2023 (9) TMI 1667 - AT - Income Tax

Denial of deduction u/s 80P - interest income earned from deposits placed with the bank - expenditure incurred in relation to earning interest income taxable under Section 56 can be allowed under Section 57 of the Act or not? HELD THAT - In the light of the judgment of Mantola Co-operative Thrift Credit Society Ltd. 2014 (9) TMI 833 - DELHI HIGH COURT we do not see any merit in the plea of the assessee for claim of deduction. Expenditure incurred in relation to earning interest income taxable - We notice that there is no discussion or finding on allowability of expenditure u/s 57 incurred in relation to earning of interest taxable income u/s 56 of the Act. Hence we consider it expedient to remit the matter back to the file of AO for re-determination of taxable income for giving appropriate allowances towards expenditure connected to the earning of interest income in accordance with law. Assessee society would be entitled to general relief of Rs.50, 000/- provided under Section 80P(2)(c)(ii) of the Act and out of the income assessed under the head business income . Assessee appeal partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the interest income earned by a cooperative society from fixed deposits placed with banks (other than cooperative banks) is eligible for deduction under Section 80P of the Income Tax Act, 1961.
• Whether the expenditure incurred in relation to earning interest income taxable under Section 56 can be allowed under Section 57 of the Act.
• Entitlement of the assessee to general relief under Section 80P(2)(c)(ii) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deduction under Section 80P for Interest Income from Fixed Deposits

• Relevant Legal Framework and Precedents: Section 80P of the Income Tax Act provides deductions to cooperative societies on certain types of income. The Supreme Court's decision in Totgars Cooperative Sale Society vs. ITO and the Delhi High Court's ruling in Mantola Co-operative Thrift & Credit Society Ltd. vs. CIT were pivotal in interpreting these provisions.
• Court's Interpretation and Reasoning: The Tribunal relied on the Delhi High Court's interpretation that Section 80P provides partial exemptions limited to specified earnings or incomes in subsection (2). The court noted that interest income from surplus funds kept with banks does not qualify for deduction under Section 80P as it is assessable under "income from other sources".
• Key Evidence and Findings: The court noted the absence of a cooperative bank relationship for the fixed deposits in question and referenced established legal precedents to support its conclusion.
• Application of Law to Facts: The Tribunal applied the legal principles from the cited precedents to the facts, concluding that the interest income from fixed deposits with non-cooperative banks is taxable under Section 56 as "income from other sources".
• Treatment of Competing Arguments: The assessee's argument for the deduction was dismissed based on the binding precedents, particularly the Mantola case, which directly addressed similar circumstances.
• Conclusions: The Tribunal found no merit in the assessee's claim for deduction under Section 80P for the interest income in question.

Issue 2: Allowability of Expenditure under Section 57

• Relevant Legal Framework and Precedents: Section 57 of the Act allows deductions for expenses incurred wholly and exclusively for earning income taxable under the head "income from other sources".
• Court's Interpretation and Reasoning: The Tribunal noted the lack of discussion on the allowability of such expenditure in the lower authorities' decisions and deemed it necessary to remit the matter for further examination.
• Key Evidence and Findings: The Tribunal did not find specific evidence or findings from the lower authorities on this issue, prompting a remand for further consideration.
• Application of Law to Facts: The Tribunal directed the Assessing Officer to reassess the taxable income, considering any allowable expenses under Section 57.
• Treatment of Competing Arguments: The Tribunal did not delve deeply into arguments on this issue due to the lack of prior findings, opting instead for a remand.
• Conclusions: The matter was remitted to the Assessing Officer for re-evaluation concerning the allowability of expenses under Section 57.

Issue 3: General Relief under Section 80P(2)(c)(ii)

• Relevant Legal Framework and Precedents: Section 80P(2)(c)(ii) provides a general relief of Rs.50,000 for cooperative societies on income assessed under the head "business income".
• Court's Interpretation and Reasoning: The Tribunal recognized the entitlement of the assessee to this relief, irrespective of the decision on the main issue of interest income deduction.
• Key Evidence and Findings: The Tribunal acknowledged the statutory provision granting this relief to cooperative societies.
• Application of Law to Facts: The Tribunal applied the statutory provision directly to the facts, granting the relief.
• Treatment of Competing Arguments: No competing arguments were addressed as the provision was clear and unambiguous.
• Conclusions: The assessee was entitled to the general relief of Rs.50,000 under Section 80P(2)(c)(ii).

3. SIGNIFICANT HOLDINGS

• Crucial Legal Reasoning: "The interest income earned from surplus fund kept with Banks, would not qualify for deduction as it was assessable under the head 'income from other sources'. It was further observed that interest earned from investing surplus funds with Banks would fall under Section 56 of the Act and would be taxable under the head income from other sources and thus would be taxable under Section 2(24) of the Act."
• Core Principles Established: Interest income from fixed deposits with non-cooperative banks is taxable under "income from other sources" and does not qualify for deduction under Section 80P. The assessee is entitled to general relief under Section 80P(2)(c)(ii) for business income.
• Final Determinations on Each Issue: The appeal was partly allowed. The claim for deduction under Section 80P was denied, the issue of expenses under Section 57 was remanded for further consideration, and the general relief under Section 80P(2)(c)(ii) was granted.