2017 (12) TMI 1883 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income earned on the surplus fund i.e. Interest on Reserve, Bad Debt, MSSS 5% on the FD general - HELD THAT - In the instant case the assessee has shown income from the fixed deposits maintained with the bank as discussed in the preceding paragraph. The above interest income was disallowed by the AO on the ground that it is not arising from the credit facilities provided to the members therefore it is not eligible for deduction u/s 80P(2)(a)(i). As noticed that the AO has made the disallowance of interest income on the fixed deposits (general) for ₹ 40,76,664.00 but the CIT(A) has deleted the addition made by the AO to the tune of 5% of the interest income - Hon ble ITAT has restored the issue raised by the assessee to the file of AO for fresh adjudication for the same assessment year. The relevant extract of the order has already been produced in the preceding paragraph. As the present issue of interest is common with that of the assessee, therefore we are inclined to restore the same issue to the file of AO for fresh adjudication in accordance with the law. Other interest income - We notice that these funds were created to meet the requirement of the provisions of West Government Co-operative Societies Act 1983 as discussed above. Therefore in our considered view the impugned interest income is eligible for deduction u/s 80P(2)(a)(i). We find that the impugned issue has already been decided by the Hon ble ITAT in the own case of the assessee for the AY 2008-09 in 2012 (4) TMI 832 - 13-04-2012 where the Co-ordinate Bench of this Tribunal was pleased to delete the addition made by the AO. The relevant extract of the order has already been produced in the preceding paragraph. Thus, we hold that the impugned interest income earned on MSSS, Reserve Fund on Bad debts Funds is eligible for deduction under section 80P(2)(a)(i) of the Act. Thus, the ground raised by the Revenue is partly allowed for statistical purposes. Addition made on account of subsidy received by the assessee - AO disallowed the deduction claimed by the assessee u/s 80P(2)(a)(i) by observing that the same is not arising from the activities of providing credit facilities to the members - HELD THAT - As in the own case of the assessee for the AY 2008- 09 2012 (4) TMI 832 - 13-04-2012 as in respect of the subsidy amount since it is of non-capital in nature the same cannot be disallowed by applying the ratio laid down in the case of the Totgars Co-operative Sales Society Ltd. 2010 (2) TMI 3 - SUPREME COURT Deduction u/s 80P(2)(a)(i) of the Act on account of the provision for Ex-gratia - HELD THAT - As undisputed that in the instant case the assessee is claiming deduction u/s 80P(2)(a)(i) of the Act. Therefore, the disallowance of ex-gratia will result into higher deduction to the assessee u/s 80P(2)(a)(i) of the Act. Thus, there will no effect on the tax liability of the assessee even after making the addition of the provision for exgratia expense.

Summary

Issues Involved:
1. Eligibility for deduction under section 80P(2)(a)(i) of the Income Tax Act for interest income earned by a cooperative society.
2. Applicability of the judgment in Totgars Co-operative Sale Society Ltd. v. ITO.
3. Proportionate deduction in respect of interest paid/payable to members.
4. Non-adjudication of specific grounds raised in the memorandum of appeal.
5. Provision for ex-gratia.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The core issue revolves around whether the interest income earned by the cooperative society qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act. The assessee, a cooperative society, claimed deductions for various interest incomes, including those from fixed deposits, reserve funds, bad debts, and MSSS accounts. The Assessing Officer (AO) disallowed the deduction for interest income on the grounds that it was not directly related to the business of providing credit facilities to its members. The AO's decision was based on the interpretation that only interest income directly arising from credit facilities provided to members is eligible for deduction under section 80P(2)(a)(i). The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the AO's decision but allowed deductions for interest from reserve funds, bad debts, and MSSS accounts, while disallowing interest from fixed deposits.

2. Applicability of the Judgment in Totgars Co-operative Sale Society Ltd. v. ITO:
The AO applied the Supreme Court judgment in Totgars Co-operative Sale Society Ltd. v. ITO, which held that interest income from surplus funds invested in short-term deposits/securities is taxable under the head "Income from Other Sources" and not eligible for deduction under section 80P(2)(a)(i). The CIT(A) and the Income Tax Appellate Tribunal (ITAT) found this judgment distinguishable, noting that the facts in Totgars involved surplus funds from sales proceeds, whereas the present case involved statutory reserves and funds required by the West Bengal Co-operative Societies Act, 1983. The ITAT restored the issue to the AO for fresh adjudication, emphasizing the need to verify whether the investments were made from surplus funds or statutory reserves.

3. Proportionate Deduction in Respect of Interest Paid/Payable to Members:
The assessee argued for a proportionate deduction of interest paid to members out of the interest income earned. The ITAT, following its previous decisions, restored this issue to the AO for fresh consideration, requiring verification of whether the investments were made from surplus funds or liabilities payable to members.

4. Non-adjudication of Specific Grounds Raised in the Memorandum of Appeal:
The CIT(A) was found to have erred in not adjudicating specific grounds raised in the memorandum of appeal, including those related to the proportionate deduction of interest paid to members. The ITAT directed the AO to address these grounds during the fresh adjudication process.

5. Provision for Ex-gratia:
The AO disallowed a provision for ex-gratia amounting to Rs. 1.50 lakhs, stating that provisions are not allowable as deductions under the Income Tax Act. However, the CIT(A) allowed the deduction under section 80P(2)(a)(i), reasoning that the disallowance would result in a higher deduction for the assessee. The ITAT upheld the CIT(A)'s decision, noting that the disallowance of ex-gratia would not affect the tax liability due to the deduction under section 80P(2)(a)(i).

Conclusion:
The ITAT's judgment largely revolves around the interpretation and application of section 80P(2)(a)(i) concerning interest income earned by cooperative societies. The Tribunal restored several issues to the AO for fresh adjudication, emphasizing the need for detailed verification of whether the interest income arose from surplus funds or statutory reserves. The decision underscores the importance of distinguishing between different types of interest income and their eligibility for deductions under the Income Tax Act.