2020 (7) TMI 715 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income earned from investment of funds in commercial banks and cooperative banks/societies - CIT-A upholding action of AO such interest income is not eligible for deduction under that section - HELD THAT - Assessee is not a banking company and the expression business of banking cannot be given a spacious meaning to unrealistically expand the term beyond, the assessee is not eligible for deduction u/ s 80P(2)(a)(i). Accordingly, we hereby hold that the interest earned from the fixed deposits made out of the surplus funds is not eligible for the claim of deduction u/s 80P(2)(a)(i). Deduction u/s 80P(2)(d) - alternative plea for deduction - whether the co- operative bank wherein the assessee made deposits out of this surplus fund be considered as a co-operative society, for if a co-operative bank is considered to be a co-operative society than only the interest earned by the assessee on the deposits would be eligible for deduction u/s 80P(2)(d)? - HELD THAT - We find that co- operative society is a broad and larger umbrella under which the co-operative banks do perform. All co-operative societies may not be banks but all co-operative banks are deemed to be co-operative societies. According to banking Regulations Act, a co-operative society bank as the same meaning of the co- operative society. We have also given a thought as to the interest earned by the surplus funds. As per the Income Tax Act, there is no such stipulation or prerequisite as to the nature of the funds. Section 80P(2)(d) of the Act allows whole deduction of an income by way of interest or dividends derived by the co-operative society from its investment with any other co-operative society. This provision does not make any distinction in regard to source of the investment because this section envisages deduction in respect of any income derived by the co-operative society from any investment with a co-operative society. The revenue is not required to look to the nature of the investment whether it was from its surplus funds or otherwise. Referring to cases TOTAGARS CO-OPERATIVE SALE SOCIETY, 2017 (1) TMI 1100 - KARNATAKA HIGH COURT and 2010 (2) TMI 3 - SUPREME COURT we hereby hold that the assessee is eligible for deduction u/ s 80P(2)(d) on the income earned by the way of interest from the co-operative societies. Expenditure u/s 57 - assessee has taken a plea that the expenditure incurred in earning of interest from the commercial banks be allowed while computing the taxable income - HELD THAT - The assessee is eligible for the expenditure u/s 57 incurred in earning the interest income which is taxable under the head income from other sources as per Section 56.

Issues Involved:
1. Deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Alternative deduction under section 80P(2)(d) of the Act.
3. Deduction of proportionate interest and other expenses under section 57 of the Act.

Detailed Analysis:

Deduction under Section 80P(2)(a)(i):
The assessee claimed deductions under section 80P(2)(a)(i) for interest income earned from investments in commercial banks and cooperative banks/societies. The Assessing Officer (AO) disallowed this deduction, stating that income earned by a cooperative society from sources other than providing credit facilities to its members is not eligible for deduction under section 80P. The AO relied on the Supreme Court judgment in Totgars Co-operative Sale Society Ltd. vs. ITO, which held that interest income from bank deposits is taxable under "income from other sources."

The CIT(A) upheld the AO's decision, and the matter was taken to the Delhi High Court, which confirmed that the assessee, being a thrift and credit society, is not engaged in the "business of banking" and thus not eligible for deduction under section 80P(2)(a)(i).

The Tribunal concluded that the interest earned from fixed deposits made out of surplus funds is not eligible for deduction under section 80P(2)(a)(i).

Alternative Deduction under Section 80P(2)(d):
The assessee alternatively claimed a deduction under section 80P(2)(d), which allows deductions for interest or dividends derived from investments with other cooperative societies. The AO and CIT(A) initially rejected this claim, but the Tribunal reconsidered it de novo.

The Tribunal noted that cooperative banks are essentially cooperative societies engaged in banking activities. Thus, the interest earned from deposits in cooperative banks qualifies for deduction under section 80P(2)(d). The Tribunal emphasized that section 80P(2)(d) does not distinguish between the sources of investment funds, allowing deductions for any income derived from investments with cooperative societies.

The Tribunal also referenced the Karnataka High Court's decision in Totgars Co-operative Sale Society Ltd., which allowed deductions under section 80P(2)(d) even though the Supreme Court had ruled against deductions under section 80P(2)(a)(i).

Deduction of Proportionate Interest and Other Expenses under Section 57:
The assessee argued for the deduction of expenses incurred in earning interest from commercial banks under section 57, which allows deductions for expenses incurred wholly and exclusively for earning income under "income from other sources."

The Tribunal directed the AO to allow the deduction of such expenses, noting that section 57 permits deductions for any reasonable expenses incurred in earning income from other sources.

Conclusion:
1. The assessee, being a cooperative society not engaged in banking operations, is not eligible for deduction under section 80P(2)(a)(i).
2. The assessee is eligible for deduction under section 80P(2)(d) for interest earned from investments with other cooperative societies.
3. The assessee is eligible for deductions under section 57 for expenses incurred in earning interest income taxable under "income from other sources."

In the result, all the appeals of the assessee were allowed.

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