In view of aforesaid, my answer to the first question referred to above, is in the negative, against the Revenue and in favour of the assessee and it is held that a sum of Rs.15,98,592 received by way of interest on bank deposit is ancillary and incidental to carrying out the business of providing credit facility to its members, and, as such, exempt under s. 80P(2)(a)(i) of the Act."
17. Thi s proposi ti on , we fi nd, was al so appl i ed b y the Coordi nate Bench of the I . T.A. T. whi l e al l o wi ng deducti on u/s 80P( 2) ( a) ( i ) on the i nterest ea rned on FDR's i n the case I T O , P a t a n V s M /s J a f a r i Mo m i n Vi k a s C o- o p . C r e di t S o c i e ty L t d . I . T. A . T. A h m e d a b a d I TA N o. 1 4 9 1 / A h d/ 2 0 1 2 C . O . N o . 1 3 8 / A h d / 2 01 2 h o l d i n g as u n d er :
"17. We have carefully considered the submissions of the either party, perused the relevant records and also the case law on which the learned AR had reservation in it's applicably in the circumstances of the assessee's case.
18. It was the stand of the learned CIT (A) that the entire income was not exempt and that it was to be examined as to whether there was any interest income on the short term bank deposits and securities included in the total income of this society which has been claimed as exempt. According to the CIT (A), a similar issue to that of the present one was dealt with by the Hon'ble Supreme Court in the case of Totgars Co- op. Sale Society Ltd v. ITO (supra). The issue before the Hon'ble Court for determination was whether interest income on short term bank deposits and securities would be qualified as business income u/s 80P (2)(a)(i) of the Act.
19. The issue dealt with by the Hon'ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts, as under:
"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? The 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 by such retention was not required immediately for business purposes, it was 11 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 under section 28 of the Act? in our view, such interest income would come in the category of 'income from other sources', hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer..."
19.1 However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon'ble Supreme Court -
"(On page 286) 7............Before the assessing officer, it was argued by the assessee(s) that it had invested the funds on short term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence, these civil appeals have been filed by the assessee(s)."
19.2 From the above, it emerges that -
(a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits;
(b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members;
(c) that assessee carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii) marketing the agricultural produce; and
(d) that the surplus had arisen emphatically from marketing of agricultural produces.
19.3 In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds.
19.4 While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely: (1) in the case of the assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds;
- in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members;
12
(2) in the case of present assessee, it did not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such;
- in the case of Totgars, the Hon'ble Supreme Court had not spelt out anything with regard to operational funds; 19.5 Considering the above facts, we find that there is 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. That was why, it was submitted by the assessee that it had invested in short-term deposits. Furthermore, the assessee had maintained overdraft facility with Dena Bank and the balance as at 31.3.2009 was Rs.13,69,955/- [source: Balance Sheet of the assessee available on record] 19.6 In overall consideration of all the aspects, we are of the considered view that the ratio laid down by the Hon'ble Supreme Court in the case of Totgars Co-op Sale Society Ltd (supra) cannot in any way come to the rescue of either the Ld. CIT (A) or the Revenue. In view of the above facts, we are of the firm view that the learned CIT (A) was not justified in coming to a conclusion that the sum of Rs.9,40,639/- was to be taxed u/s 56 of the Act. It is ordered accordingly."
18. Moreover, we are al so i n agreeme nt wi th the conte nti on of the Ld. coun sel for assessee that the deci si on of the Hon'bl e Ape x Co urt i n the case of Totgars Coope rative Sal e Soci et y ( supra) was based on separate set of facts si nce, as ri ghtl y poi nted out by the Ld. co unsel for assessee, i n that case that it was the surpl us funds avai l abl e wi th the assessee on acco unt of sal e of pr oduce of i ts mem bers whi ch was parked i n F DR's, the i nteres t i ncome earned from whi ch was hel d by the Hon'bl e Ape x Court to be not attri butabl e to the acti vi t y carri ed out by the assessee and hence not el i gi bl e for deduc ti on u/s 80P( 2) ( a ) ( i ) of the Act. Th e same i s evi dent from the fi ndi ngs of the Hon'bl e Ape x Co urt i n the 13 case of Totgars Cooperati ve Sal e Soci et y ( supra) whi ch i s as under:
"10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under s. 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 s. 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 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 under s. 28 of the Act? In our view, such interest income would come in the category of "income from other sources", hence, such interest income would be taxable under s. 56 of the Act, as rightly held by the AO. In this connection, we may analyze s. 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The head note to s. 80P indicates that the said section deals with deductions in respect of income of co- operative societies. Sec. 80P(1), inter alia, states that where the gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities in s. 80P(2) of the Act, would be eligible for deduction. The word "income"
has been defined under s. 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in s. 80P(2) of the Act. In the present case, as stated above, assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee- society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under s. 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as 14 "investment". Further, as stated above, assessee(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 bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-society, was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in s. 80P(2)(a)(i) of the Act or in s. 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the AO was right in taxing the interest income, indicated above, under s. 56 of the Act."
19. Thus we hol d that where the FDR'S i n banks are made from the operational funds of the cooperati ve soci et y whi l e carr yi ng out i ts acti vi t y of provi d i ng credi t to i ts members, the i nterest earned thereon bei ng i nci dental to carr yi ng out the sai d acti vi t y, i s attri butable to the sai d acti vi t y and hence enti tl ed to deducti on u/s 80P( 2) ( a) ( i ) of the Act.
20. Havi ng sai d so and reverti ng to the facts of the present case, we fi nd that the acti vi t y of the assessee i nvol ves provi di ng credi t faci l i ti es to i ts members, though the consi stent pl eadi ng of the Ld. counsel for assessee before the l o wer author i ti es and even b efore us, i s that the sai d i ncome has been earned by parki ng deposi ts col l ected from i ts members, i n FDRs to mai ntai n l i qui di t y so as to refund the deposi ts as and when demanded. Thi s acti vi t y of the assessee cl earl y does not qual i f y as provi di ng cred i t faci l i ti es to i ts members and i n fact tantamounts to onl y col lecti ng deposi ts from m embers. But at t he same ti me we note that nothi ng i s there on record to bri ng out the nature of acti vi t y carri ed out by the assessee. I t i s necessar y, therefore, to fi rst establ i sh the facts rel ati ng to the case whether the 15 assessee is i nvol ved in the acti vi t y of provi di ng credi t faci l i ti es to i ts members and the deposi ts made i n banks were i n the cour se of carr yi ng o ut these acti vi ti es and the sai d facts need to be e xami ne d and veri fi ed al so. We, therefore, consi der i t fi t to restore the i ssue back to the fi l e of the Assessi ng Offi cer for the l i mi ted purpose of e xami ni ng the acti vi ti es c arri ed out by the assessee s oci et y and whether the deposi ts made by i t i n banks were d one duri ng the course of carr yi ng out i ts stated acti vi ti es and thereafter deci de the i ssue i n accordance wi th l a w.
21. The ground of ap peal No.1 rai sed by the assessee i n al l the appeal s, t herefore, stands al l o wed for stati stical purposes.
22. In the ne xt ground of appeal , the Ld. couns el for assessee has agi tated agai nst the di smi ssal of i ts al ternati ve cl ai m made before the Ld.CI T( Appeal s) that the gross i nterest i ncome shoul d not be subjected to ta x but the net i nterest i ncome after deducti ng i nterest pai d rel a ti ng to the funds i nvested i n FDRs. The Ld. c ounsel for assessee i n thi s regard rel i ed u p o n t h e f ol l o w i ng ca s e l a w be f o r e us :
1. ITO, Ludhiana Vs The Ayali Kalan Co-op Agri. Multipurpose Society Ltd. ITAT-Chandigarh, ITA No. 414/CHD/2011.
23. The Ld. DR, on t he other hand, r el i ed upon the or der of the Ld.CI T( Appeal s) .
24. We have heard the contenti ons of both the parties. The sol e contenti on r ai sed before us i n thi s ground i s that i n the event no deduction i s al l o wed to the assessee of the i nterest 16 i ncome earned o n FDRs kept wi t h banks u/s 8 0 P( 2) ( A)( i ) of the Act, i t i s only the net i nterest i ncome whi ch shoul d be subjected to ta x after deducti ng the i nterest e xpenses i ncurred and not the gross i nterest i ncome earned as hel d by the authori ti es bel o w. We have al so gone through the order of the Ld.CI T( Appeal s) di smi ssi ng the contenti on of the assessee as under:
"Ground of appeal 3 is regarding an alternative plea taken by the appellant to the effect that Ld AO has erred in taxing the gross interest received from SBI. In the written submissions filed during appeal as reproduced in para 4.2 above, it has been submitted that out of the interest of Rs.7,42,295/-, interest of only Rs.48,415/- is taxable after excluding the interest paid by it. The calculation submitted by Ld AR in this regard is, however, not correct as the expenditure directly attributable to interest earned is to be seen with reference to the funds invested and not the income earned. As held by Hon'ble ITAT, Chandigarh, in the case of ITO Ward 111(4) Ludhiana Vs The Ayali Kalan Co-op Agri. Multipurpose Society Ltd reproduced above, only that much of the interest paid is to be excluded which has a direct nexus with the interest received. In this case, the appellant has already claimed the entire interest paid and other administrative and other costs in the P&L account. Hence, there are no further expenses remaining to be allowed against the FDR interest from nationalized banks. The appellant also has non cost-bearing funds from Membership fee and Reserves of Rs.26,88,413/- and Rs.32,08,024/- respectively. Apart from making general submission regarding the differential in the average rates at which interest has been received and paid, no details have been given of the interest paid which had a direct nexus with the interest received. In view of the totality of above facts, the alternative ground cannot be accepted and is rejected."
25. We fi nd no i nfi rmi t y i n the same. The fi ndi ngs o f the Ld.CI T( Appeal s) to the effect th at the assessee has been unabl e to establ i sh di rect ne xus bet ween the i nterest e xpenses i ncurr ed of the i nte rest i ncome ea rned has remai ned uncont roverted even bef ore us. The Ld. c ounsel for assessee has fai l ed to establ i sh any ne xus bet ween the i nterest e xpenses i ncurred by i t and i nterest i ncome earned 17 by i t on FDRs. Further there i s no denyi ng the fact that the assessee has al ready cl ai med the enti re i nterest pai d i n i ts Profi t & Loss Account and there remai ns nothing to be al l o wed agai nst the FDRs i nterest from nati onal i zed banks. Further the fi ndi ngs of the Ld.CI T( Appeal s) that it had suffi ci ent non i nterest beari ng funds al so i n the form of membershi p fees and reserves of Rs.26,88,413/- and Rs.32,08,024/- respecti vel y has al so not been co ntroverted by the Ld. counsel for assessee before us. I n the backdrop of the above facts, we fi nd no meri t i n the contenti on of the Ld. counsel for assessee that the i nterest e xpenses shoul d be set off agai nst the i nterest i ncome earned from FDRs before subjecti n g the same to ta x. In the a bsence of establ i shi ng any ne xus bet ween the t wo, no s et off of i nterest i ncome i s al l o wabl e a gai nst the i nter est income earned as ri g htl y hel d by the Ld.CI T( Appeal s) . Th e Ld.CI T( Appeal s) , we hol d, ha s ri ghtl y di sm i ssed this contenti on of the assessee, fol l o wi ng the deci si on of the I TAT Chandi garh Bench i n the case of A y a l i K a l a n C o - o p A g ri . M u l t i p u r po s e So c i e t y L t d . ( su p ra ) w h e re i n it has been c a t e g o r i ca l l y h e l d t h a t o n l y t h a t m u c h o f t h e i n t e r e s t p a i d i s t o b e e x c l ud e d w h i c h h a s a d i re c t n e x u s w i t h th e i n t e r e st earned. Th e l o gi c b e i n g t h a t t he i n t e r es t e ar n ed o n F DR s w o u l d b e t a xa b l e a s i n c o m e u n der t h e h e a d " o th er s o u r c e s "
u / s 5 6 o f t he A ct a n d t h e o nl y de d u c t i o n al l o w a bl e a g a i n s t s u c h i nc o m e s ar e t h o se w h i c h a r e l a i d o u t w h o l l y a n d e x c l u s i v el y f or th e p u r p o se o f e ar n i n g s u ch i n c om e , a s pe r t h e p r o vi s i o n s of s e c t i on 5 7 of t h e A c t w h i c h de a l s w i th 18 d e d u c t i o n w hi c h a r e a l l o w e d a g a i n s t i n c o m e s s u bje c t t o t a x u n d e r t h e he a d " i n c o m e fr o m o th e r s o u r c es " u /s 5 6 o f t h e Act.
26. I n v i e w of the above, we u ph o l d t h e o r d e r o f t he L d . CI T( A p p e a l s ) o n t h i s i s s u e tha t i t i s t h e gr o ss i n t e r e st e a r n e d w hi c h i s t o b e s u bj e c t e d to t a x , i f a n y .
G r o u n d o f a p p e al N o . 2 i s t h e r ef o re d i s m i s se d
27. I n t h e r e s ul t , a l l t h e a p p e a l s o f t h e a s s e s s e e a r e p a r t l y a l l o w e d f o r s ta t i s t i c a l p ur p o s e s.
O r d e r p r on o u n c ed i n t h e O p e n Cou r t .
Sd/- Sd/-
(DIVA SINGH) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 1 s t May, 2018
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh
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