2018 (6) TMI 1787 - AT - Income Tax

Deduction u/s.80P(2)(d) - nexus between the interest/dividend income earned from the co-op. societies and the interest expenditure incurred by the assessee on borrowed funds - HELD THAT - We find that there is not direct specific or definite expenditure factually incurred to earn income of dividend and or intent from investments with other co-operative societies eligible for deduction u/s.80P(2)(d) of the Act hence the action of the AO in assuming expenditure alleged to have incurred or deemed to have incurred for earning dividend without bring any evidence or record to prove the nexus between expenditure disallowed and dividend/interest income earned from investment with other co-operative societies in wholly arbitrary imaginary hence not sustainable in law It is seen that the assessee has been statutorily investing its surplus fund from the year 1992 with other co-operative societies including co-operative banks. On such investment the assessee is receiving interest and dividend which has been claimed as deduction u/s.80P(2)(d) of the Act. It is evident that there is no direct nexus between such expenses and interest and dividend. The prorate allocation of interest expenditure resulting its part disallowance of deduction has been done without examined the issue in details. Therefore in absence of any expenses directly or indirectly co-related to such income the part disallowance of deduction is not satisfied. In view of this matter we do not find any fault in the order of CIT(A) hence same is upheld. Claim of deduction u/s. 80P(2)(d) of the Act on the interest income earned from Co-operative banks - HELD THAT - It is undisputed fact that the assessee is a Credit Co-operative Society and received advances and loans from its members on which interest was being received and paid. We find that the Surat Bench of the Tribunal (camp at Surat) on the similar issue in assessee s own case 2017 (4) TMI 1545 - ITAT SURAT for the A.Y. 2009-10 held the issue in favour of the assessee by dismissing the appeal filed by the Revenue. We find that there is no direct nexus between expenditure related to part disallowance hence findings of CIT(A) are upheld. It is further apparent that the assessee is entitled to deduction u/s.80P(2)(d) in respect of the interest income earned from Co-operative Societies are eligible for deduction. Therefore we do not find any infirmity in the order of ld.CIT(A) - Decided against revenue.

Summary

Issues Involved:
1. Deduction claimed by the assessee under Section 80P(2)(d) of the Income Tax Act.
2. Nexus between interest/dividend income earned from co-operative societies and interest expenditure incurred by the assessee on borrowed funds.

Detailed Analysis:

Issue 1: Deduction Claimed by the Assessee under Section 80P(2)(d)
The Revenue challenged the CIT(A)'s decision allowing the assessee's deduction claim under Section 80P(2)(d) amounting to ?1,40,52,159/-. The assessee, a Co-operative credit society, claimed deductions on interest and dividend income earned from investments with other co-operative societies. The AO had reduced the allowable deduction to ?22,24,361/- after excluding interest received from Surat Dist. Co-operative Bank Ltd. and prorating expenses. The CIT(A) observed that the assessee's investments were long-standing and not directly linked to any current year's expenses. Consequently, the CIT(A) allowed the full deduction as claimed by the assessee.

Issue 2: Nexus Between Interest/Dividend Income and Interest Expenditure
The AO contended that the interest expenses incurred by the assessee were directly connected to the interest income earned, thus warranting a proportionate disallowance of deductions. However, the CIT(A) found no direct or indirect nexus between the interest expenses and the income from investments. It was noted that the interest expenses were related to member deposits and not to the investments generating the interest and dividend income. The Tribunal upheld this view, emphasizing that the assessee’s investments were made long back and no new investments were made during the relevant year. Therefore, the interest expenses could not be linked to the income earned from these investments.

Judgment Summary:
The Tribunal confirmed the CIT(A)'s order, which allowed the assessee's deduction claim under Section 80P(2)(d) on the net income of ?1,40,52,159/-. The Tribunal found no evidence of direct or indirect expenses related to the income from co-operative society investments, thus rejecting the AO's prorated disallowance. The Tribunal also referenced its previous decisions and other judicial pronouncements, affirming that the assessee's claim was in accordance with the law. Consequently, the Revenue's appeal was dismissed.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, allowing the full deduction claimed by the assessee under Section 80P(2)(d) and dismissing the Revenue's appeal. The judgment emphasized the lack of direct nexus between the interest expenses and the income from investments with other co-operative societies, validating the assessee's deduction claim on net income.