2024 (5) TMI 443 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) and/or u/s. 80P(2)(d) - interest income earned on its investments amount made with District co-operative banks - HELD THAT - Rule 23 of the Karnataka Co-operative Societies Rules states that reserve fund belongs to the society and is intended to meet the unforeseen losses. Further if the cooperative society wants to invest reserve fund or any portion thereof for any other purpose as prescribed under section 58 (a) to (d) of the Karnataka Co-operative Societies Act permission is to be taken from , the Registrar of Co-operative Societies. Therefore the argument of the assessee that it is operational income is rejected. Even the maintainability of SLR requirement from out of internal fund/external funds invested in KDCC Bank and interest earned thereon will not change the character of the nature of income and it is not attributable to the business of the assessee. The issue regarding the word attributable has been discussed in the case of M/s Totgars Co-operative Sales Society 2010 (2) TMI 3 - SUPREME COURT where it is held that the deduction u/s 80P is available only to the income which is attributable to the business operation. Since the interest income received by the appellant is not attributable to the main business of the appellant i.e. not operational income, accordingly the interest received by the assessee on investment made with KDCC Bank is not eligible for deduction u/s. 80P(2)(a)(i) of the Act. Deduction u/s 80P(2)(d) - Section 80P(2)(d) describes that if the assessee has derived interest/dividend from its investments with any other co-operative society, then the assessee is eligible for claim of deduction on such interest/dividend derived. In the judgment of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. 2023 (9) TMI 761 - SUPREME COURT it has been discussed in detail the definition of co-operative banks and cooperative society. If the payer bank falls under the definition of cooperative bank in the light of the judgment of Hon ble Apex Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income derived from KDCC Bank. We note that the assessee has received interest from KDCC Bank is a schedule bank which is governed by the Banking Regulation Act of 1949 as observed by the ld. CIT (A) at Para No. 6.11 of his order and this finding has not been denied by the ld. AR of the assessee, accordingly we hold that the assessee is not eligible for deduction u/s 80P(2)(d) on such interest income also. Interest receipts from KDCC Bank on its investments - revenue authorities have considered the entire interest as income from other sources u/s. 56 and no expenses u/s. 57(iii) has been allowed to the assessee for earning of such income - While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. Therefore relying on the judgment of Totgars Cooperative Sales Society Ltd. 2015 (4) TMI 829 - KARNATAKA HIGH COURT the assessee is eligible for claim of its cost of funds on the interest income received from bank. Reliance is also placed on The West Coast Paper Mill Employees Souharda Credit Co-op. Ltd. 2023 (8) TMI 1110 - ITAT BANGALORE Accordingly, the assessee is directed to provide the details of cost of funds before the assessing officer. Therefore for allowing cost of funds, we are remitting this issue to the assessing officer for determining the cost of funds for earning interest income. Both the appeals are partly allowed for statistical purpose.

Summary

Issues Involved:
1. Eligibility for deduction u/s 80P(2)(a)(i) on interest income.
2. Eligibility for deduction u/s 80P(2)(d) on interest income.
3. Consideration of cost of funds u/s 57(iii).

Summary:

Issue 1: Eligibility for deduction u/s 80P(2)(a)(i) on interest income:
The assessee, a credit co-operative society, claimed a deduction u/s 80P(2)(a)(i) on interest income from investments with Karnataka District Central Co-operative Bank (KDCC Bank). The AO denied the deduction, citing the Supreme Court decision in Citizen Co-operative Society Ltd., noting that the society violated the principle of mutuality. The CIT(A) upheld the AO's decision, relying on the Supreme Court judgment in Totgars Co-operative Sale Society Ltd., which categorized interest from investments as "income from other sources" and not operational income. The ITAT concurred, stating the interest income was not attributable to the main business operations of the assessee, thus not eligible for deduction u/s 80P(2)(a)(i).

Issue 2: Eligibility for deduction u/s 80P(2)(d) on interest income:
The assessee alternatively claimed a deduction u/s 80P(2)(d) on interest income from investments with KDCC Bank. The CIT(A) denied this claim, referencing the Karnataka High Court judgment in Totgars Cooperative Sale Society Ltd. and the Supreme Court's interpretation that co-operative banks under RBI's license fall within the mischief of section 80P(4). The ITAT upheld this view, noting that KDCC Bank, being a scheduled bank governed by the Banking Regulation Act, 1949, does not qualify as a co-operative society for the purposes of section 80P(2)(d).

Issue 3: Consideration of cost of funds u/s 57(iii):
The revenue authorities taxed the entire interest income without allowing any expenses u/s 57(iii). The ITAT, relying on the Karnataka High Court judgment in Totgars' Cooperative Sales Society Ltd., directed that the net income should be considered after reducing the expenditure incurred towards earning such income. The matter was remitted to the AO to determine the cost of funds for earning the interest income.

Conclusion:
The ITAT partly allowed the appeals for statistical purposes, directing the AO to consider the cost of funds while calculating the taxable interest income. The order was pronounced on May 7, 2024.