2023 (12) TMI 1326 - AT - Income Tax

Deduction u/s 80P - interest income received from co-operative banks / scheduled banks - limited prayer of the assessee before the Tribunal is to allow the interest cost as a deduction u/s 57 for earning interest income which is to be assessed under the head income from other sources - HELD THAT - Hon ble Karnataka High Court in the case of Totgars Co-operative Sale Society Ltd. 2015 (4) TMI 829 - KARNATAKA HIGH COURT had categorically held that where an assessee a co-operative society earns interest on deposits kept with scheduled banks; only the net interest income can be taxed u/s 56 of the Act (i.e. the interest income reduced by the administrative expenses and other proportionate expenses to earn the said income). We restore the matter to the AO. AO is directed to calculate the cost of funds for earning the interest income which has to be assessed u/s 56 of the Act and allow the same as deduction u/s 57 of the Act. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
- Interpretation of deduction under section 80P of the Income Tax Act, 1961 for interest income from cooperative banks/scheduled banks.

The judgment pertains to an appeal by an assessee against the CIT(A)'s order under section 250 of the Income Tax Act, 1961 for the Assessment Year 2017-18. The assessee, a cooperative society, had filed a return of income claiming deduction under chapter VIA, but the AO restricted the claim of deduction under section 80P of the Act for interest income received from cooperative banks/scheduled banks. The AO assessed the total income at a higher amount, considering the interest income under the head 'income from other sources'. The CIT(A) upheld this view, stating that interest income from such investments cannot be treated as 'business income'.

The assessee appealed to the Tribunal, primarily seeking to allow the cost of funds for earning the interest income assessed under 'income from other sources'. The Tribunal considered the case law of the Hon'ble Karnataka High Court, which held that only the net interest income (interest income reduced by expenses) can be taxed under section 56 of the Act for cooperative societies earning interest from banks. Relying on this precedent, the Tribunal directed the AO to calculate the cost of funds and allow it as a deduction under section 57 of the Act for assessing the interest income under section 56. The appeal was allowed for statistical purposes, and the matter was remanded to the AO for further proceedings.

In conclusion, the Tribunal's decision was based on the interpretation of the relevant provisions of the Income Tax Act and the precedent set by the Hon'ble Karnataka High Court regarding the taxation of interest income from cooperative banks/scheduled banks for cooperative societies. The Tribunal's order emphasized the need to allow deductions for expenses incurred in earning such interest income, in line with the legal principles established in the case law cited.