2018 (8) TMI 1844 - AT - Income Tax

Deduction u/s. 80P on the interest income - pro rata expenses in respect of interest earned from deposit held with nationalized bank to the assessee - HELD THAT - Income by way of interest earned by deposit or investment of idle or surplus does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus clause (d) of section 80P(2) would not apply in the facts and the circumstances of the present case. The assessee has earned interest income on surplus funds deposited with nationalized bank and the cooperative Bank and the same is not attributable to business operation of the assessee co-operative society as interest earned on the fund invested with the commercial bank is not operational income from providing credit facilities to its members. We consider that earning of such interest income either from nationalized or cooperative bank will not change nature and character of the income. On perusal of the provision of section we observe such deduction is pertinent to the operational income earned by the cooperative society from the activities in which it is engaged and not the other income which accrues to the society in the form of interest from investment of surplus funds with the cooperative bank. After considering the facts and legal finding, we do not find any merit in the appeal of the assessee, therefore, the same is dismissed. However as decided in the various decision of the Co-ordinate Benches of ITAT Ahmedabad we direct the assessing officer to allow pro rata expenses in respect of interest earned from deposit held with nationalized bank to the assessee for computing the deduction u/s. 80P after examining/verification and affording adequate opportunity to the assessee. Therefore, the appeal of the assessee is partly allowed for statistical purposes.

Issues Involved:
1. Deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Classification of interest income under Section 56.
3. Deduction under Section 80P(2)(d) for interest earned from cooperative banks.
4. Levy of interest under Section 234B.
5. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i):
The primary issue revolves around whether the interest income earned by the assessee from deposits made with nationalized and cooperative banks qualifies for deduction under Section 80P(2)(a)(i). The assessee claimed this deduction, arguing that the income was related to the business of providing credit facilities to its members. However, the assessing officer disallowed this claim, stating that such interest income is not attributable to the business operations of the cooperative society. The CIT(A) upheld this disallowance, relying on the jurisdictional High Court decision in SBI vs. CIT (2016) 72 taxmann.com 64, which clarified that interest income from deposits with commercial banks is not exempt under Section 80P(2)(a)(i).

2. Classification of Interest Income under Section 56:
The assessing officer classified the interest income of ?1,33,22,271 as "income from other sources" under Section 56, rather than operational income. This classification was based on the observation that the interest earned on funds invested with commercial and cooperative banks does not constitute income from providing credit facilities to members, thus not qualifying for the deduction under Section 80P(2)(a)(i).

3. Deduction under Section 80P(2)(d) for Interest Earned from Cooperative Banks:
During the appellate proceedings, the assessee contended that the interest income from surplus funds invested in fixed deposits with cooperative banks should be allowed as a deduction under Section 80P(2)(d). However, it was noted that Section 80P(2)(d) allows deduction for interest and dividend income derived from investments in another cooperative society, not cooperative banks. Citing the Karnataka High Court decision in Principal CIT vs. Tatagars Co-operative Sale Society (2017) 83 taxmann.com 140, it was emphasized that the nature of income does not change based on whether it is earned from a scheduled bank or a cooperative bank. The court held that interest income from surplus deposits is not attributable to the business operations of the cooperative society and thus not eligible for deduction under Section 80P(2)(d).

4. Levy of Interest under Section 234B:
The assessee's ground of appeal regarding the levy of interest under Section 234A/B/C was dismissed as it is mandatory as per the provisions of the Act. This ground was considered general in nature and did not warrant separate adjudication.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The ground of appeal against the initiation of penalty proceedings under Section 271(1)(c) was deemed premature and did not require adjudication at this stage. Consequently, this ground was also dismissed.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes. The Tribunal directed the assessing officer to allow pro rata expenses in respect of interest earned from deposits held with nationalized banks for computing the deduction under Section 80P, after proper examination and verification. All five appeals filed by different assessees were partly allowed for statistical purposes, with the order pronounced in the open court on 29-08-2018.

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