2023 (12) TMI 271 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i)/80P(2)(d) on the interest income received from the co-operative banks/bank deposits denied - Alternatively if the assessee is not eligible for claim of deduction u/s. 80P(2) then the cost of funds should be allowed to the assessee - HELD THAT - Assessee has received interest from co-operative banks to which the revenue authorities have not been allowed deduction u/s 80P(2)(a)(i)/80P(2)(d) observing the latest judgment in the case of Totgars Co- operative Sales Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT in which it has been held that the income by way of interest earned by the assessee co-operative society during the Assessment Years 2007- 2008 to 2011-12 on the investments made in the co-operative bank are not eligible for deductions under Section 80P(2)(d) character of the income does not change irrespective of the investments made in Co-operative Banks or otherwise and would always remain income from other sources and that only operational income would qualify for deduction u/s 80P. We hold that the assessee is not eligible for deduction u/s 80P on the interest income earned on its investments with the Co-operative Banks. Arguments of the ld. AR that the surplus funds or those funds invested by the assessee and interest income received on such deposits are eligible for deduction u/s 80P is also not sustainable because the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. Since during the course of arguments, the Ld.AR of the assessee took alternative ground that the cost of funds for earning the interest income has to be allowed, we concur with the Ld.AR of the assessee, that benefit of the cost of funds towards earning of the interest income has to be allowed. We noted that entire interest received has been taxed as income from other source. We are of the view that the fundamental principle under Income-tax Act being that only net income has to be taxed and not the gross income. 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 (cost of funds) shall be allowed as deduction u/s 57 of the I.T.Act. This alternative ground is partly allowed for statistical purpose.

Summary

Issues Involved:
1. Deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income from co-operative banks.
2. Alternative claim for deduction of the cost of funds if deduction under Section 80P(2) is not allowed.
3. Disallowance of provisions made towards Income Tax reserve and General reserve.

Summary:

Issue 1: Deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income from co-operative banks

The assessee challenged the denial of deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income received from co-operative banks. The revenue authorities relied on the judgment of the jurisdictional High Court in the case of Totgars Cooperative Sale Society (2017) 83 taxmann.com 140, which held that interest income from investments in co-operative banks is not eligible for deduction under Section 80P(2)(d) as it is considered "income from other sources" and not operational income. The Tribunal concurred with the revenue's position, stating that the character of the income does not change irrespective of whether it is earned from a scheduled bank or a co-operative bank, and thus, it is not eligible for deduction under Section 80P(2)(d).

Issue 2: Alternative claim for deduction of the cost of funds

The assessee argued that if the deduction under Section 80P(2) is not allowed, the cost of funds for earning the interest income should be deductible. The Tribunal agreed with this argument, noting that only net income should be taxed, not the gross income. The case was remitted to the Assessing Officer (AO) to examine whether the assessee incurred any expenditure for earning the interest income, which should be allowed as a deduction under Section 57 of the IT Act. The AO was directed to decide the issue as per law, with the assessee instructed to cooperate and provide necessary evidence.

Issue 3: Disallowance of provisions made towards Income Tax reserve and General reserve

For the Assessment Year 2013-14, the AO disallowed provisions made towards Income Tax reserve and General reserve. The Tribunal remitted this issue back to the AO to determine whether these provisions were made out of business profits. If so, the AO should give the benefit of Circular No. 37/2016 dated 2nd November 2016. The AO was instructed to provide a reasonable opportunity of being heard to the assessee and decide the issue as per law, with the assessee directed to substantiate their claims with necessary documents and avoid unnecessary adjournments.

Conclusion:

All the appeals were partly allowed for statistical purposes, with the common order to be kept in the respective case files. The order was pronounced in the open court on 29th September 2023.