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June 13, 2023

Deduction under Section 80P(2)(a)(i) for Interest Earned on Investments Made Out of Reserve Fund

Deduction under Section 80P(2)(a)(i) for Interest Earned on Investments Made Out of Reserve Fund

Fact and issue of the case

This appeal is filed by the Assessee against order dated 28.07.2020 passed by the CIT(A), Gandhinagar for the Assessment Year 2017-18.

The Assessee has raised the following grounds of appeal :-

On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming disallowance of Rs.23,54, 135/- being deduction claimed by the appellant under section 80P of the I. T. Act, 1961 without considering the fact that the appellant is a credit cooperative society and cannot be denied of the benefits of deduction under Section 80P of the I. T. Act, 1961.

On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not allowing the claim of proportionate expenditure on the ground that the appellant has not established that any expenditure incurred by it has any proximate connection with earning of interest income or expended even though claim of appellant was supported by decision of Hon’ble Ahmedabad ITAT allowing similar claim of expenditure under Section 57(iii) of the I. T. Act, 1961

The assessee is a Co-operative Credit Society and engaged in the business of providing credit facility to its members. The revised return of income was filed on 02.2019 declaring total income of Rs.nil after claiming deduction under Chapter VI A of the Income Tax Act, 1961. The case was selected through CASS for reasons deduction under Chapter VI A and investments/advance/loan and accordingly notice under Section 143(2) of the Act was issued on 27.09.2019. In response to the said notices the assessee filed reply. The Assessing Officer observed that the assessee has shown interest amounting to Rs.1,68,30,114/- and claimed as deduction under Section 80P of the Act. The assessee has deducted all the interest income derived from various bank including Nationalised Banks and, therefore, show cause notice was issued to the assessee. The assessee has received interest income of Nationalised Bank at Rs.23,54,135/- (Rs.17,00,651/- from State Bank of Bikaner & Jaipur and Rs.6,53,484/- from State Bank of India). The Assessing Officer disallowed Rs.23,54,135.-. The Assessing Officer further made addition of Rs.115/- being interest earned from deposits from Mehsana District Central Co-op. Bank. The Assessing Officer also made addition of Rs.13,204/- in respect of Provident Fund SB account of staff and interest income earned from Mehsana District Central Co-op. Bank. The Assessing Officer also made addition of Rs.1 ,70,222/- in respect of interest certificate from Mehsana District Central Co-op. Bank pertaining to PF FDR of staff.

Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.

As regards ground no.1, the Ld. AR submitted that the CIT(A) as well as the Assessing Officer erred in making disallowance of Rs.23,54,135/- being deduction claimed by the assessee under Section 80P of the Act without considering the fact that the assessee is a Credit Co-operative Society and cannot be denied of the benefit of deduction under Section 80P of the IT Act. The Ld. AR further submitted that the assessee Credit Society has derived interest on the reserve fund and the same should have been allowed in the light of the decision of Hon’ble Supreme Court in the case of CIT vs. Karnataka State Co-operative Apex Bank [(2001) SUPP(2) SCR 35; (Appeal (Civil) No.4646-4648 of 2000, date of judgement 22.08.2001, passed by three Judges Bench]. The Ld. AR further submitted that Section 80P of the Act will also include interest arising from investments made in compliance with statutory provisions to carry on the banking business. The Ld. AR also relied upon Section 71 & 67 of Gujarat Co-operative Societies Act.

The Ld. DR submitted that whether this amount upon which the interest is derived from State Bank of India and State Bank of Bikaner & Jaipur relates to reserve fund or not has not been pointed out before any of the Revenue Authorities by the assessee. Therefore, the Assessing Officer has rightly made the addition.

Observation of the court

Heard both the parties and perused all the relevant material available on As per the Gujarat Co-operative Societies Act, 1961 more particularly that of Section 71, a society may invest or deposit its funds in the State Bank of India in consonance with the provisions of reserve fund as provided in Section 67 of the said Act. The decision quoted by the Ld. AR of Hon’ble Supreme Court in case of Karnataka State Co-operative Apex Bank (supra) the fixed deposit or rather government securities coming out of reserve fund which cannot be easily encashed and which could be utilised only when the contingencies mentioned arose, was taken into account while citing question of law i.e. wherein case of assessee being co­operative society, any income recorded in sub-section 2 there shall be in accordance with and sub-section to the provisions of Section i.e. Section 80P, the same is specified in sub-section 2 in computing the total income of the assessee, therefore, whether the Tribunal was right in law in holding that the interest income arising from the investments made out of reserve fund is exempt under Section 80P(2)(a)(i) of the Act. The component of reserve fund has not been verified by the Assessing Officer as well as by the CIT(A). Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer to verify the same and if the same is coming under the threshold of Section 67 of the Gujarat Co-operative Societies Act, 1961 related to reserve fund and the interest derived from State bank of India and State Bank of Bikaner & Jaipur, then in the light of decision of Hon’ble Apex court, the Assessing Officer to adjudicate the same in accordance with law. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. Thus, ground no.1 is partly allowed for statistical purpose.

As regards ground no.2 related to claim of proportionate expenditure, the Ld. AR submitted that the same should have been allowed as the assessee has established that the expenditure recorded by it has proximate connection with earning of interest income and thus the claim of expenditure under Section 57(iii) of the Act should have been allowed in the light of decision of Hon’ble Karnataka High Court in the case of Totagars Co-operative Sale Society Limited vs. ITO (2015) 58 com 35.

The Ld. DR relied upon the Assessment Order and the order of the CIT(A).

Heard both the parties and perused all the relevant material available on It is not disputed that the assessee derived interest income and the assessee must have incurred expenditure for earning the same interest income. The proximity of earning the interest income is rightly claimed in respect of expenditure spent on earning that interest income. The decision of Hon’ble Karnataka high Court in the case of Totagars Co-operative Sale Society Limited (supra) as well as the decision of ITAT Ahmedabad Bench in the case of ITO vs. Upkar Retail Pvt. Ltd. is also applicable and the most favoured view should be taken into account as per the decision of the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Limited (1973) CTR 177 (SC). Therefore, ground no.2 is allowed.

In the result, appeal filed by the assessee is partly allowed for statistical purpose.

Order pronounced in the open Court on this 10th day of May, 2023.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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