2022 (10) TMI 607 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - Interest income from Nationalized bank as income from other sources u/s 56 - proportionate deduction u/s 57 from gross interest income as considered income u/s 56 - as per AO CIT(A) has not considered the facts on record that the Assessing Officer has not pointed out anywhere in assessment order about nexus of the source of the investment out of interest free fund only - HELD THAT - Submissions of the Ld. AR that the assessee has earned interest income from the investment made with nationalized bank which is not allowable for granting deduction u/s 80P(2)(a)(i) of the Act. But the submission of the Ld. AR that the assessee incurred the expenditure to earn the total interest from the actual investment including that of nationalized bank appears to be correct. The finding of the decision in case of Abhay Co-op. Credit Society Ltd. 2021 (12) TMI 456 - ITAT AHMEDABAD is apt in assessee s case. In fact, in the present case as well the assessee had given before us the proportionate deduction to be disallowed which is reproduced in para 6 in the form of Table. Thus, we direct the AO to allow expenditure for earning such interest income after considering deduction under Section 80P(2)(c)(ii) as allowed by the CIT(A) and restrict the addition accordingly. Hence, Ground No. 2 is partly allowed for statistical purpose.

Summary

Issues:
1. Disallowance of deduction under Section 80P(2)(a)(i) for interest income from a nationalized bank.
2. Computation of proportionate deduction under Section 57 in relation to interest income.

Analysis:
1. The appeal was filed against the order disallowing deduction under Section 80P for interest income from a nationalized bank. The assessee, a Credit Society, claimed deduction under Section 80P but the Assessing Officer disallowed it and determined the income at Rs. 2,09,120/-. The CIT(A) partly allowed the appeal. The issue was whether the interest income from the nationalized bank could be considered for deduction under Section 80P(2)(a)(i) of the Act.

2. Regarding Ground No. 1, the Ld. AR did not press the ground, leading to its dismissal. However, on Ground No. 2, the Ld. AR argued that the CIT(A) did not consider the nexus of the source of investment from interest-free funds. The AR contended that investments and deposits are part of the business and working capital, making it impracticable to establish a one-to-one nexus. The AR proposed a proportionate disallowance based on the interest income from the nationalized bank. Citing relevant case laws, the AR requested the deduction under Section 57 of the Income Tax Act for proportionate expenses. The Tribunal found merit in the AR's contentions and directed the AO to allow expenditure for earning the interest income, considering the deduction under Section 80P(2)(c)(ii) and restricting the addition accordingly. Ground No. 2 was partly allowed for statistical purposes.

3. The Tribunal's decision was based on the principle that if income does not qualify for deduction under Section 80P(2)(a)(i), it should be computed on a net basis, allowing related expenditure. The Tribunal referred to a previous judgment and directed the AO to determine the net interest income after considering the expenditure incurred for earning such income. The Tribunal upheld the AR's argument regarding the proportionate disallowance and directed the AO to restrict the addition after considering the allowed deduction under Section 80P(2)(c)(ii). Consequently, the appeal of the assessee was partly allowed for statistical purposes.