2024 (5) TMI 1115 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) and 80P(2)(d) - assessee has invested its fund in co-operative banks and earned interest thereon - HELD THAT - Assessee has received interest from cooperative bank but it is not clear whether the interest payer is a bank and registered with Reserve Bank of India and holding licence from RBI for carrying out banking business as per RBI Act. In addition in the judgment of Kerala State Cooperative Agricultural and Rural Development Bank Ltd. KSCARDB 2023 (9) TMI 761 - SUPREME COURT it has been discussed in detail the definition of cooperative banks and co-operative society. If the payer bank falls under the definition of co-operative 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 received from cooperative banks therefore this issue is remitted back to the Ld.AO. Deduction of expenditure u/s 57 - Assessee has received interest from other co-operative bank on its investments. In this regard the Ld.CIT(A) has not given benefit of deduction u/s. 80P(2)(d) as per the judgment of the Jurisdictional High Court 2017 (7) TMI 1049 - KARNATAKA HIGH COURT . The revenue authorities have considered the entire interest as income from other sources u/s. 56 and no cost of expenses u/s. 57 has been allowed to the assessee. 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 Co-operative Sales Society Ltd. 2015 (4) TMI 829 - KARNATAKA HIGH COURT assessee is eligible for claim of its cost of funds on the entire interest income. Reliance is also placed on the judgment of The West Coast Paper Mill Employees Souhardha 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. Appeals of the assessee are partly allowed for statistical purposes.

Summary

Issues Involved:
1. Eligibility of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Eligibility of deduction under Section 80P(2)(d) of the Income Tax Act.
3. Deduction of expenditure under Section 57 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Eligibility of Deduction under Section 80P(2)(a)(i):

The primary issue was whether the assessee, a co-operative society, was eligible for deduction under Section 80P(2)(a)(i) for interest income earned on investments made with co-operative banks. The Assessing Officer (AO) disallowed the deduction, relying on various judgments, including the jurisdictional High Court's decision in Pr.CIT Hubballi vs. Totagars Co-operative Sale Society, which held that interest income from investments with co-operative banks is not eligible for deduction under Section 80P(2)(a)(i). The CIT(A) concurred, allowing only the deduction related to income from providing credit facilities to its members.

The Tribunal noted that the assessee argued that the interest income was attributable to the business of banking and should be included under the term "profits and gains" in Section 80P(2). However, the Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Totgars Co-operative Sales Society, which clarified that interest income not directly attributable to the business operations of the society should not be allowed as a deduction under Section 80P(2)(a)(i).

2. Eligibility of Deduction under Section 80P(2)(d):

The second issue was whether the interest income from investments in co-operative banks qualified for deduction under Section 80P(2)(d). The assessee contended that co-operative banks are also co-operative societies, and thus, interest earned from them should be deductible under Section 80P(2)(d). The Tribunal noted that the CIT(A) rejected this claim, relying on the judgment of the Karnataka High Court and subsequent ITAT decisions, which held that interest from co-operative banks does not qualify for deduction under Section 80P(2)(d).

The Tribunal further emphasized that the definition of a co-operative bank, as discussed in the Supreme Court's ruling in Kerala State Co-operative Agricultural and Rural Development Bank Ltd., should be considered. If the payer bank is registered with the RBI and holds a license for banking business, it does not qualify as a co-operative society for the purposes of Section 80P(2)(d). Consequently, the Tribunal remitted this issue back to the AO for verification.

3. Deduction of Expenditure under Section 57:

The third issue was whether the proportionate expenses incurred in earning the interest income should be allowed as a deduction under Section 57. The assessee argued that if the interest income is assessed as "income from other sources," the related expenses should be deductible. The Tribunal agreed, citing the Karnataka High Court's judgment in Totgars Co-operative Sales Society Ltd. vs. ITO Sirsi, which held that net income should be considered after reducing the expenditure incurred towards earning such income.

The Tribunal directed the AO to determine the cost of funds for earning the interest income and allow the deduction accordingly. This issue was remitted back to the AO for further examination and calculation.

Conclusion:

The Tribunal partly allowed the appeals for statistical purposes, directing the AO to re-examine the eligibility of deductions under Sections 80P(2)(d) and 57, based on the definitions and principles outlined in the relevant judgments. The decision emphasized the need for a detailed examination of the nature of the interest income and the status of the payer bank to determine the correct tax treatment.