2024 (8) TMI 498 - AT - Income Tax

Deduction u/s 80P(2)(d) - income earned from deposits with bank - HELD THAT - Artificial distinction attempted to be created between idle funds and operational funds may be misconceived since the interest arising out of funds advanced as loans to the members has already been allowed by the authorities below. Such funds have been deemed to be operational funds and hence, due credit for the same has been allowed. The remaining funds, available with the assessee for whatever reason, have been treated to be the kind of funds on which the Totgars, Co-operative Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT case has specifically ruled that they would be outside the purview of Section 80P of the Act and would constitute income from other sources. We draw considerable strength from the case of PCIT vs. Electro Urban Co-operative Credit Society Ltd. 2020 (3) TMI 402 - CALCUTTA HIGH COURT in which a similar question arose whereby certain funds had to be considered u/s 80P of the Act where also the West Bengal Cooperative Societies Act, 2006 was applicable and the issue was required to be dealt with keeping in view the Totgars, Co-operative Sale Society Ltd. (supra) case by the Hon'ble Jurisdictional High Court. Thus, it is held that the impugned amount of interest income cannot be considered for relief u/s 80P of the Act. However, the alternative submission of the appellant, as per ground no. 2, deserves to be considered and for this limited purpose, the matter is restored to the file of ld. CIT(A) for allowing a reasonable expense for earning the said income. For that purpose, the ld. CIT(A) may refer to the case of Kisan Sahkari Chini Mills Ltd. 2004 (7) TMI 57 - ALLAHABAD HIGH COURT for necessary guidance in terms of identifying the quantum of expense to be allowed as relief on the said disallowance. Appeal filed by the assessee is partly allowed.

Issues Involved:

1. Deduction under Section 80P(2)(d) of the Income Tax Act, 1961.
2. Treatment of interest income from bank deposits.
3. Allowance of expenses related to earning interest income.

Issue-Wise Detailed Analysis:

1. Deduction under Section 80P(2)(d) of the Income Tax Act, 1961:

The appellant, a Cooperative Credit Society, filed its return of income for the assessment year at 'NIL' income. The Assessing Officer (AO) added Rs. 8,27,230/- as interest income, which was deemed outside the purview of Section 80P(2)(d) of the Income Tax Act, 1961. The AO relied on the Supreme Court's judgment in Totgars, Co-operative Sale Society Ltd. vs. ITO, which held that interest income from surplus funds invested in short-term deposits and securities is not eligible for deduction under Section 80P(2)(a)(i).

The appellant argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that the funds in question were operating funds, not surplus funds, and thus should be eligible for deduction. However, the CIT(A) confirmed the AO's addition, relying on the Totgars case and other authorities.

Upon further appeal to the ITAT, the appellant reiterated that the funds were operating funds as per the West Bengal Cooperative Societies Act, 2006, and not surplus funds. The ITAT, however, upheld the AO's and CIT(A)'s decision, citing the Totgars case and the case of PCIT vs. Electro Urban Co-operative Credit Society Ltd., which similarly ruled that interest income from funds not required for business purposes falls outside Section 80P and is taxable under Section 56 as 'Income from other sources.'

2. Treatment of Interest Income from Bank Deposits:

The ITAT noted that the distinction between idle funds and operational funds is artificial. Interest from funds advanced as loans to members has been allowed as operational income. However, interest from remaining funds, irrespective of their classification, is treated as income from other sources per the Totgars case. The ITAT referenced the case of CIT vs. South Eastern Railway Employees Co-op Credit Society Ltd., which also applied the Totgars ruling to interest income from investments, treating it as taxable under Section 56.

3. Allowance of Expenses Related to Earning Interest Income:

The appellant's alternative plea was that if the interest income is treated as income from other sources, expenses incurred to earn this income should be allowed. The ITAT agreed with this contention, referencing the case of CIT vs. Kisan Sahkari Chini Mills Ltd., which provides guidance on estimating allowable expenses for such income.

The ITAT restored the matter to the CIT(A) to allow a reasonable expense for earning the interest income. The CIT(A) was directed to consider the quantum of expense to be allowed as relief on the disallowed interest income.

Conclusion:

The ITAT concluded that the impugned amount of Rs. 8,27,230/- cannot be considered for relief under Section 80P. However, the appellant's alternative submission regarding the allowance of expenses was accepted. The CIT(A) was instructed to determine a reasonable expense for earning the interest income, following the guidance from the Kisan Sahkari Chini Mills Ltd. case.

Outcome:

The appeal filed by the assessee was partly allowed, with the appellant failing on the primary ground but succeeding on the alternative ground related to the allowance of expenses. The order was pronounced in the open Court on 7th August, 2024.

← Previous Next →