2023 (1) TMI 612 - AT - Income Tax

Disallowance u/s. 80P - Interest income - quantification of amount of deduction from eligible activities - the disallowance exceeding the deduction claimed - assesssee-society extends credits to it s Members, an activity specified u/s. 80P(2)(a)(i), earning interest thereon - HELD THAT - Sure, the assessee has despite claiming the entire net profit as deductible, returned a net income of rs. 2060. The same may perhaps be on account of a suo motu disallowance/s, and which remains undisturbed in assessment, nor dilated upon at any stage. That is, the deduction could not possibly be claimed in a sum higher than the income earned, which is, by definition, net of expenses claimed toward the same, and which is also the purport of s. 80AB. The disallowance u/s. 80P (for rs. 749.41 lacs) is, thus, without any basis on facts or in law. We are unable to understand the said disallowance, sought to be justified by the Revenue per its Grounds of Appeal in terms of mutuality, even as there is no reference thereto in the orders by the Revenue authorities, nor were any pleadings toward the same made during hearing and, per contra, not responded to by the assessee. The same is directed for deletion. Disallowance of the deduction claimed, i.e., rs. 13.76 lacs - assessee is entitled thereto at the full amount, i.e., as claimed by it, or at a lower sum? - HELD THAT - The question arising in the instant case, on the contrary, is the extent of income arising to the assessee-society on the provision of credit to it s members, the sole qualifying activity u/s. 80P(2). The same cannot be stretched to the income on placement of investible surplus with the assessee, i.e., not required for the said eligible activity for the time being, in other investment avenues deemed by law, concerned as it is with the safety of public funds, as low risk and, thus, safe . And which would be so independent and irrespective of the nature of activity being pursued. In principle, we find no difference between the investible surplus arising to the assessee-society in Totgars CSS Ltd. 2010 (2) TMI 3 - SUPREME COURT , wherein the qualifying activity/s was, as in the instant case, the provision for credit facilities to members, as also marketing their agricultural produce. The said decision, in ratio, provides for deduction u/s. 80P only on operational income . For computing the income from the activity specified u/s. 80P(2)(a)(i), to which the deduction u/s. 80P(1) is to be restricted, the net income, being the gross total income (GTI), is to be proportioned between the gross interest arising from the members and from deployment in specified modes of investment u/s. 44. The same, as apparent, is being taken as a surrogate for the funds deployed on an average during the year on the two activities, i.e., the provision of credit to the members and the said investment/s. A more refined approach is though proposed as the rate of interest on different investments, which include saving deposit accounts as well, could vary significantly. The borrowing cost as well as the administrative cost is to be applied uniformly. The net interest income from a particular source could thus be easily worked out on the basis of the proportion of the total funds invested therein. The interest income on provision of credit to members, thus worked, would be liable to be allowed, and the balance, disallowed. No other disallowance could be made. We are conscious that interest income on investment in other cooperative societies is also liable to be deducted u/s. 80P(1) r/w s. 80P(2)(d). There is, however, no claim in its respect nor anything on record to so suggest. Rather, District or State co-operative banks, though registered as co-operative societies, operate under licence from the RBI under the BR Act, so that income on deposits therewith would not qualify for deduction u/s. 80P(2)(d). Reference for the purpose stands also made to ss. 5 7 of the BR Act.

Summary

Issues Involved:
1. Justification of deletion of addition under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Justification of deletion of addition related to interest income outside the principle of mutuality.

Detailed Analysis:

1. Justification of Deletion of Addition under Section 80P(2)(a)(i):
The primary issue is whether the assessee, a cooperative society, is entitled to deduction under Section 80P(2)(a)(i) for the income earned through providing credit facilities to its members. The assessee argued that it is not a cooperative bank, which is excluded from the purview of Section 80P since AY 2007-08, and thus, it is entitled to the deduction. The Revenue contended that the assessee's interest income from bank deposits should not be eligible for deduction as it falls outside the principle of mutuality.

The Tribunal examined Section 80P, which provides deductions for certain incomes of cooperative societies. The Tribunal noted that the assessee is not a cooperative bank as defined under the Banking Regulation Act, 1949, since it does not accept deposits from the public and does not issue cheque books. Therefore, the assessee is eligible for deduction under Section 80P(1) for income from activities specified in Section 80P(2)(a)(i), which includes providing credit facilities to its members.

2. Justification of Deletion of Addition Related to Interest Income Outside the Principle of Mutuality:
The Tribunal considered whether the interest income earned from bank deposits should be treated as income from other sources and thus not eligible for deduction under Section 80P(1). The Tribunal referred to the decision in Totgars Cooperative Sale Society Ltd. v. ITO, where it was held that interest income on surplus funds not immediately required for business purposes should be treated as income from other sources.

The Tribunal found that the assessee's case is distinguishable from Totgars because the funds invested in bank deposits were not surplus but were part of the corpus formed from members' subscriptions. The interest earned on these deposits is integral to the assessee's activity of providing credit facilities to its members. Therefore, the interest income should not be regarded as income from other sources but as income from the specified activity under Section 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the assessee is entitled to the deduction under Section 80P(1) for the income earned from providing credit facilities to its members. The interest income from bank deposits, being integral to the assessee's specified activity, is also eligible for deduction. The Tribunal directed the deletion of the disallowance of Rs. 7,49,40,575 and upheld the deletion of the addition of Rs. 13,76,224 made by the CIT(A). The Revenue's appeal was disposed of on these terms.