Income Tax Appellate Tribunal - Ahmedabad
M/S. Jalaram Mercantile Co. Op. Credit ... vs The Income Tax Officer, Ward-1,, Anand on 3 October, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC" BENCH, AHMEDABAD
BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER &
Ms. MADHUMITA ROY, JUDICIAL MEMBER
I.T.A. No.428/Ahd/2017
(Assessment Year : 2013-14)
M/s.Jalaram Mercantile Co- Vs. The Income Tax Officer
op.Credit Society Ltd. Ward-1,
C/o. Shah Teelani & Associates Anand
E-315, Sumerl Business Park-3
Opp.New Cloth Market
Sarangpur, Ahmedabad
[PAN No. AADFJ 4783 A]
(Appellant) .. (Respondent)
Appellant by : None
Respondent by : Shri Omprakash Pathak, Sr.DR
Date of Hearing 10/07/2018
Date of P ronouncement 03/ 10 /2018
ORDER
PER Ms. MADHUMITA ROY - JM:
The instant appeal has been filed by the Assessee before us against the order dated 30.09.2016 passed by the Commissioner of Income Tax(Appeals)-4, Vadodara [Ld.CIT(A) in short] arising out of the order dated 30.11.2015 passed by the ITO, Ward-1, Anand for Assessment Year (AY) 2013-14.
2. The assessee has come up before us with the following grounds:
1. That, the learned CIT(A) has wrongly confirmed the addition of Rs.14,62,750 as interest income instead of Rs.9,64,984. [Rs.10,16,984 Less Rs.50,000 Deduction u/s.80P(2)(c)(ii)].
2. That, the learned CIT(A) has wrongly confirmed the addition u/s.80P(2)(a)(i) on account of interest from nationalized bank.-2- ITA No. 428/Ahd/2017
Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO Asst.Year - 2013-14
3. The assessee is a registered co-operative society engaged in a business of extending credit facilities to its members. The assessee claimed deduction u/s.80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") of Rs.15,12,750/- which was processed u/s.143(1) of the Act. Subsequently, upon scrutiny, notice u/s.143(2) of the Act was issued on 094.09.2014 which was served upon the assessee followed by another notice u/s.142(1) dated 29.05.2015 and 09.10.2015.
3.1. The Ld. Assessing Officer disallowed the claim of the assessee. However, deduction at Rs.50,000/- u/s.80P(2)(c)(ii) of the Act was allowed. Appeal preferred by the assessee against the said order was dismissed. Hence, the instant appeal.
3.2. At the time of hearing of the instant appeal, no one appears on behalf of the assessee. The Ld.DR also agrees to get the matter disposed of by us since the matter is duly covered against the assessee i.e. in favour of the Revenue.
3.3. During the assessment proceeding, the Ld. Assessing Officer worked out the income of the assessee as follows:
Interest from other banks - Rs.18,36,400/-
Draft/cheque charge income - Rs. 28,085/-
Total = Rs.18,64,485/-
===========
3.4. The Ld. Assessing Officer proposed to disallow the deduction claimed by the assessee u/s.80P(2)(a)(i) of the Act since the income is not derived on carrying on the business of banking or providing credit facilities to its members and asked for reply from -3- ITA No. 428/Ahd/2017 Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO Asst.Year - 2013-14 the assessee in response whereof, the assessee made a submission dated 23.11.2015 which is as follows:
"With reference to your show cause notice for not allowing deduction u/s.80P of the Act to the extent of interest on fixed deposits of Nationalized Bank, we herewith submit following details and explanation.
Jalaram Mercantile Co-Operative Credit Society is a registered Co-Operative Credit Society engaged in the business of extending credit facilities to members.
We are not carrying on any separate business of earning interest on Fixed Deposits of Nationalized Bank.
The fund or capital which is not required immediately to be lent to the members are deposited to Nationalized Bank as fixed deposit and interest income is received on those fixed deposits.
The society cannot keep the funds idle every time and therefore making fixed deposits at Nationalized Bank is inevitable.
The interest income on Fixed Deposits at Nationalized Banks is the income attributable to business of extending credit facilities to members and cannot be treated as separate business of Co-Operative Credit Society.
Karnataka High Court in case of Guttigedarara Credit Co-Operative Society Ltd. v/s. Income Tax Officer (2015 377 ITR Karnataka) has also upheld that interest on deposits of banks is an income attributable to the extension of credit facilities to members and therefore entitled to deduction u/s.80P of the Act.
Copy of the said judgment is attached herewith for your ready reference.
In addition to that, in case of Chief CIT v/s. Sabarkantha Kharid Vechan Mandali Ltd. (1977 107 ITR 447 GUJ), Gujarat high Court has upheld that al interest income on Fixed Deposits cannot be disallowed for 80P deduction and proportionate interest on Fixed Deposits is to be calculated."
3.5. The Ld. Assessing Officer ultimately while disallowing the claim of the assessee observed as follows:
-4- ITA No. 428/Ahd/2017Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO Asst.Year - 2013-14 "I have considered the legal submission of the assessee, the same is not tenable. The interest earned from its members by the co-operative society is exempt u/s.80P(2)(a)(i) of the Income-tax Act, 1961. In the present case, the assessee has received interest on fixed deposits with other banks. Apart from the above, the assessee has also received draft cheque charges income. These incomes are not eligible for deduction u/s.80P(2)(a)(i). The interest earned from fix deposit etc which is in question is not eligible for deduction under section 80P(2)(a)(i) of the Act is not the members for proving credit facility to them, What is 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, Since the fund created by such retention was not required immediately for business purpose, the assessee in specified securities. Interest on such deposits/securities, which strictly speaking accrues to the members account, could not be taxed as business Income under section 28 of the Act. Such interest income would be. taxable under section 56 of the Act.
Further, these incomes, the assessee has debited all the expenditures and net profit was shown at Rs,9,43,641. As such no further expenditure required to be given for earning these incomes.
3.4 The assessee has relied upon various decisions. The same is also not applicable to the facts of the present case.
3.5. Further, the decision of the Hon, Supreme Court in the case of The Totgars' Cooperative Sale Society Ltd, [Supra] is squarely applicable to the present case. In the instant case, the interest received from other banks is not the interest received from the members for providing credit facilities to them. What is sought to be taxed u/s.56 of the Act is the interest income arising on the surplus invested in deposits with banks or in other securities which surplus was not required for business purposes. Therefore, such income comes in the category of "Income from other sources", Hence, such interest income would be taxable u/s.56 of the Income-tax Act, 1961, Section 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 section 80P(2) of the Act, would be eligible for deduction, The word "income" has been defined u/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". The assessee Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, viz., carrying on the business of providing credit facilities to its members, Therefore, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Income-tax Act,, 1961 or in section 80P(2)(iii) of the Act and hence, the interest income earned on deposits with banks is taxable u/s,56 of the Income-tax Act, 1961.
3.6 In view of above, the deduction claimed by the assessee u/s.80P(20(a)(i) of the Income-
tax Act, 1961 is disallowed, However, the assessee is allowed deduction at Rs,50,000 -5- ITA No. 428/Ahd/2017 Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO Asst.Year - 2013-14 u/s,80P(2)(c)(ii) of the Income-tax Act, 1961, Penalty proceedings u/s.27l(1)(c) of the Income- tax Act, 1961 are separately initiated."
3.6. In appeal, the Ld. CIT(A) observed as follows:
"Thus, in view of this decision of Gujarat High Court, the interest earned by the appellant on investment of surplus amounts with banks and bonds is not eligible for deduction u/s.80P of the Act, in case where the co-operative society is a bank, one of its objects would be to carry on the general business of banking. Like other banks, money would be its stock-in-trade or circulating capital and its normal business is to deal in money and credit. The business of such a bank does not consist only of receiving deposits and lending money to its members or such other societies as are mentioned in the objects. When such a society lends out its monies so that they may be readily available to meet the demands of its depositors if and when they arise, it is a legitimate mode of carrying on its banking business. In case of a credit society like the present one, the business of the society is limited to providing credit to its members and the income that is earned from providing such credit facilities to its members is deductible under section 80P(2)(a)(i), However, investing its surplus funds with the nationalized banks is no part of the business of the appellant of providing credit to its members and hence, it cannot be said that the interest income derived from depositing surplus funds with the nationalized banks is profits and gains of business attributable to the activities of the appellant society. The character of the interest is different from the income attributable to the business of the society of providing credit facilities to its members. The interest income derived from investing surplus funds with the nationalized banks must be closely linked with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. Therefore, the profits and gains can be said to be directly attributable to the business of providing credit facilities to its members if there is a direct and proximate connection between the profits gains and the business of the appellant. In the present case there is no obligation upon the appellant to invest its surplus funds with the nationalized banks. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) and the interest derived by depositing surplus funds with the nationalized banks not being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a)(i). If the appellant wants to avail of the benefit of deduction of such interest income,, it is always open for it to deposit the surplus funds with a cooperative bank/other co-op societies and avail of deduction under section 80P(2)(d). Accordingly, the action of the Assessing Officer of not allowing deduction on such income is upheld and the sole ground of appeal is dismissed."
3.7. Further, the assessee challenged the confirmation of addition u/s.80P(2)(a)(i) of the Act on account of interest income from nationalized bank.
-6- ITA No. 428/Ahd/2017Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO Asst.Year - 2013-14
4. We have heard the Ld.DR. We have perused the relevant materials available on record. It is a settled principle of law that the assessee is not entitled to deduction of the interest income accrued from the fixed deposit lying with the nationalized bank out of his surplus fund. Such was not required for business purposes. The said ratio has been upheld by the Jurisdictional High Court in the case of State Bank of India vs. CIT (2016) 389 ITR 578 (Guj.) with the following observation:
"13. In the opinion of this court, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned under section 80P(2)(a) of the Act. In the case of Totgars Co-operative Sale Society (supra), as rightly submitted by the learned counsel for the respondent, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. This is further clear when one peruses the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. This court is, therefore, of the view that the above decision is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression "profits and gains of business" and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as "investment" are ineligible for deduction under section 80P(2)(a)(i) of the Act. For the above reasons, this court respectfully does not agree with the view taken by the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law.
14. Thus, in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in -7- ITA No. 428/Ahd/2017 Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO Asst.Year - 2013-14 section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act."
4.1 The ratio had been squarely followed by the CIT(A) which we do not want to interfere with. However, the assessee disputed the quantum of addition of Rs.14,62,750/- as interest income instead of Rs.9,64,984/-.
5. Since the assessee in appeal before us disputed the quantum of addition, we find it fit to send the matter back to the file of Ld. Assessing Officer to re-compute the disallowance of the interest income on the fixed deposit of the assessee lying with the nationalized bank. However, we further direct the Ld. Assessing Officer to exclude and/or deduct the amount of interest expenditure incurred by the assessee on such deposits with the nationalized bank. While doing so, we make it clear that the assessee be given an opportunity of being heard by the Ld. Assessing Officer and also to be allowed to rely upon the evidences in support of his case to be considered by the Ld. Assessing Officer.
6. In the result, the appeal of the assessee is partly allowed for statistical purposes.
This Order pronounced in Open Court on 03 / 10 /2018
Sd/- Sd/-
( WASEEM AHMED ) ( Ms. MADHUMITA ROY )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 03/ 10 /2018
ट .सी.नायर, व. न.स./T.C. NAIR, Sr. PS
-8-
ITA No. 428/Ahd/2017
Jalaram Mercantile Co-op.Credit Society Ltd. vs. ITO
Asst.Year - 2013-14
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं धत आयकर आयु त / Concerned CIT
4. आयकर आयु त(अपील) / The CIT(A)-4, Vadoara
5. !वभागीय त न ध, आयकर अपील य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड) फाईल / Guard file.
आदे शानुसार/ BY ORDER, स या!पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation .. 3.10.2018 (dictation-pad 10- pages attached at the end of this appeal-file)
2. Date on which the typed draft is placed before the Dictating Member ... 3.10.2018
3. Other Member...
4. Date on which the approved draft comes to the Sr.P.S./P.S.................
5. Date on which the fair order is placed before the Dictating Member for pronouncement......
6. Date on which the fair order comes back to the Sr.P.S./P.S.......9.10.2018
7. Date on which the file goes to the Bench Clerk.....................
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................