2024 (1) TMI 1061 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - i nterest income received on investments made with District Co-operative Bank - as per AO interest income received from Kanara District Co-operative Bank was not entitled to deduction - HELD THAT - On identical factual situation, the Bangalore Bench of the Tribunal in the case of Canara Bank Staff Credit Co-operative Societies Ltd 2023 (10) TMI 1350 - ITAT BANGALORE had restored the matter to the AO to examine whether the amounts invested with the Co-operative Banks are out of compulsion under the Karnataka Co-operative Societies Act and the relevant Rules. It was further held by the Tribunal that if the investments are out of compulsion under the Act and the relevant Rules, the interest income received out of the investment made under such compulsion would be liable to be taxed as income from business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. In the event it is found that assessee is not entitled to get the benefit under section 80P(2)(a)(i) of the Act, the AO shall also examine whether it is entitled to deduction u/s 80P(2)(d) in light of the recent judgment of Kerala State Co-operative Agricultural Rural Development 2023 (9) TMI 761 - SUPREME COURT If the assessee is not entitled to benefit of deduction either under section 80P(2)(a)(i) or under section 80P(2)(d) of the Act, the AO shall consider the claim of deduction under section 57 of the Act in respect of the cost of funds for earning such interest income which is assessed as income under the head income from other sources . For the direction to grant deduction for the cost of funds, we rely on the judgment of Totgar s Co-operative Sales Society Ltd 2017 (1) TMI 1100 - KARNATAKA HIGH COURT Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Partial disallowance of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Eligibility of interest income for deduction under section 80P(2)(d) of the Act.
3. Liability to be charged interest under section 234-B of the Act.

Summary:

Issue 1: Partial Disallowance of Deduction under Section 80P(2)(a)(i)
The assessee, a co-operative society, claimed a deduction of Rs. 1,02,85,865 under section 80P(2)(a)(i) of the Income Tax Act for the Assessment Year 2018-19. The Assessing Officer (AO) disallowed Rs. 6,97,062 of this amount, arguing that interest income from Kanara District Co-operative Bank did not qualify for the deduction under section 80P(2)(a)(i) or section 80P(2)(d). The AO relied on the Supreme Court judgment in Totgar's Co-operative Sales Society Ltd. vs. ITO, which held that such interest income is not eligible for deduction.

Issue 2: Eligibility of Interest Income for Deduction under Section 80P(2)(d)
The CIT(A) upheld the AO's decision, noting that the interest income of Rs. 6,97,062 was not derived from investments with another co-operative society, hence not eligible for deduction under section 80P(2)(d). The CIT(A) referenced multiple judgments, including the Karnataka High Court decision in PCIT Hubbali vs. Totagar Co-operative Sales Society, which denied such deductions when funds were deposited in a co-operative bank.

Issue 3: Liability to be Charged Interest under Section 234-B
The assessee contested the liability to be charged interest under section 234-B, claiming that under the facts and circumstances, the interest should be canceled. However, this issue was not elaborated upon in the judgment.

Tribunal's Decision:
The Tribunal restored the matter to the AO to examine if the investments in the District Co-operative Bank were made out of statutory compulsion under the Karnataka Co-operative Societies Act and relevant rules. If so, the interest income should be treated as 'income from business' and eligible for deduction under section 80P(2)(a)(i). If not, the AO should consider the claim under section 80P(2)(d) and, if necessary, allow a deduction under section 57 for the cost of funds used to earn the interest income. The appeal was allowed for statistical purposes, and the AO was directed to re-examine the facts in light of relevant judicial pronouncements.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the eligibility of the interest income for deductions under sections 80P(2)(a)(i), 80P(2)(d), and potentially section 57, based on statutory requirements and judicial precedents.