2021 (12) TMI 864 - AT - Income Tax

Deduction u/s 80P - Assessee is a co-operative society and engaged in the activity of providing credit facilities to the members - HELD THAT - The provisions of section 80P(2)(a)(i) of the Act provides the deduction to a co-operative society engaged in the business of banking or providing credit facilities to its members. The provisions of the section are without any ambiguity. In other words, 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). 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 Banks other than cooperative bank 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). The 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. How to 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) of the Act and the same should be brought to tax under the head income from other sources as per 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(iii) . In case of co-operative credit society, income to which benefit of section 80P(2)(a)(i) is not allowed, e.g., rental income, interest income from surplus funds kept in FDs' of banks, etc., basic exemption of ₹ 50,000 as provided for in section 80P(2)(c)(ii) must be granted. Though the word 'activity' is not defined, yet the investment activity, activity of renting of immovable property, etc., and the consequent income attributable to such activities would be covered under section 80P(2)(c). Hence, we direct the AO to allow the deduction under section 80P(2)(c) of the Act. Thus, in view of above discussion the appeal of the assessee is partly allowed subject to the discussion made in previous paragraph. Appeal filed by the assessee is partly allowed for the statistical purposes.

Summary

Issues:
1. Deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for interest income from deposits with banks other than cooperative banks.
2. Allowance of proportionate expenses against interest income.

Analysis:

Issue 1: Deduction under section 80P(2)(a)(i) for interest income from non-cooperative bank deposits:
The appellant, a cooperative credit society, contested the disallowance of deduction under section 80P(2)(a)(i) for interest income of ?12,61,040 earned from deposits with non-cooperative banks. The Assessing Officer (AO) held that this income did not arise from financing to members, thus not eligible for deduction. The Commissioner of Income Tax (Appeals) upheld this decision. The appellant argued citing the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd. v. CIT, asserting eligibility for deduction. However, the Tribunal, referencing State Bank of India v. CIT, clarified that only interest from activities with members qualifies for deduction. The Tribunal dismissed the appeal, emphasizing that income from non-members is not deductible under section 80P(2)(a)(i).

Issue 2: Allowance of proportionate expenses against interest income:
The appellant further contended that if the interest income is excluded from deduction, proportionate expenses of ?9,11,140 should be allowed. The Tribunal explained that net interest income must be excluded from the deduction claimed under section 80P(2)(a)(i). It directed the AO to calculate this net income by deducting expenses incurred for generating the interest income. The Tribunal highlighted that only expenses directly related to earning the income are eligible for deduction under section 57 of the Act. It rejected the idea of proportionate expenses, emphasizing the necessity of incurring expenses wholly and exclusively for earning the interest income.

The Tribunal also addressed the provisions of section 80P(2)(c), allowing deductions for activities not covered under section 80P(2)(a)(i). It clarified that income not eligible for section 80P(2)(a)(i) deduction, like rental income or interest from non-cooperative bank deposits, should receive the basic exemption of ?50,000 under section 80P(2)(c)(ii). The Tribunal directed the AO to grant this deduction. Consequently, the appeal was partly allowed for statistical purposes.

In conclusion, the Tribunal's detailed analysis emphasized the specific criteria for deduction under section 80P(2)(a)(i), the treatment of expenses related to interest income, and the eligibility for deductions under section 80P(2)(c) for activities not covered by section 80P(2)(a)(i).