2021 (9) TMI 1000 - AT - Income Tax

Deduction u/s 80P - interest income earned on account of investments made with co-operative Banks, whether it is entitled to deduction either u/s 80P(2)(d) or u/s 80P(2)(a)(i) - HELD THAT - Bangalore Bench of the Tribunal in the case of M/s.Vasavamba Cooperative Society Ltd. 2021 (8) TMI 706 - ITAT BANGALORE had held that the assessee is not entitled to deduction either u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the I.T.Act with regard to the interest income earned from investments made with co-operative banks. The Bangalore Bench of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd. (supra) had followed the judgment of the Hon ble jurisdictional High Court in the case of Pr.Commissioner of Income-tax Anr. v. Totagars Co-operative Sales Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT Thus hold that the assessee is not entitled to deduction u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income earned from investments with Cooperative Banks. Deduction u/s 57 - whether the assessee has incurred any expenditure for earning interest income which is assessed u/s 56? - HELD THAT - A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head income from other sources . If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. The assessee is directed to co-operate with the department and furnish the necessary evidence for expeditious disposal of the matter

Summary

Issues Involved:
1. Whether the CIT(A) is justified in confirming the assessment order wherein the claim of deduction u/s 80P of the I.T. Act was partly denied.
2. Whether the interest income earned from investments with Cooperative Banks is entitled to deduction u/s 80P(2)(d) or u/s 80P(2)(a)(i) of the I.T. Act.
3. Whether the cost incurred for earning interest income should be allowed as deduction u/s 57 of the I.T. Act.

Issue-wise Detailed Analysis:

1. Confirmation of Assessment Order and Partial Denial of Deduction u/s 80P:
The primary issue raised was whether the CIT(A) was justified in confirming the assessment order which partly denied the claim of deduction u/s 80P of the I.T. Act. The assessee, a credit co-operative society, declared its entire gross total income as a deduction u/s 80P, resulting in a taxable income of 'Nil'. The Assessing Officer (A.O.) made an addition of ?14,81,899 being interest earned on deposits/securities, distinguishing between interest income earned by providing credit facilities to members and interest income earned by investing funds in deposits/securities. The A.O. allowed deduction u/s 80P(2)(a)(i) for the former but assessed the latter as income from other sources, relying on the Supreme Court's judgment in Totagars Co-operative Sales Society (322 ITR 283).

2. Deduction u/s 80P(2)(d) or u/s 80P(2)(a)(i):
The Tribunal had to decide whether the interest income earned from investments with Cooperative Banks is entitled to deduction either u/s 80P(2)(d) or u/s 80P(2)(a)(i). The Bangalore Bench of the Tribunal, in the case of M/s. Vasavamba Cooperative Society Ltd., held that such interest income is not entitled to deduction under these sections. This decision was based on the jurisdictional High Court's judgment in Totagars Co-operative Sales Society (395 ITR 611), which clarified that interest income earned from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) and is not deductible under section 80P(2)(d) either.

3. Deduction u/s 57 for Cost Incurred in Earning Interest Income:
The assessee argued that if the interest income is to be assessed as income from other sources, the cost incurred for earning such income should be allowed as a deduction u/s 57. The Tribunal found merit in this argument, referencing the Karnataka High Court's judgment in Totgars Co-operative Sales Society Ltd. v. ITO [2015] 58 Taxmann.com 35, which held that when interest income is treated as income from other sources, the proportionate cost incurred in earning such income should be deductible. Consequently, the Tribunal restored the case to the files of the A.O. to examine whether the assessee incurred any expenditure for earning the interest income, with directions to allow such expenditure as a deduction u/s 57 if proven.

Conclusion:
The appeals were allowed for statistical purposes, and the Tribunal directed the A.O. to re-examine the expenditure incurred by the assessee for earning the interest income. The Tribunal upheld the CIT(A)'s disallowance of ?14,81,899 interest income from deduction u/s 80P but allowed the assessee to claim deduction u/s 57 for the cost incurred in earning this interest income. The order emphasized the principle that only net income should be taxed, not gross income.