By TIOL News Service

BANGALORE, JULY 13, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether a co-operative society is eligible for claiming deduction u/s 80P(2)(a)(i) on the interest earned on the FDs placed with banks, this being a part of its business income. YES is the answer.

Facts of the case:

The assessee, a cooperative society filed return for relevant AY in which it had claimed deduction u/s 80P(2)(a)(i) of the Act. The AO was of the opinion that the assessee fell within the definition of a cooperative bank given in clause (ccv) of Section 5 of the Banking Regulations Act, 1949. Therefore, according to him, sub-section (4) of section 80P stood attracted. The said sub-section specifically stated that the provisions of section 80P would not apply to a cooperative bank. Though the assessee argued that it had transactions only with its members and not public, this contention was not accepted by AO. The AO held assessee was not eligible for a deduction u/s 80P(2)(i) of the Act. On appeal, the CIT(A) held that assessee was entitled to exemption u/s.80P(2)(a)(i) of the Act.

On appeal, the ITAT held that,

++ one of the main object of assessee society was providing credit facility to its members. Out of substantial sum received as deposits from the members, only small portion were given by assessee as loans to its members. Major part of the funds were parked in FDs. However, it is an admitted position that assessee was bound to give interest to its members on the deposits received by it from them. Therefore, when there were no takers for the money, which assessee as a part of its objects wanted to lend, the only available choice for assessee, in order not to keep the funds idle, was to place it in banks for earning interest. The High Court in the case of CIT v. Tumkur Merchants Souharda Credit Cooperative Ltd held that interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act;

++ the judgement of jurisdictional High Court clearly mentioned that the money meant for lending, remaining surplus, there being no takers, if deposited in banks for earning interest, such interest income would be attributable to the business of banking carried out by the assessee.Facts of the case here fit perfectly well with the facts in the judgment mentioned above. It was therefore, held that assessee was eligible for claiming deduction u/s.80P(2)(a)(i) of the Act, on the interest earned on the FDs placed by it with banks, this being a part of its business income.

(See 2017-TIOL-1025-ITAT-BANG)