2023 (5) TMI 578 - AT - Income Tax

Deduction u /s. 80P(2)(a)(i) or 80P(2)(d) - relevancy of source of income - gross total income being business income from providing credit facilities to its members, which includes interest on investments also - AO observed that interest on investments as deposits would fall in the category of income from other sources because the interest was not received from the cooperative society and it is also not business income - as submitted RBI has directed to maintain SLR to the banks and any income received from such activity is treated as business income of the banks and the same principle will also apply here because the Karnataka Co-op. Societies Act mandates for maintenance of 25% to 30% liquid funds against deposits HELD THAT - The assessee submits that it is operational income because it has to maintain the funds as per Rule 28 of the Karnataka State Co-op. Rules, 1960 which are mandatory for the cooperative society and try to correlate with the RBI norms for maintaining certain percentage of deposits in the form of investments which are applicable for the Banks, therefore, it qualifies for deduction u/s. 80P(2)(a)(i) of the Act., but in this regard the ld. AR of the assessee could not produce any single document for substantiating the claim. The interest received by the assessee cannot be treated as operational income of the assessee because the interest received was not from the credit facilities provided to its members as envisaged in section 80P(2)(a)(i) of the Income Tax Act. This issue has been settled by the Hon ble jurisdictional High Court in the case of PCIT v. Totagars Co-operative Sale Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT wherein it is held that the source of funds are irrelevant. Similar issue has been decided against the assessee by this Tribunal in the case of Krishanarajapet Taluk Agri Pro Co-op Marketing Society Ltd. 2022 (2) TMI 489 - ITAT BANGALORE held that interest income is not income from business but was income chargeable to tax under the head income from other sources and therefore there was no question of allowing deduction u/s.80P(2)(d) - thus the assessee is not eligible for deduction u/s 80P(2)(a)(i) or 80P(2)(d) on the interest received. Decided against assessee. Net interest income should be taxed instead of entire gross interest income earned by the assessee on investments and that assessee will suffer loss under the head business income for which necessary set off has to be provided to the assessee - alternate ground - HELD THAT - Since the fundamental principle under Income-tax Act being that only net income has to be taxed and not the gross income, this plea of the assessee has to be necessarily accepted, especially in the light of the judgment of Totagars Sale Cooperative Society v. ITO 2015 (4) TMI 829 - KARNATAKA HIGH COURT Accordingly, the case is restored to the file of the A.O. with a direction to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head income from other sources . If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. Further if the assessee is eligible for setting off of loss suffered from the business carried on by it, the AO is directed to decide the issue as per law. The assessee is directed to co-operate with the department and furnish the necessary evidence for expeditious disposal of the matter. This ground is partly allowed for statistical purpose.

Summary

Issues Involved:
1. Whether the interest earned from investments in co-operative banks should be treated as income from 'Other Sources' and thus not eligible for deduction under section 80P(2)(d) of the Income-tax Act, 1961.
2. Whether the gross interest instead of net interest should be taxed under section 56 of the Act, ignoring the proportionate interest expenses debited to the P&L account under section 57.

Judgment Summary:

Issue 1: Treatment of Interest Income
The primary issue in these appeals was the treatment of interest income earned from investments in co-operative banks. The revenue authorities treated this interest as income from 'Other Sources' and denied the deduction under section 80P(2)(d) of the Income-tax Act, 1961. The assessee, a co-operative society engaged in providing credit facilities to its members, argued that the interest earned on such deposits should be considered as operational income and thus eligible for deduction under section 80P(2)(a)(i). The Tribunal, however, upheld the revenue authorities' stance, citing the Supreme Court's decision in Totagars' Co-operative Sale Society Ltd., which clarified that interest earned from surplus funds is taxable under the head 'Income from Other Sources' and not eligible for deduction under section 80P(2)(a)(i). The Tribunal also referred to various case laws, including the Karnataka High Court's decision in PCIT v. Totagars Co-operative Sale Society, which supported the view that interest income from co-operative banks does not qualify for deduction under section 80P(2)(d).

Issue 2: Taxation of Gross vs. Net Interest
The alternate ground raised by the assessee was that if the deduction under sections 80P(2)(a)(i) and 80P(2)(d) is not granted, the proportionate expenditure for earning interest income under section 57 should be allowed. The Tribunal agreed with this contention, emphasizing that only net income should be taxed, not the gross income. The Tribunal directed the Assessing Officer (AO) to examine whether the assessee incurred any expenditure for earning the interest income and to allow the same as a deduction under section 57. Additionally, if the assessee suffered a loss from its business activities, the AO was instructed to allow the set-off of such loss as per the law.

Conclusion:
The appeals were partly allowed for statistical purposes. The Tribunal upheld the denial of deduction under sections 80P(2)(a)(i) and 80P(2)(d) but directed the AO to consider the net interest income for taxation and to allow any eligible expenditure under section 57. The case was restored to the AO for further examination and appropriate action based on the Tribunal's directions.