Income Tax Appellate Tribunal - Ahmedabad
Shri Kherava Co.Op. Credit Society ... vs Assessee on 11 February, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD ''C" BENCH - AHMEDABAD
Before S/Shri Rajpal Yadav, JM, & Manish Borad, AM.
ITA No.2704/Ahd/2015
Asst. Year: 2012-13
Kherava Co. Op. Credit Society Ltd., Vs. ITO, Ward-4, Mehsana
At Kherva,
Tal. & Post -Mehsana
Appellant Respondent
PAN AAAAS5684B
Appellant by Shri H. V. Doshi, AR
Respondent by Mr. Lala Philips, Sr.DR
Date of hearing: 19/11/2015
Date of pronouncement: 11/02/2016
ORDER
PER Manish Borad, Accountant Member.
This appeal of assessee is directed against the order of CIT(A), Gandhinagar, Ahmedabad, dated 17.8.2015 in appeal No.CIT(A)/GNR/218/2014-15. Assessment for Asst. Year 2012-13 was framed u/s 143(3) of the Income-tax Act, 1961 (in short the Act) on 30/10/2014 by the ITO, Ward-4, Mehsana. Grounds of appeal raised by the assessee are as under :-
1. The ld. CIT(A) had erred in law and facts in confirming addition made by AO by way of disallowing claim of deduction u/s 80P(2)(i) of IT Act to the extent of Rs.2,18,305/- in respect of interest income by treating interest income received on FD of Nationalised Banks as income from other sources u/s 56 if IT ITA No. 2704/Ahd/2015 2 Asst. Year 2012-13 Act by wrongly applying ratio laid down by Supreme Court in the case of Totagars Co-op. Sale Society Ltd. vs. ITO but not following the decision of Ahmedabad ITAT in favour of Jafari Momin Vikas Co-op. Credit Society Ltd. on similar facts in ITA No.1491/Ahd/2012 d.4.9.12 which had distinguished the facts from Totagars case.
2. Ld. CIT(A) had further erred in enhancing addition of Rs.3,30,212/- i.e. from Rs.2,18,305/- as made by A.O. to 5,48,517/- by way of treating Gross interest income of Rs.5,48,517/- as income from other sources instead of Rs.2,18,305/- as worked out by AO by calculating income on prorate basis after considering interest and other expenses on proportionate basis.
3. The appellant crave leave to add, amend, alter or delete any of above grounds of appeal.
2. Briefly stated facts are that the assessee is a Co-op. Credit Society. It e-filed its return of income on 11.9.2012 declaring total income of Rs.NIL. The case was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued and duly served upon the assessee . During the course of assessment proceedings it was observed that assessee received interest income from Bank deposits a/c as well as Govt. securities and on the basis of submissions made by the assessee Assessing Officer framed assessment order by taxing the interest/commission income of Rs.5,48,517.00 which was not received from members as income u/s 56 of the Act under the head income from other sources and also allowed proportionate expenditure under section 57 of the Act of Rs.3,31,828.00 (as confirmed by assessee) and also added interest of IT refund at ITA No. 2704/Ahd/2015 3 Asst. Year 2012-13 Rs.1,616/- and assessed total income of the assessee at Rs.2,18,310/-.
3. Aggrieved, assessee went in appeal before the CIT(A) who dismissed the appeal of the assessee by observing as under :-
"6. I have considered the facts of the case, assessment order, submission made by the appellant and the case laws relied upon, Appellant has earned interest of Rs.5,48,517/- from deposits made in nationalized banks and this income has been taxed by the AO u/s 56 of the Act Appellant has challenged this action of the AO relying on the decision of the Hon'ble Gujarat High Court in Tax Appeal N0.442, 443 & 863 of 2013 dated 15/1/2014 in the case of Jafari MominVikas Co-op. Credit Society Ltd.
The issue has been 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 the aforementioned judgement, the issue for determination was whether interest income on the short term bank deposits and securities would be qualified as business income u/s.80P(2)(a)(i) of the 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, 80P(2)(a)(i) of the Income tax Act is not the interest received from the members for providing the credit facilities to them. What is sought to be taxed u/s. 36 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 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 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 section 28 of the Act.ITA No. 2704/Ahd/2015 4
Asst. Year 2012-13 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 respect 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 purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income fails in the category of 'Other Income' which has been rightly taxed by the Department under section 56 of the I. T. Act "
It is to be noted that the Hon'ble Jurisdictional Tribunal in the case relied upon by the appellant (Jafari Momin Vikas Co-op. Credit Society Ltd) for AY 2009-10 has decided the above issue in favour of appellant with the following findings:
"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 (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 C3T(A) was not justified in coming to a conclusion that the sum of Rs,9,4Q,639/- was to be taxed u/s 56 of the Act. It is ordered accordingly."
The above finding of the Hon'ble Tribunal is distinguishable to the that on the same issue the Hon'ble High Court of Gujarat while deciding the appeal of the appellant on same is silent on the issue of taxability of interest income u/s 56 of the Act.
Considering the above facts, the ratio of the decision of Hon'ble Supreme Court is in favour of department. The issue before the Hon'ble Supreme Court in the case of Totgars Co-op. SaJe Society Ltd Vs ITO, Karnataka was whether interest income on the bank deposits and securities would qualify as business income u/s. 80P(2)(a)(i) of the 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. 80P(2)(a)(i) of the Income tax Act is not the interest received from the members for providing the credit facilities to them. What is sought to be taxed u/s. 36 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 purpose, Assesses 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 section 28 of the Act.ITA No. 2704/Ahd/2015 5
Asst. Year 2012-13 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 respect 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 purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of 'Other Income' which has been rightly taxed by the Department under section 56 of the I. T. Act"
From the above, I find that the Hon'ble Supreme Court is very clear in the above land mark judgment in the case of co- operative" societies as to whether the surplus funds of members which was invested in specified securities and deposits in the nationalized banks was required to be taxed u/s 28 of the Act. The Hon'ble High Court of Gujarat is silent in its order dated 15/01/2014 in the case of Jafari Momin (supra) on the decision of Hon'ble ITAT, as regards the taxability of interest income u/s 56 of the Act. Taking into consideration, the ratio of the Hon'ble Supreme Court in the case of Totgars (supra), the decision of Hon'ble jurisdictionai Tribunal in the case of JafarlIMomin (supra) in ITA No.l491/Ahd/2012 dtd 4/9/2012 is distinguishable. This clearly indicates that appellant has received the interest income from nationalized banks which definitely falls under the purview of section 56 in view of Hon'ble Supreme Court decision of Totgars (supra), The AO has calculated the taxable interest income u/s 56 on pro-rata basis. Considering the facts and following the ratio laid down by the Hon'ble Supreme Court in the case of Totgars (supra). This issue is discussed with the AR of the appellant and the entire interest income received by the appellant from nationalized bank of Rs.5,48,517/- is required to be taxed. Therefore, I am of the firm view that the total interest income earned of Rs.5,48,517/-from nationalized banks is required to be taxed u/s 56 of the Act. The action of the AO in taxing the above interest income-earned from nationalized bank is rightly taxed by the AO u/s 56 of the Act and is hereby confirmed.
ITA No. 2704/Ahd/2015 6Asst. Year 2012-13
4. Aggrieved, assessee is now in appeal before us.
5. Ld. AR submitted that additions made by the Assessing Officer of Rs.2,16,689/- in respect of proportionate income other than from investments in co-op. bank and further addition enhanced by ld. CIT(A) to Rs.5,48,517/- by taxing entire interest income without considering deduction u/s 57 of the Act is not in accordance with law and also following the decision of co-ordinate bench in the case of Dhanalaxmi Credit Co-op. Society Ltd. vs. ITO in ITA No.2342/Ahd/2012 dtd. 8.2.13, wherein the Tribunal has relied on the decision of co-ordinate bench in the case of ITO vs. M/s Jafari Momin Vikas Co-op. Credit Society Ltd. in ITA No.1491/Ahd/2012 for Asst. Year 2009-10 dated 31.10.2012 and held as under: -
4. With this brief background, we have heard both the sides. It was explained that the Co-operative Society is maintaining "operations funds" and to meet any eventuality towards re-payment of deposit, the Co-operative Society is maintaining some liquidated funds as a short term deposit with the banks. This issue was thoroughly discussed by the ITAT "B" Bench Ahmedabad in the case of The Income Tax Officer vs. M/s.Jafari Momin Vikas Co-op.Credit Society Ltd.
bearing ITA No.1491/Ahd/2012 (for A.Y. 2009-10) and CO No.138/Ahd/2012 (by Assessee) order dated 31/10/2012. The relevant portion is reproduced below:-
"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 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 ITA No. 2704/Ahd/2015 7 Asst. Year 2012-13 '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;ITA No. 2704/Ahd/2015 8
Asst. Year 2012-13
- 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;
(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. 9supra) 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."
5. Respectfully following the above decision of the Co-ordinate Bench, we hereby hold that the benefit of deduction u/s.80P(2)(a)(i) was rightly granted by ld.CIT(A), however, he has wrongly held that the interest income is taxable u/s.56 of the Act so do not fall under the category of exempted income u/s.80P of the Act. The adverse portion of the view, which is against the assessee, of ld.CIT(A) is hereby reversed ITA No.2342/Ahd/2012 Dhanlaxmi Credit Co- operative Society Ltd. vs. ITO Asst.Year - 2008-09 following the decision of the Tribunal cited supra, resultantly ground is allowed.
6. In the result, Assessee's appeal is allowed.
6. Ld. DR on the other hand relied on the orders of lower authorities.
ITA No. 2704/Ahd/2015 9Asst. Year 2012-13
7. We have heard the rival contentions and perused the material on record and also gone through the judicial pronouncements relied upon by the assessee. Two issues are emanating out of this appeal. Firstly against the addition of Rs.2,18,305/- made by Assessing Officer by disallowing the claim of deduction u/s 80P(2)(i) of the Act in respect of gross interest income treating interest received from banks and govt. securities as income from other sources u/s 56 of the Act and secondly against the enhancement made by ld. CIT(A) by not allowing the claim of incidental expenses at Rs.3,30,212/- incurred for earning interest income.
8. From going through the records we find that assessee is a credit co-op. society. Ld. CIT(A) has relied on the ratio laid down in the decision of Hon. Supreme Court in the case of Totagars Co-op. Sale Society Ltd. vs. ITO 188 taxman 0282. From perusal of this decision it reveals that in the case of Totagars Co-op. Sale Society Ltd. vs. ITO (supra) the assessee was marketing agricultural produce of its members whose sale proceeds at times were retained by the society and those retained funds which were not required for business purposes were invested in specified securities and the income earned on such funds which were not required for business purposes and were retained on behalf of the members fetched interest income and the same was decided by the Hon. Supreme Court to be taxed as income from other sources under section 56 of the Act whereas in the case of present assessee which is a credit co- op. society and has not received any proceedings on behalf of the ITA No. 2704/Ahd/2015 10 Asst. Year 2012-13 members but has invested the funds which remained idle in the process of taking and giving loans to the members and for optimum returns for society has earned interest income and for these reasons the facts of the case which we are dealing in this appeal are different than the case decided by Hon. Supreme Court.
On the other hand assessee has relied on the views taken by the co-ordinate bench in the case of Jafari Momin Vikas Co-op. Credit Society Ltd. (supra) wherein the coordinate bench has made a finding that the assessee which is not a co-operative bank but its nature of activity is of accepting deposits from the members and lending to its members and to meet eventuality which was required to maintain the liquidity funds and these liquidity funds used to be invested in short term deposits and interest income earned on such short term deposits were held to be income from activities of co-op. society and not to be taxed u/s 56 of the Act.
9. From going through the assessment order, we find that assessee has earned income from interest and commission at Rs.5,48,517.00 from following :-
S.S.N.Ltd. Interest 3,98,082/- U.G.V.C.L. Interest 41,836/- SBI interest 1,08,312/- UGVCL Commission 3,287/- Total 5,48,517/-
Certainly from the above details, we find that the major portion of income is earned from Govt. securities which too are not of short term ITA No. 2704/Ahd/2015 11 Asst. Year 2012-13 nature. Further during the course of assessment proceedings assessee himself has given an alternate option to the Assessing authority to treat the income from interest and commission at Rs.5,48,517/- as income from other sources and the same is reproduced below :-
3. Alternatively if your office does not agree with the decision of Jafari Momin Co-op Credit Society Ltd. and decide to follow Apex court decision of Totagaer co-op, sale society Ltd, we reiterate that the decision is regarding disallowance for deduction u/s.BQP only. Proposal of your office to consider gross receipts of interest income on investment as taxable income is incorrect income on investment is considered as income from other sources, deduction u/s.57 is available in respect of expenses incurred to earn investment income. A\\s there is no direct nexus of expense attributable to earn investment income, proportionate expenses incurred to earn interest income on investment should be allowed. The working is as under.-
Sr.No particular Amount
1 Gross Receipt as per P&L a/c. 10307727.00
2 Gnoss.income as per Computation of income 4072007.00
3 Expense claimed from gross receipts (1-2) 6235720.00
4 Interest on investments, Commission .
income considered not eligible for deduction ii/s.8QP. 548517.00
5 Proportionate expenses available as deduction* u/s.57
of the l. T. Act. ...
548517*(6235720/1 0307727)* " ; 331828.00-
6. Income from other sources (4-5) 216689.00
Out of above income, deduction u/s 80P(2)© of Rs.50000/- is available and so net taxable income will be of Rs. 156689/- only. If the interest income, on investment is assumed as income from other sources addition in returned income will be Rs.156689/-.;
We reiterate that above working is given only with reference to your proposal to disallow interest & commission income by applying S.C. decision in case of The Totagar Co-op. Sales Society Ltd. which we are not accepting in our case as the facts are different.
This alternate submissions made by the assessee during the assessment proceedings was duly accepted by the Assessing Officer however he did not allow deduction u/s 80P(2)(c) of the Act for Rs.50,000/-.
ITA No. 2704/Ahd/2015 12Asst. Year 2012-13
10. From going through the alternate submissions made 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-ordinate bench in the case of Jafari Momin Vikas Co-op. Credit Society Ltd. (supra) as well as in the case of Dhanalaxmi Credit Co-op. Society Ltd. vs. ITO (supra). This interest income is on investments not of short term nature except bank interest 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 incurred to earn the above income and the same has duly been accepted by the assessing authority, so we find it justified that Assessing Officer has rightly taxed the interest income of Rs.2,16,689/- as income from other sources. However, deduction u/s 80P(2)(c) ought to have been allowed to the assessee as section 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 independently 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' co- operative society, one hundred thousand rupees; and
(ii) in any other case, fifty thousand rupees.
Explanation.- In this clause," consumers" co- operative society" means a society for the benefit of the consumers;] ITA No. 2704/Ahd/2015 13 Asst. Year 2012-13 From going through the above provisions it is very clear that the assessee is eligible for deduction of Rs.50,000/- under section 57 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/- deduction u/s 80P(2)(c)].
12. In the result, appeal is partly allowed.
Order pronounced in the open Court on 11th February, 2016 Sd/- sd/-
(Rajpal Yadav) (Manish Borad)
Judicial Member Accountant Member
Dated 11/02/2016
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. 2704/Ahd/2015 14
Asst. Year 2012-13
1. Date of dictation: 10/02/2016
2. Date on which the typed draft is placed before the Dictating Member: 10/02/2016 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 the Dictating Member for pronouncement: __________
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk: 11/2/16
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: