2024 (7) TMI 207 - AT - Income Tax

Deduction u/s 8-P - Income by way of interest earned by it on the deposits or investments made by it during the concerned years with a Co-operative Banks which are not co- operative societies - HELD THAT - The ratio laid down by the Hon ble Karnataka High Court in the case of Totalgars Cooperative Sales Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT is that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society 2010 (2) TMI 3 - SUPREME COURT in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in cooperative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. The argument that co-operative Banks are also co-operative societies is again without any basis in the light of the law explained in the case of Totagar co-opeartive sales society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT - The reliance placed by Assessee on the earlier decisions of Tumkur Merchants Souharda Credit Cooperative Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT that the decision in Totgars Cooperative Sale Society 2015 (4) TMI 829 - KARNATAKA HIGH COURT stands explained by the later decision in the case of Totagar co-opeartive sales society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT Thus, we hold that CIT(A) is not justified in granting deduction under section 80P(2)(d) of the Act for the Assessment Years 2017-18, 2018-19 and 2020-21. Deduction u/s 80P(2)(d) concerning interest income from cooperative banks - claim of deduction u/s 57 in respect of the cost of funds for earning such interest income which is assessed as income under the head Income from Other Sources - HELD THAT - AO is directed to examine whether investment with Co-operative Bank is out of statutory compulsions to maintain the SLR, and if so, to grant deduction under section 80P(2)(a)(i) of the Act. In the event it is found that assessee is not entitled to get the benefit under section 80P(2)(a)(i) of the Act, the AO shall also examine whether it is entitled to deduction under section 80P(2)(d) of the Act in light of the recent judgment of Kerala State Co-operative Agricultural Rural Development ( 2023 (9) TMI 761 - SUPREME COURT ). If the assessee is not entitled to benefit of deduction either under section 80P(2)(a)(i) or under section 80P(2)(d) of the Act, the AO shall consider the claim of deduction under section 57 of the Act in respect of the cost of funds for earning such interest income which is assessed as income under the head Income from Other Sources . For the direction to grant deduction for the cost of funds, we rely on the judgment of the jurisdictional High Court in the case of Totgar s Cooperative Sales Society Ltd., 2015 (4) TMI 829 - KARNATAKA HIGH COURT Further, the AO shall also consider the claim of the assessee raised in its CO in ground 4.1 (supra). It is ordered accordingly.

Summary

Issues Involved:

1. Deduction under Section 80P(2)(d) for interest income from cooperative banks.
2. Deduction under Section 80P(2)(a)(i) for interest income from cooperative banks.
3. Classification and taxation of interest income as "Income from Other Sources."
4. Deduction of expenses under Section 57.
5. Set-off of business loss with income from other sources before considering deductions under Section 80P(2)(a).

Detailed Analysis:

1. Deduction under Section 80P(2)(d) for interest income from cooperative banks:

The primary issue was whether the assessee, a primary agricultural cooperative society, is entitled to deduction under Section 80P(2)(d) of the Income Tax Act for interest income earned from investments made with cooperative banks. The Revenue argued that the CIT(A) erred in allowing this deduction, citing the Karnataka High Court's decision in the case of Totagars Co-operative Sale Society, which held that interest income from cooperative banks is not eligible for deduction under Section 80P(2)(d). The Tribunal upheld this view, stating that cooperative banks are not considered cooperative societies for the purposes of Section 80P(2)(d), and thus, the CIT(A) was not justified in granting the deduction for the assessment years 2017-18, 2018-19, and 2020-21.

2. Deduction under Section 80P(2)(a)(i) for interest income from cooperative banks:

The assessee contended that it is engaged solely in providing credit facilities to its members, and therefore, the interest income from funds not immediately required for lending should be deductible under Section 80P(2)(a)(i). The Tribunal noted that if the investments with cooperative banks are made out of statutory compulsion under the Karnataka Cooperative Societies Act, 1959, the interest income would be considered as business income and eligible for deduction under Section 80P(2)(a)(i). The Tribunal directed the AO to examine this aspect and grant the deduction if the investments were indeed made under such compulsion.

3. Classification and taxation of interest income as "Income from Other Sources":

The AO had classified the interest income from cooperative banks as "Income from Other Sources," which was contested by the assessee. The Tribunal referred to the Karnataka High Court's decision in Totagars Co-operative Sale Society, which held that interest income from investments in banks does not fall under the categories mentioned in Section 80P(2)(a) and should be taxed as "Income from Other Sources." However, the Tribunal allowed for a re-examination by the AO to determine if the investments were made under statutory compulsion, which could change the classification to business income.

4. Deduction of expenses under Section 57:

The assessee argued that if the interest income is classified as "Income from Other Sources," then expenses directly related to earning this income should be deductible under Section 57. The Tribunal agreed and directed the AO to consider the deduction of such expenses if the interest income is ultimately classified under "Income from Other Sources."

5. Set-off of business loss with income from other sources before considering deductions under Section 80P(2)(a):

The assessee also contended that any resultant business loss should first be offset against the income from other sources before considering the deduction under Section 80P(2)(a). The Tribunal directed the AO to consider this claim in accordance with Section 71 of the Income Tax Act, which allows for the set-off of business loss against income from other sources.

Conclusion:

The Tribunal allowed the Revenue's appeals, disallowing the deduction under Section 80P(2)(d) for interest income from cooperative banks. The assessee's cross-objections were allowed for statistical purposes, with directions to the AO to re-examine the nature of investments and consider deductions under Sections 80P(2)(a)(i) and 57, as well as the set-off of business loss against income from other sources. The judgment emphasizes the need for a detailed examination of the statutory compulsion behind investments to determine the correct tax treatment of interest income.