2021 (12) TMI 752 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - assessee has shown interest income which was received from the non-members - impugned income of interest was earned by the assessee from the co-operative banks as well as from the nationalized bank thus as per AO assessee is not eligible for deduction under section 80P(2)(a)(i) - HELD THAT - The income from the activity of financing from the members is only eligible for deduction under section 80P(2)(a)(i) of the Act. If there is any income arising to the co-operative society from the non-members that will not be subject to deduction under section 80P(2)(a)(i) of the Act. In holding so we draw support and guidance from the judgment of the Hon ble Gujarat High Court in the case of State Bank of India 2016 (7) TMI 516 - GUJARAT HIGH COURT It is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India is not being attributable to the business as envisaged under the provisions of the Act. Thus the same cannot be deducted under section 80P(2)(a)(i) of the Act. There remains no ambiguity that income received by the assessee on the money deposited with the bank is not eligible for deduction under section 80P(2)(a)(i) of the Act - profits and gains attributable to non-members arising as a result of advancement of loans was held to be not an allowable deduction under Section 80P(2)(a)(i) of the Act. In view of the above, we do not find any merits in the argument advanced by the learned counsel for the assessee. Determine the income which is not eligible for deduction under section 80P(2)(a)(i) - The income on the deposits from the bank has been treated as income from other sources but the gross income cannot be excluded from the deduction available to the assessee under the provisions of section 80P(2)(a)(i) - It is the net interest income on the deposits from the bank which needs to be excluded from the amount of deduction claimed under section 80P(2)(a)(i) and the same should be brought to tax under the head income from other sources under the provisions of section 56 - To determine, the net income on the deposits from the bank, amount of expenses incurred in generating such interest income should be allowed as deduction from the gross income of interest in pursuance to the provisions of section 57. The expenses such as electricity, rental, audits, printing and stationery which cannot be said to have been incurred wholly and exclusively for the purpose of earning the interest income. Thus, we are not in agreement with the contention of the learned AR for the assessee. But it is also equally important to note that there is no mechanism provided under the provisions of section 57 of the Act for making the disallowance on ad hoc manner as done by the ld. CIT-A. We direct the AO to work out the interest income on the deposits from the bank after deducting the corresponding expenses incurred by the assessee in generating the interest income - such expenses have to be brought on record by the assessee based on cogent materials. Furthermore, if the assessee has made deposits in the banks out of the money borrowed from the members, then the corresponding interest cost borne by the assessee should be allowed as deduction - we hold that there is no infirmity in the order of the learned CIT (A), requiring any interference. Hence, we uphold the same. Hence, the ground of appeal of the assessee is partly allowed for the statistical purposes.

Issues involved:
1. Disallowance of deduction under section 80P(2)(a)(i) of the Income Tax Act.
2. Eligibility of interest income from non-members for deduction under section 80P(2)(a)(i).
3. Treatment of interest income from non-members under section 56 of the Act.
4. Determination of expenses eligible for deduction under section 57 of the Act.
5. Application of case law in determining deduction eligibility.
6. Consideration of proportionate expenses in determining net income.
7. Comparison with previous tribunal decisions regarding expenses.

Issue 1: Disallowance of deduction under section 80P(2)(a)(i) of the Income Tax Act:
The Appellate Tribunal considered the disallowance of deduction under section 80P(2)(a)(i) of the Act. The Tribunal referred to the judgment of the Hon’ble Gujarat High Court and held that income from non-members is not eligible for deduction under this section.

Issue 2: Eligibility of interest income from non-members for deduction under section 80P(2)(a)(i):
The Tribunal analyzed the interest income received from non-members and concluded that such income is not eligible for deduction under section 80P(2)(a)(i) of the Act. The Tribunal relied on the judgment of the Hon’ble Supreme Court and emphasized that only income derived from credit provided to members is deductible under this section.

Issue 3: Treatment of interest income from non-members under section 56 of the Act:
The Tribunal discussed the treatment of interest income from non-members under section 56 of the Act. It was determined that such income should be treated as income from other sources and not eligible for deduction under section 80P(2)(a)(i) of the Act.

Issue 4: Determination of expenses eligible for deduction under section 57 of the Act:
The Tribunal examined the determination of expenses eligible for deduction under section 57 of the Act. It was clarified that only expenses directly related to earning the interest income should be allowed as a deduction, and proportionate expenses are not recognized under this section.

Issue 5: Application of case law in determining deduction eligibility:
The Tribunal considered the application of case law in determining the eligibility of deductions. It was highlighted that the judgments provided guidance on the deduction of profits attributable to non-members and emphasized the importance of determining the net income for deduction purposes.

Issue 6: Consideration of proportionate expenses in determining net income:
The Tribunal discussed the consideration of proportionate expenses in determining the net income eligible for deduction. It was clarified that only expenses directly linked to earning the income should be deducted under section 57 of the Act.

Issue 7: Comparison with previous tribunal decisions regarding expenses:
The Tribunal compared the current case with previous tribunal decisions regarding expenses. It was noted that the issue of proportionate expenses was not raised in a previous case, and the Tribunal upheld the decision of the learned CIT (A) without requiring any interference.

In conclusion, the appeals by the assessee were partly allowed for statistical purposes based on the findings related to the disallowance of deductions under section 80P(2)(a)(i) and the treatment of interest income from non-members. The Tribunal emphasized the importance of determining net income and eligible expenses for deduction under the relevant sections of the Income Tax Act.

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