2020 (3) TMI 681 - AT - Income Tax

Disallowance u/s 80P(2)(a)(i) - HELD THAT - 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 co-operative 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. No merit in the appeal of the assessee, therefore, the same is dismissed. However as decided in the various decision of SHREE RAM CO-OP. CREDIT SOCIETY LTD 2020 (3) TMI 619 - 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.

Summary

Issues Involved:
1. Disallowance of claim under section 80P(2)(a)(i) of the Income Tax Act.
2. Disallowance of claim under section 80P(2)(d) of the Income Tax Act.

Detailed Analysis:

Issue 1: Disallowance of Claim under Section 80P(2)(a)(i)

Facts and Arguments:
The assessee filed a return declaring nil income after claiming a deduction under section 80P amounting to ?19,49,051. During scrutiny, it was observed by the assessing officer that the assessee's share capital and reserves exceeded ?1,00,000, and it was not a Primary Agricultural Credit Society or Primary Cooperative Agricultural and Rural Development Bank. Therefore, it was treated as a Co-operative Bank under section 80P(4), making it ineligible for the deduction. The assessing officer disallowed the entire deduction claimed under section 80P.

CIT(A) Decision:
The CIT(A) held that merely exceeding the threshold of ?1,00,000 in share capital and reserves does not automatically classify the appellant as a co-operative bank under section 80P(4). The appellant was providing credit facilities to its members only and had not obtained a banking license from the Reserve Bank of India. Therefore, it was eligible for deduction under section 80P(2)(a)(i) for interest income derived from its business of advancing loans to its members. However, the deduction was not admissible on interest income earned from Scheduled/Nationalized Banks.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, stating that interest earned on funds invested with banks is not operational income from providing credit facilities to members. The Tribunal relied on the Gujarat High Court's decision in SBI vs. CIT, which held that interest income from deposits with commercial banks is not exempt under section 80P(2)(a)(i). The Tribunal found no merit in the appeal and dismissed it.

Issue 2: Disallowance of Claim under Section 80P(2)(d)

Facts and Arguments:
The assessee claimed that interest income of ?14,09,709 from KDCC Bank was eligible for deduction under section 80P(2)(d). The CIT(A) referred to the Karnataka High Court's decision in PCIT vs. Totagars Co-operative Sales Society Ltd., which held that section 80P(2)(d) refers to interest income from a Co-operative Society and not from a Co-operative Bank. The CIT(A) concluded that the appellant was not entitled to claim deduction under section 80P(2)(d) for interest income earned from KDCC Bank.

Tribunal's Decision:
The Tribunal observed that interest earned by depositing idle or surplus funds does not change its character irrespective of whether it is earned from a scheduled bank or a co-operative bank. The Tribunal referred to multiple decisions, including those of the Co-ordinate Benches and the Karnataka High Court, which supported the view that interest income from co-operative banks is not entitled to deduction under section 80P(2)(d). The Tribunal dismissed the appeal but 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.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the assessee was not entitled to deductions under sections 80P(2)(a)(i) and 80P(2)(d) for interest income earned from Scheduled/Nationalized Banks and Co-operative Banks, respectively. The appeal was dismissed, and the order was pronounced in the open court on 31-01-2020.