2024 (6) TMI 1022 - AT - Income Tax

Disallowance of claim u/s 80P(2)(a)(i) for interest earned from credit facilities - assessee is a State Level Federal Agriculture and Rural Development Credit Society registered under the provision of the Karnataka Co-op Societies Act 1959 - as submitted that the assessee though has the word bank in its name it is not a bank It is further submitted that the assessee is not licensed to carry on the operations of banking as per the Banking Regulation Act - HELD THAT - In respect of the observation of the authorities below regarding the violation of Principle of Mutuality since the facilities are extended to associate members and nominal members are concerned the ratio by Hon ble Supreme Court in case of Mavilayi 2021 (1) TMI 488 - SUPREME COURT read with section 2(f) of Karnataka Co-operative Act 1959 covers the issue. We note that Karnataka Co-operative Societies Act 1959 defines Members to include nominal / associate members u/s. 2(f). Considering the definition of Member under the Karnataka Co-operative Societies Act the present assessee qualifies for deduction u/s. 80P(2)(a)(i) - Thus we allow the claim of the assessee u/s. 80P(2)(a)(i) of the act in respect of the interest earned by the assessee from credit facilities extended to members that includes nominal / associate members. Disallowance of interest u/s 80P(2)(a)(i) earned by the assessee from staff loans - The arguments advanced by the Ld.AR do not support the scheme of the Act under section 80P(2)(a). What is allowable under the section has been expressly provided for therein. As per section 80P an income which is attributable to any of the specified activities in Section 80P(2) of the Act could be only eligible for deduction. Providing loan to the employees cannot be considered as attributable to the business of the assessee as the term attributable to the business is much narrow term which is directly connected to the objects of the assessee for which it has been established. We therefore hold that the interest earned by the assessee from loan give to its employees cannot be considered for deduction under section 80P(2)(a)(i) of the Act. It has to be treated as income form other sources. Accordingly we hold that the interest earned from the credit activities of the assessee to its members including nominal / associate is allowable u/S 80P(2)(a)(i ) of the act. We also hold that the interest earned by the assessee from loan to its employees are to be treated as Income from other sources not eligible for deduction under the provisions of Section 80P. Disallowance of interest u/s 80P(2)(a)(i)/(d) earned by the assessee from investments made - In the instant case there is nothing on record to come to the conclusion that the amount which was invested in banks to earn interest was amount due to its members and that it was a liability. In fact this amount which is in the nature of profits and gains was not immediately required by the assessee for objects of the society but was required to be invested as required by the Karnataka Co-operative Societies Act 1959. Therefore they had deposited the money out of which interest was earned. The said interest is thus attributable to carrying on the business of the assessee and therefore it is liable to be deducted in terms of Section 80P(2)(d) of the Act. In fact similar view is taken in the case of CIT v. Andhra Pradesh State Co-operative Bank Ltd. 2011 (6) TMI 215 - ANDHRA PRADESH HIGH COURT Thus direct the A.O. to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society as observed in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. 2023 (9) TMI 761 - SUPREME COURT the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act. Without prejudice to the above we make it clear that if the interest earned by assessee from the banks the same be considered under the head Income from other sources and necessary relief to be granted to the assessee u/s 57 of the Act in respect of cost of funds and proportionate administrative and other expenses in accordance with law. Accordingly the issue is restored to the file of Ld.AO for denovo consideration with the above observations. We direct the Ld.AO to carry out necessary verification based on the evidences filed by the assessee and to compute the deduction under section 80P(2)(a)(i)/(d) in accordance with law. Disallowance of guarantee commission u/s 43B - AR submitted that the guarantees in the present case were extended by the Government to the assessee as a part of the executive power of the state under article 293(1) of the Constitution and section 43B contemplates that a law must levy a tax duty cess or fee and that there is no such levy in the case of a guarantee commission thus Section 43B does not cover guarantee commission - HELD THAT - Section 43B falls in Part-V of the Act. What is apparent is that the scheme of the Act is such that Sections 28 to 38 deal with different kinds of deductions whereas Sections 40 to 43B spell out special provisions laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme Section 40 (which too starts with a nonobstante clause overriding Sections 30-38) deals with what cannot be deducted in computing income under the head Profits and Gains of Business and Profession Each of these deductions has its contours depending on the expressions used and the conditions that are to be met. It is therefore necessary to bear in mind that specific enumeration of deductions dependent upon fulfilment of certain conditions that would qualify as allowable deductions and failure by the assessee to comply with those conditions would render the claim to be rejected. In the present case it is apparent that the guarantee- commission paid has been debited to the Assessee s P L account. Guarantee commission cannot be considered to be in the nature of any levy cess of such type. In fact the provisions of section 43B would not be admissible to the payment Guarantee commission by the assessee to the State Government under an agreement as it does not qualify for any of the types mentioned therein. We therefore remand this issue to the Ld.AO to carry out necessary verification based on the agreement entered into by the assessee with the state Government and to analyse if the payment of guarantee Commission is an admissible deduction under section 37(1) of the Act. Disallowance of business loss - As per assessee he returned loss under the head profits and gains from business or profession and on account of the income from other heads exceeding the loss declared the gross total income as declared became positive - HELD THAT - As AR submitted that the Ld.AO in determining the gross total income has taken income under the head profits and gains from business and profession as nil and he has ignored the loss of Rs. 29, 48, 007.In our opinion this issue needs to be verified by the Ld.AO while giving effect to the order of this Tribunal. Addition of e-stamping income - AR submitted that the Ld.AO observed that since the Appellant renders e-stamping services and receives income from non-members the deduction under section 80P(2)(a)(i) will not be allowable. However no disallowance of the deduction under section 80P was made specifically as it relates to e-stamping income - HELD THAT - Identical issue has been analysed hereinabove while considering the interest earned by the assessee from staff loan. We rely on the observations made in para 16.3 and hold that the income earned by the assessee from E stamping cannot be considered for the purpose of deduction under section 80P(2) of the act.

Summary

Issues Involved:
1. Disallowance of claim under section 80P(2)(a)(i) of the Act.
2. Disallowance of interest earned on staff loans.
3. Disallowance of interest earned from investments under section 80P(2)(a)(i)/(d).
4. Disallowance of guarantee commission under section 43B.
5. Disallowance of business loss.
6. Addition of e-stamping income.
7. Incorrect quantification of total income.

Issue-wise Detailed Analysis:

1. Disallowance of Claim Under Section 80P(2)(a)(i):
The assessee, a state-level non-banking co-operative credit society, claimed deductions under section 80P(2)(a)(i)/(d) for various assessment years. The AO disallowed these claims, arguing that the assessee was engaged in banking activities and thus fell under section 80P(4). The CIT(A) upheld these disallowances, stating that the principle of mutuality did not exist for transactions with nominal/associate members. The Tribunal noted that the assessee is not a bank as per the Banking Regulation Act and that nominal/associate members are considered members under the Karnataka Co-operative Societies Act. Therefore, the Tribunal allowed the claim under section 80P(2)(a)(i) for interest earned from credit facilities extended to members, including nominal/associate members.

2. Disallowance of Interest Earned on Staff Loans:
The AO and CIT(A) disallowed the interest earned on staff loans, arguing that these transactions were with non-members. The Tribunal held that staff loans are not directly connected to the business of providing credit facilities to members. Thus, the interest earned from staff loans should be treated as income from other sources and not eligible for deduction under section 80P(2)(a)(i).

3. Disallowance of Interest Earned from Investments Under Section 80P(2)(a)(i)/(d):
The AO disallowed the entire claim under section 80P(2)(a)(i) for interest earned from investments. The Tribunal noted that investments made to meet statutory requirements should be considered under section 80P(2)(d). The Tribunal directed the AO to verify if the interest/dividend was earned from investments with co-operative societies and allow the deduction accordingly. If the interest was earned from banks, it should be considered under the head "Income from other sources," and necessary relief should be granted under section 57.

4. Disallowance of Guarantee Commission Under Section 43B:
The AO treated the guarantee commission paid to the Government of Karnataka as a fee under section 43B and disallowed it. The Tribunal held that guarantee commission is not a levy, cess, or fee but a contractual payment. The Tribunal remanded the issue to the AO for verification based on the agreement with the state government and to analyze if the payment qualifies for deduction under section 37(1).

5. Disallowance of Business Loss:
The AO disallowed the business loss of Rs. 29,48,007 for AY 2017-18. The Tribunal remanded the issue to the AO for verification while giving effect to the Tribunal's order.

6. Addition of E-stamping Income:
The AO observed that income from e-stamping services rendered to non-members would disqualify the assessee from claiming deductions under section 80P(2)(a)(i). The Tribunal held that the income from e-stamping is not material enough to alter the assessee's eligibility for deductions. However, the Tribunal directed the AO to consider the alternate claim of the assessee for expenditure incurred on e-stamping.

7. Incorrect Quantification of Total Income:
The AO incorrectly quantified the total income for AY 2017-18. The Tribunal directed the AO to quantify the total income in accordance with the law and the evidences filed by the assessee.

Conclusion:
The Tribunal allowed the appeals partly, directing the AO to verify and compute deductions under section 80P(2)(a)(i)/(d) in accordance with the law. The Tribunal also remanded specific issues for further verification and appropriate action.