2024 (2) TMI 1040 - AT - Income Tax

Denial of deduction claimed u/s 80P (2)(d) - AO disallowed the benefit by invoking the provision of section 154 for rectification of mistake change of opinion - interest derived by the Co-operative society from its investments with any other co-operative society - HELD THAT - The issue of allowability of deduction of interest received from other co-operative society (though the said co-operative society is doing banking activities) is allowable u/s 80P(2)(d) of the Act is already decided by the Jodhpur bench in the case of in the case ITO Vs. Bhilwara Zila Dugdh Utpadak Sahkari Sang Ltd., 2023 (9) TMI 1410 - ITAT JODHPUR wherein as held Section 22 of the Regional Rural Bank Act provides that Regional Rural Bank to be deemed to be a co-operative society for purpose of the Income-tax Act, 1961, thus considering the provisions of section 22 of Regional Rural Bank Act, wherein the status of the banks established are of the co-operative society the assessee is entitled for the exemption on the interest earned on the deposits. Thus allowability of deduction of interest u/s. 80P(2)(d) decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings initiated for rectification under Section 154 of the IT Act.
2. Eligibility for deduction under Section 80P(2)(d) of the IT Act.
3. Disallowance of interest under Section 36(1)(iii) of the IT Act.
4. Validity of penalty proceedings under Section 271(1)(c) of the IT Act.

Summary:

1. Validity of proceedings initiated for rectification under Section 154 of the IT Act:
The assessee challenged the initiation of rectification proceedings under Section 154, arguing it was bad in law and facts, especially since the deduction under Section 80P(2)(d) was allowed in the original return and by the CIT(A) in a previous order dated 26/07/2018. The Tribunal noted that the issue of rectification under Section 154 is not permissible on debatable points of law, referencing the Supreme Court's decision in Volkart Brothers and other relevant case laws.

2. Eligibility for deduction under Section 80P(2)(d) of the IT Act:
The primary issue was whether interest income earned from investments with cooperative banks qualifies for deduction under Section 80P(2)(d). The Tribunal relied on various judicial precedents, including the Karnataka High Court's decision in Totagars Cooperative Sale Society, which held that interest earned from cooperative banks is not deductible under Section 80P(2)(d). However, the Tribunal also considered contrary decisions from other jurisdictions and ultimately decided in favor of the assessee, allowing the deduction under Section 80P(2)(d) based on the principle of judicial consistency and the specific facts of the case.

3. Disallowance of interest under Section 36(1)(iii) of the IT Act:
The Tribunal addressed the disallowance of interest on borrowed capital, holding that interest on loans used for working capital purposes is allowable as a revenue expenditure. The Tribunal referenced decisions such as Devi Construction vs. DCIT, which support the deductibility of interest on loans used for business purposes, whether for capital or revenue expenditures.

4. Validity of penalty proceedings under Section 271(1)(c) of the IT Act:
The Tribunal did not adjudicate the penalty proceedings under Section 271(1)(c) since the quantum appeal was decided in favor of the assessee, rendering the penalty issue academic.

Conclusion:
The Tribunal allowed the appeals of the assessee, granting the deduction under Section 80P(2)(d) and addressing the rectification and interest disallowance issues in favor of the assessee. The penalty proceedings were not adjudicated due to the favorable decision on the quantum appeal.