2021 (10) TMI 566 - AT - Income Tax

Disallowance of deduction u/s 80P - assessee was having more than 15% members as associate / nominal members which violates the provisions of Karnataka Co-operative Societies Act 1959 - HELD THAT - The Division Bench of the Tribunal in the case of M/s.Ravindra Multipurpose Co-operative Society Limited 2021 (9) TMI 342 - ITAT BANGALORE had remanded the identical issue to the files of the A.O. for de novo consideration. The Tribunal directed the A.O. to follow the dictum laid down by the Hon ble Apex Court in the case of M/s.Mavilayi Service Co-operative Bank Ltd. v. CIT 2021 (1) TMI 488 - SUPREME COURT . In view of the order of the ITAT which is identical to the facts of the instant case restore the issue of claim of deduction u/s 80P of the I.T.Act to the files of the A.O. for de novo consideration. Claim of deduction u/s 80P(2)(d) - CIT(A) has not adjudicated the same for the reason that the assessee has violated the principle of mutuality. If the assessee receives / earns interest / dividend income out of investments with co-operative society the same is entitled to deduction u/s 80P(2)(d) of the I.T.Act. With these observations we direct the A.O. to examine the claim of deduction u/s 80P(2)(d) of the I.T.Act afresh. Deduction u/s 57 in respect of expenditure for earning the interest income - Inspite of such plea not being raised before the lower authorities since the fundamental principle under Income-tax Act being that only net income has to be taxed and not the gross income this plea of the assessee has to be necessarily entertained especially in the light of the judgment of the Hon ble jurisdictional High Court in the case of Totgars Sales Co-operative Society Limited 2015 (4) TMI 829 - KARNATAKA HIGH COURT . Accordingly the issue of deduction u/s 57 of the I.T.Act is restored to the files of the A.O. The 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. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
Appeal against CIT(A)'s order disallowing deduction u/s 80P(2)(a)(i) and u/s 80P(2)(d) of the Income Tax Act for profits earned from credit facilities and investments with co-operative banks.

Detailed Analysis:

1. Deduction u/s 80P(2)(a)(i):
The primary issue revolved around the denial of deduction claimed u/s 80P(2)(a)(i) by the Assessing Officer and upheld by CIT(A). The contention was that the appellant, a co-operative society, violated mutuality principles due to admitting nominal and associate members, thus rendering it ineligible for the deduction. The appellant argued that the admission of such members was permissible under the Karnataka Co-operative Societies Act, and there was no violation of any provisions. The Tribunal referred to the judgment in the case of M/s.Mavilayi Service Co-operative Bank Ltd. v. CIT and remanded the issue to the Assessing Officer for fresh consideration, emphasizing the need to grant a proper opportunity for assessment.

2. Deduction u/s 80P(2)(d):
Another issue was the denial of deduction u/s 80P(2)(d) for interest/dividend income earned from investments with co-operative banks. The Assessing Officer based this decision on the violation of mutuality principles, citing the judgment in the case of Totagars Co-operative Sales Society. The CIT(A) affirmed this view, linking it to the judgment in The Citizen Co-operative Society Ltd. v. ACIT. The Tribunal, following the precedent set in similar cases, directed the Assessing Officer to re-examine the claim of deduction u/s 80P(2)(d) afresh.

3. Deduction u/s 57 for Expenditure:
The appellant raised a plea for allowing the actual interest paid on member's deposits as a deduction u/s 57 instead of an arbitrary allowance of 10% of income as incidental expenses. Despite this plea not being raised before the lower authorities, the Tribunal considered the fundamental principle that only net income should be taxed. Referring to the judgment in Totgars Co-operative Sales Society Ltd. v. ITO, the Tribunal restored the issue of deduction u/s 57 to the Assessing Officer for examination of expenditure incurred for earning interest income assessed under 'income from other sources.'

In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fresh assessment considering the legal principles and judgments cited during the proceedings.