2022 (9) TMI 30 - AT - Income Tax

Revision u/s 263 - AO had wrongly accepted section 80P(2)(a) deduction claim regarding interest income derived from deposits made in the co-operative banks - HELD THAT - We have given our thoughtful consideration to the Revenue s foregoing arguments supporting the learned PCIT s revision directions and find no merit therein as this tribunal s recent co-ordinate bench s order in Rena Sahakari Sakhar Karkhana 2022 (1) TMI 419 - ITAT PUNE held that interest income earned by a co-operative society on its investments held with a co-operative bank would be eligible for claim of deduction under Sec.80P(2)(d) CIT-DR could hardly pinpoint any distinction on facts and on law regarding the instant issue of 80P deduction claim raised on interest income derived from deposits made in co-operative banks. We accordingly reverse the learned PCIT s revision directions in issue. Ordered accordingly.

Issues Involved:

1. Correctness of the PCIT's revision directions regarding the assessment order dated 09.12.2019.
2. Eligibility of the assessee's claim for deduction under Section 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act, 1961 for interest income derived from deposits made in co-operative banks.
3. Verification of the principle of mutuality concerning the loans and deposits.
4. Classification of interest income as "income from other sources".

Issue-wise Detailed Analysis:

1. Correctness of the PCIT's Revision Directions:

The assessee challenged the correctness of the PCIT's revision directions, which held that the regular assessment dated 09.12.2019 was erroneous and prejudicial to the interest of the Revenue. The PCIT argued that the Assessing Officer (AO) had wrongly accepted the assessee's Section 80P(2)(a) deduction claim regarding interest income of Rs.14,04,405/- from deposits in co-operative banks without proper verification. The PCIT contended that the AO did not examine whether the loans or deposits taken from members were given back to them as loans or advances, thereby failing to verify the principle of mutuality.

2. Eligibility for Deduction under Section 80P(2)(a)(i) and 80P(2)(d):

The PCIT argued that the assessee's interest income from deposits with co-operative banks could not be considered attributable to the business of providing credit facilities to its members. The PCIT cited the Supreme Court's decision in Totgar's Cooperative Sale Society Ltd. Vs. ITO and the Karnataka High Court's decision in Pr. Commissioner of Income Tax, Hubali Vs. Totgars Cooperative Sale Society, which held that interest earned on such deposits should be brought to tax and not allowed as a deduction under Section 80P.

The PCIT noted that the assessee did not furnish requisite details about the deposits made with different banks or institutions, and the AO did not verify whether these deposits were made out of the members' deposits or surplus funds. The PCIT also pointed out that if the co-operative banks were registered with the RBI, the interest received would not be entitled to deduction under Section 80P(2)(d).

3. Verification of the Principle of Mutuality:

The PCIT emphasized that the AO failed to verify the principle of mutuality, which requires that the loans or deposits taken from members should be given back to them as loans or advances. The PCIT highlighted that a significant portion of the assessee's income was earned from interest on deposits made with various banks, and these deposits were not utilized for lending to members. The PCIT concluded that making deposits out of members' deposits could not be considered attributable to the business of providing credit facilities to members, thus not satisfying the principle of mutuality.

4. Classification of Interest Income as "Income from Other Sources":

The PCIT argued that the interest income should be treated as "income from other sources" rather than under the regular head of business income under Section 80P. The PCIT cited the Karnataka High Court's decision in PCIT vs. The Totagars Co-operative Sale Society, which supported this classification.

Tribunal's Findings:

The tribunal found no merit in the Revenue's arguments supporting the PCIT's revision directions. It referred to a recent co-ordinate bench's order in Rena Sahakari Sakhar Karkhana Ltd. vs. PCIT, which held that interest income derived by a co-operative society from investments made with co-operative banks is eligible for deduction under Section 80P(2)(d). The tribunal noted that the term "co-operative society" includes co-operative banks, and as long as the interest income is derived from investments made with any other co-operative society, the deduction under Section 80P(2)(d) is available.

The tribunal also considered conflicting judicial pronouncements and preferred the view favoring the assessee, as held by the Bombay High Court in K. Subramanian and Anr. Vs. Siemens India Ltd. and Anr.

Conclusion:

The tribunal reversed the PCIT's revision directions and allowed the assessee's appeal, holding that the interest income derived from deposits made in co-operative banks is eligible for deduction under Section 80P(2)(d). The tribunal directed the AO to re-examine the assessee's claim of deduction under Section 80P, ensuring proper verification of facts and giving the assessee a reasonable opportunity to adduce evidence and information.

Order Pronounced:

The assessee's appeal was allowed, and the order was pronounced in the Open Court on 29th August 2022.

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