2021 (9) TMI 140 - AT - Income Tax

Deduction u/s.80P(2)(d) - interest income and dividend income claimed as deduction on deposits and investments with co-operative banks not to be allowed to the assessee either under section 80P(2)(a)(i) or 80P(2)(d) - HELD THAT - The Hon ble Karnataka High Court in the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 2017 (7) TMI 1049 - KARNATAKA HIGH COURT took a view and held that interest income earned on deposits whether with any other bank will be in the nature of income from other sources and not income from business and therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed to the assessee. The Hon ble Court followed decision of Hon ble Gujarat High Court in the case of SBI 2016 (7) TMI 516 - GUJARAT HIGH COURT held that interest income is not income from business but was income chargeable to tax under the head income from other sources and therefore there was no question of allowing deduction u/s.80P(2)(d). If there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments whether can be said to have business nexus and therefore should be considered as income derived from the business of providing credit facility to the members, requires examination. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT(A) by remanding the issue examination afresh. Deduction u/s.80P(2)(d) - what is the quantum of interest income that should be brought to tax by the AO, in case the deduction is denied to the Assessee u/s.80P(2)(d)? - As decided in THE PUTTUR PRIMARY CO-OP AGRICULTURE AND RURAL DEVELOPMENT BANK LTD. 2021 (6) TMI 460 - ITAT BANGALORE tribunal held that the Assessee should be allowed expenses and the entire gross interest cannot be taxed - AO will afford opportunity of being heard to the assessee and filing appropriate evidence, if desired, by the assessee to substantiate its case, before deciding the issue in the set aside proceedings. Appeal of the assessee is treated as partly allowed for statistical purpose.

Summary

Issues Involved:
1. Deduction under Section 80P(2)(d) of the Income Tax Act, 1961.
2. Deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
3. Quantum of interest income to be taxed if deduction is denied.
4. Compliance with statutory requirements and its impact on business income.

Detailed Analysis:

1. Deduction under Section 80P(2)(d) of the Income Tax Act, 1961:
The primary issue concerns the assessee's claim for deduction under Section 80P(2)(d) for interest and dividend income earned from deposits and investments made with South Canara District Co-operative Bank (SCDCC Bank). The Assessing Officer (AO) denied this deduction, referencing the Karnataka High Court's decision in Totagars Co-operative Sale Society, which held that such income is taxable under "income from other sources" and not eligible for deduction under Section 80P(2)(a)(i) or 80P(2)(d). The CIT(A) upheld the AO's decision. The Tribunal, referencing the Karnataka High Court's judgment, reiterated that interest from investments in co-operative banks does not qualify for deduction under Section 80P(2)(d), which only exempts interest from investments in co-operative societies.

2. Deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961:
The AO also denied the deduction under Section 80P(2)(a)(i), arguing that nominal and associate members, who do not have voting rights or profit participation, do not satisfy the mutuality principle as per the Supreme Court's decision in Citizen Co-operative Society Ltd. The CIT(A) confirmed this view. The Tribunal, citing the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd., remanded the issue back to the AO for re-examination, emphasizing the need to consider the definition of "members" under the relevant co-operative societies act.

3. Quantum of Interest Income to be Taxed if Deduction is Denied:
The Tribunal addressed the issue of what portion of interest income should be taxed if the deduction under Section 80P(2)(d) is denied. It referenced the ITAT Bengaluru Bench's decision in Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., which held that the assessee should be allowed to deduct proportionate costs, administrative, and other expenses. The Tribunal directed the AO to allow such deductions if the interest income is assessed under "income from other sources."

4. Compliance with Statutory Requirements and Its Impact on Business Income:
The assessee argued that the interest income from deposits made in compliance with Section 58 of the Karnataka Co-operative Societies Act, 1959, should be considered business income eligible for deduction under Section 80P(2)(a)(i). The Tribunal noted that this argument, raised for the first time, requires examination by the AO. It emphasized the need to determine if statutory compulsions for maintaining deposits in a particular manner could establish a business nexus, thereby qualifying the interest income as derived from the business of providing credit facilities to members.

Conclusion:
The Tribunal remanded the issues back to the AO for fresh examination, particularly considering the statutory requirements and the Supreme Court's decisions. The appeal was partly allowed for statistical purposes. The Tribunal's directions ensure that the AO re-evaluates the applicability of deductions under Sections 80P(2)(d) and 80P(2)(a)(i) in light of the relevant legal precedents and statutory mandates.