2020 (3) TMI 619 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) - interest income earned from commercial and co-operative bank - interest income accrued to the assessee on the funds invested with the bank was considered as income from other sources u/s. 56 - HELD THAT - Disallowance of expenses u/s. 14A ITAT has held that assessee was having mixed funds and the interest funds were more than investment in cooperative bank and cooperative societies no disallowance was called for from eligible deduction u/s. 80P(2)(d). Disallowance of claim of deduction u/s. 80P(2)(d) on the basis of attracting provision of section 14A of the Act as narrated in the case of ACIT vs. Sabarkantha District Co-operative Milk Producers Union Ltd. 2013 (9) TMI 1114 - ITAT AHMEDABAD - On the other hand, the issue involved in this case of the assessee is claim of deduction of interest income u/s. 80P(2)(d) of the act earned on idle funds placed with co-operative bank. However, on the issue of earning similar nature of interest from the commercial bank the Jurisdictional Hon ble High Court in the case of SBI vs. CIT 2016 (7) TMI 516 - GUJARAT HIGH COURT has held that interest income on deposit placed with the commercial bank is not entitled for deduction u/s. 80P(2)(a)(i) of the act. In the light of the above, we are of the view that the income by way of interest earned by deposit of idle fund 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. The identical issue on the similar facts has been adjudicated by the Co-ordinate Bench of the ITAT after considering the decision in the case of Pr. CIT s. Tatagars Co-operative Sale Society 2010 (2) TMI 3 - SUPREME COURT . The Narsanda Mercantile Co.Op. Credit Society Ltd. 2018 (8) TMI 1844 - ITAT AHMEDABAD has adjudicated the identical issue on similar fact and held that earning of interest income either from nationalized or co-operative bank is not entitled for deduction u/s. 80P(2)(d) - Decided against assessee.

Summary

Issues Involved:
1. Deduction under Section 80P(2)(a)(i) for interest income from commercial and co-operative banks.
2. Deduction under Section 80P(2)(d) for interest income from co-operative banks.
3. Allowance of pro rata expenses related to interest income from commercial banks.

Issue-wise Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for interest income from commercial and co-operative banks:
The assessee claimed a deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, for interest income amounting to ?82,21,635 earned from deposits with commercial and co-operative banks. The assessing officer disallowed this deduction, treating the interest income as "income from other sources" under Section 56, as it was not derived from the activity of providing credit facilities to its members. The CIT(A) upheld this disallowance, relying on the Gujarat High Court's decision in State Bank of India vs. CIT. The ITAT agreed with the CIT(A), stating that investing surplus funds in a bank is not part of the business of providing credit facilities to members and thus, the interest income from such deposits is not deductible under Section 80P(2)(a)(i).

2. Deduction under Section 80P(2)(d) for interest income from co-operative banks:
The assessee filed a Miscellaneous Application, contending that the interest income earned from a co-operative bank should be deductible under Section 80P(2)(d). The assessing officer rejected this plea, stating that the deduction under Section 80P(2)(d) is only allowable if the investment is in another co-operative society, not a co-operative bank. The CIT(A) dismissed the appeal, and during the appellate proceedings, the assessee argued that it is entitled to the deduction, citing the Gujarat High Court's decision in CIT-II Vs. Sabarkantha District Co-operative Milk Producers Union Ltd. However, the ITAT found that the interest income earned from idle funds, whether from a scheduled bank or a co-operative bank, does not qualify for the deduction under Section 80P(2)(d), as it is not operational income from the business of providing credit facilities to members. The ITAT referenced decisions from the Karnataka High Court and other Co-ordinate Benches of ITAT Ahmedabad to support this conclusion.

3. Allowance of pro rata expenses related to interest income from commercial banks:
The ITAT directed the assessing officer to verify the assessee's claim for pro rata expenses incurred on earning interest income from commercial banks. The assessing officer was instructed to allow netting of these expenses after proper verification, as decided in various judicial pronouncements by the Co-ordinate Benches of ITAT Ahmedabad.

Conclusion:
The ITAT dismissed the appeal of the assessee, concluding that the interest income from deposits with commercial and co-operative banks does not qualify for deductions under Sections 80P(2)(a)(i) and 80P(2)(d). However, the ITAT allowed the assessee's claim for pro rata expenses related to the interest income from commercial banks, subject to verification by the assessing officer. The appeal was partly allowed for statistical purposes.