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INTEREST RECEIVED AS OTHER SOURCES AND NOT AS BUSINESS

INCOME BY CO-OP SOCIETIES NOT ELIGIBLE FOR 80P
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI N.R.S. GANESAN, JM & CHANDRA POOJARI, AM
ITA No.11/Coch/2014
(Asst Year 2010-11)

Mutholy Service Co-Operative Bank
Ltd
Puliyannor PO
Kottayam Dist
686573
Vs The Income Tax Officer
Ward 4, Kottayam
( Appellant) (Respondent)

PAN No. AAAJM0328H
Assessee By Shri Mathew Joseph
Revenue By Sri K K John, Sr DR
Date of Hearing 23
rd
Sept 2014
Date of pronouncement 24
th
, Sept 2014

ORDER
PER CHANDRA POOJARI, AM:
This appeal by the assessee is directed against the order dated 21.10.2013
and relates to the AY 2010-11.
2 The only issue involved in this appeal is with regard to disallowance claim of
deduction u/s 80P(2)(a)(d) of the I T Act on the reason that the interest received
by the assessee was not a business income and it is income from other source.
2.1 The facts of the case are that the assessee is a service cooperative bank
registered under Travancore Cochin Cooperative Societies Act, 1951. The assessee
filed its return of income for the assessment year under consideration on 15.6.2010
returning a total income at nil after claiming deduction u/s 80P of the Act. The
assessment was originally completed us 143(1)(a) of the Act. Thereafter, the AO
taken up the assessment for scrutiny and notice us 143(2) has been issued on 29
th

Aug 2011. During the course of assessment, it was notice by the AO that the
interest received by the society in respect of deposits with Sub-Treasury, and SBI
has been proposed to be excluded from the deduction u/s 80P. The assessee was
asked to furnish the details of interest received on deposits with other
institutions. The assessee contended that as per sec. 80P, the income of
cooperative society engaged in carrying on the business of providing credit facilities
to its members shall be deducted from GTI for calculating income tax; since deposit
of excess money was part and parcel of the banking business, the interest there
from is eligible for the deduction u/s 80P as per the direction by the
Government. Accordingly, it was pleaded that the proposed disallowance was
unsustainable. However, the assessment has been completed and confirmed the
proposal to disallow interest from the deduction u/s 80P on the ground that the
same was not qualified for the deduction as per sec. 80P(2)(d) of the Act. On
appeal the CIT(A) confirmed the action of the AO. Aggrieved, the assessee filed the
appeal before us.
3 The ld AR of the assessee submitted that during the year under
consideration the assessee received interest on deposits with sub-treasury,
Meenachili, Kadappattoor and SBI Pala totaling Rs. 20,21,909/- which the AO has
assessed under income from other source denying the benefit u/s 80P(2)(a)(i) of the
Act. It was submitted that the AO made the addition by applying the decision of the
Hon‟ble Supreme Court in the case of Totgars Cooperative Sales Society reported in
322 ITR 283(SC) wherein the Hon‟ble Supreme Court has held that deposits of
surplus funds by the Cooperative Society is not eligible for deduction u/s 80P(2). It
was contended that the statement made by the AO was without properly
understanding the facts of the case. It was submitted that in the above referred
case, the assessee was selling goods on behalf of the members and withholding that
money without paying to the members by showing it as a liability in the balance
sheet. It was submitted that the assessee used this funds for short term investment
and earned interest. As the funds invested were not belonging to the assessee and
as the funds were not from the business of banking, the Supreme Court held that
the interest earned was taxable as income from other sources. According to the ld
AR, in the present case, the facts are different. It was contended that the assessee
has deposited its own funds including the deposits money with the schedule banks
and treasury in the normal course of carrying on the business of banking. In
support of his contention, the ld AR relied various case laws i.e. CIT vs
Muzaffarnagar District Cooperative Bank Ltd (214 Taxman 498(Alld) CIT vas Gulshan
Mercantile Urban Cooperative Bank td reported in 214 Taxman 510(Alld) and also
the decision in the case of CIT vas Himachal Gramin Bank etc. wherein the hon‟ble
high Courts have held that “any banking business providing credit facilities to its
members and investing sums deposited by members of society is part of banking
business and investment by banks including non reserves are part of banking
activities since no bank would like its reserve fund to remain idle and not earn any
interest.”.
3.1 On the other hand, the ld DR submitted that the assessee is a cooperative
society and the AO granted deduction u/s 80P of the Act. It was submitted that the
assessee society had invested the surplus funds by way of investment by an
ordinary investor. Therefore, interest on such investment has to be taxed under the
head „income from other sources. Regarding the reliance placed by the ld AR of the
assessee, in the case of Totgars Cooperative Sales Society, cited supra, the ld DR
submitted that the Supreme Court held that the assessee society regularly invested
funds not immediately required for business purpose. The interest on such
investments, therefore, could not fall within the meaning of the expression ‘profit
and gains of business. It was further submitted that such interest income cannot be
said also to be attributable to the activities of the society. It was also submitted by
the ld DR that the Supreme Court was of the view that such interest income would
come in the category of income from other sources and hence such interest income
would be taxed u/s 56 of the Act. It was further submitted by the ld DR that the
Supreme Court further held that the source of income was not relevant for deciding
the applicability of section 80P of the Act would not be correct because weight age
need to be given to the words ‘the whole of the amount of profits and gains of the
business’ attributable to one of the activities specified in section 80P(2)(a) of the
act. The words ‘the whole of the amount of profits and gains of business’ emphasize
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. The ld
DR submitted that the contention of the assessee that depositing money was part
and parcel of banking business and eligible for deduction u/s 80P(2)(a)(i) was not
found to be acceptable. The ld DR submitted that in the case of the assessee, the
interest received form deposits cannot be treated as income from business as the
assessee society had invested the surplus funds as an investment by any ordinary
investor. However, the interest income derived from investment made with other
cooperative societies are found to be eligible for deduction u/s 80P(2)(d) of the
Act. Accordingly, the ld DR submitted that the lower authorizes are right in
disallowing the claim of the assessee.
4 We have considered the rival submissions and perused the relevant material
on record. We find no merit in the arguments of the assessee‟s Counsel and the
interest earned on fixed deposits with the Co-operative Bank, cannot be considered
as business income. It is to be considered as income from other sources as held by
the Hon‟ble Supreme Court in the case of Totgar‟s Co-operative Sale Society Ltd. vs.
ITO (2010) (322 ITR 283) wherein it was held that the assessee being Co-operative
Society is engaged in providing credit facilities to its members or marketing
agricultural produce of its members, interest earned by it by investing surplus funds
in short term deposits would fall under the head “income from other sources”
taxable u/s. 56 of the I.T. Act and it cannot be said to be attributable to the
activities of the Society and therefore, the interest did not qualify for deduction u/s.
80P(2)(a)(i) of the I.T. Act.
5. In the present case, we find that the assessee has earned interest income
on fixed deposits made by the assessee with sub-treasury, Meenachili, Kadappattoor
and SBI Pala totaling Rs. 20,21,909/- and the interest income earned on the surplus
funds of the assessee cannot be considered as business income so as to be entitled
for deduction u/s. 80p(2)(a)(i) of the I.T. Act. Further, we came across the decision
of the coordinate Bench of this Tribunal in the case of Aryad Block Small Scale Coir
Fibre Mats Manufacturers Co-operative Society Ltd., in I.T.A. No.787/Coch/2013
vide order dated 14.8.2014 wherein it has been held that interest income on fixed
deposits made by the assessee in a Co-operative Bank and the interest income
earned on the surplus funds of the assessee cannot be considered as business
income so as to be entitled for deduction u/s. 80P(2)(a)(i) of the I.T.
Act. Accordingly, the ground raised by the assessee is dismissed.
6. In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open Court on this 24
th
, day of Sept 2014.
Sd/- Sd/-
(N.R.S. GANESAN) (CHANDRA POOJARI)
Judicial Member Accountant Member
Cochin: Dated 24
th
, Sept 2014

Copy to:
1. Appellant –
2. Respondent –
3. CIT(A)
4. CIT,
5. DR
6. Guard File
By order
Assistant Registrar
ITAT, COCHIN