2024 (5) TMI 489 - AT - Income Tax

Denial of 80P(2)(a)(i) deduction - interest income earned on its investments amount made with SBI out of internal fund (Share Capital plus other Funds) constituting its income from the business of providing credit facilities to the members - allowing the proportionate interest paid to the members of the society as well as administrative expenses u/s. 57(iii) - HELD THAT - As relying on Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd 2022 (1) TMI 1309 - GUJARAT HIGH COURT interest received on such investments by assessee is not eligible for deduction u/s. 80P(2)(a)(i)/80P(2)(d) on such interest received from State Bank of India (SBI). Since the interest income received on such investments from State Bank of India is not attributable to main business of the appellant, hence needs to be assessed as income from other sources . Since the interest income received by the appellant was not attributable to the main business of the appellant the same should not be allowed as deduction u/s 80P of the Act. We further note that the revenue authorities have treated the entire income as income from other sources. The entire interest income cannot be taxed if the assessee has incurred expenses towards earning of such income. We further note from the financial statement as on 31.03.2016 that FD with SBI is Rs. 4,36,328,811, however the internal fund is Rs. 5,17,72,069/- which is more than investments made with SBI, it shows that the assessee has not utilized external funds for investment with SBI. Therefore, relying on the judgment of Totgars Co-operative Sales Society Ltd 2015 (4) TMI 829 - KARNATAKA HIGH COURT the assessee is eligible for claim of its expenditure towards earning of such interest income. Accordingly, the assessee is directed to provide the details of expenditure for earning interest income before the assessing officer. Therefore for allowing expenditure, we are remitting this issue to the assessing officer for determining the cost of funds for earning interest income. Appeals of the assessee are partly allowed for statistical purposes.

Summary

Issues involved:
1. Condonation of delay in filing the appeal.
2. Denial of deduction u/s 80P(2)(a)(i) of the Income Tax Act.
3. Allowance of proportionate interest paid to members and administrative expenses u/s 57(iii).

Summary:

1. Condonation of Delay:
The assessee filed an application for condonation of a 10-day delay in filing the appeal for AY 2016-17, citing reasons such as remote office location, preoccupied CA, and the need to consult a new counsel. The Tribunal observed sufficient reasons for the delay and condoned it, following the judgment of the Hon'ble Apex Court in the case of Collector, Land Acquisition Vs. MST. Katiji and Others (1987) 167 ITR 471.

2. Deduction u/s 80P(2)(a)(i):
The primary issue was the denial of deduction u/s 80P(2)(a)(i) for interest income earned on deposits with banks. The AO, relying on the Karnataka High Court judgment in Totgars Co-operative Sale Society, held that such interest is not eligible for deduction and should be taxed as "income from other sources" u/s 56. The CIT(A) partly allowed the appeal, stating that interest income from Scheduled Banks and Cooperative Banks is from non-member category and cannot be considered for deduction u/s 80P(2)(a) or 80P(2)(d), and should be taxed u/s 56. The Tribunal upheld this view, citing various judgments, including Totgars Co-operative Sales Society Ltd. and Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd., and concluded that interest from surplus funds invested in SBI is not attributable to the business of providing credit facilities to members and should be taxed as "income from other sources."

3. Proportionate Interest and Administrative Expenses u/s 57(iii):
The assessee argued for the allowance of proportionate interest paid to members and administrative expenses u/s 57(iii) if the interest income is taxed under "income from other sources." The Tribunal agreed, citing the Karnataka High Court decision in Totagar's Co-operative Sale Society Ltd., which allows deduction of costs and administrative expenses incurred in earning such interest income. The Tribunal remitted the issue to the AO to determine the cost of funds for earning the interest income and allow the expenditure accordingly.

Conclusion:
The appeals were partly allowed for statistical purposes, with the Tribunal directing the AO to allow the deduction of expenditure incurred in earning the interest income from SBI. The judgment was pronounced on May 7, 2024, as per Rule 34 of the Income Tax (Appellate Tribunal) Rules, 1963.