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2021 (12) TMI 562 - AT - Income TaxBenefit of deduction u/s 80P(2)(a)(i) - AO held that the assessee is primarily engaged in the business of banking and in view of the insertion of sub- section (4) to section 80P of the Act with effect from 001.04.2007, the assessee is not entitled to the benefit of deduction u/s 80P(2)(a)(i) - HELD THAT - The recent order of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd. 2021 (8) TMI 706 - ITAT BANGALORE by following the judgment of Totagars Co-operative Sale Society v.ITO 2017 (1) TMI 1100 - KARNATAKA HIGH COURT held that interest income earned out of investments made from surplus funds would be taxable under the head income from other sources and would not be eligible for deduction u/s 80P(2)(a)(i) of the Act. It was further held by the Tribunal insofar as the deduction u/s 80P(2)(d) of the Act is concerned, only those interest received from investment with co-operative societies alone would be entitled to deduction. CIT(A) had allowed the deduction u/s 80P(2)(a)(i) of the Act by holding that interest arising from investments made in compliance with the statutory provisions is exempt u/s 80P(2)(a)(i) of the Act. From the records, we noticed that the assessee has received interest income even from other Scheduled Banks, such as, IDBI Bank, Yes Bank etc. Therefore, the reasoning of the CIT(A) that the investments are made in compliance with the statutory provision of the Karnataka State Co-operative Societies Act, 1959, may not be fully correct. Therefore, we are of the view that the matter has to be examined by the Assessing Officer. Deduction u/s 80P(2)(d) - We make it clear that the interest income received out of investments with co-operative societies alone is to be allowed as deduction. Deduction u/s 57 - alternate contention of the assessee that if interest income is to be assessed as income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction u/s 57 - The assessee has not raised the plea before the Income Tax Authorities that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised before the lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only net income has to be taxed (i.e., gross receipt minus allowable expenditure), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of Totagars Sale Co-operative Society Limited 2017 (1) TMI 1100 - KARNATAKA HIGH COURT - Accordingly, the issue of deduction u/s 57 of the I.T.Act is restored to the files of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head income from other sources . If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. In the recent judgment of The Mavilayi Service Co-operative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT had held that the expression members is not defined under the Income-tax Act. Hence, it is necessary to construe the term members in section 80P(2)(a)(i) of the I.T.Act as it is contained in the respective State Co-operative Act. The Hon ble Apex Court had held that providing credit facilities to associate or nominal members would be entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act unless they are not considered as members of the co-operative societies under the respective State Act. The Hon ble Apex Court has also considered the judgment in case of Citizen Co-operative Society Ltd. Thus we are of the view that the matter needs to be considered afresh by the Assessing Officer. Accordingly, we set aside the order of the CIT(A) and direct the A.O. to verify the claim made by the assessee u/s 80P(2)(a)(i) and 80P(2)(d) of the Act, keeping in view the dictum laid down in the judicial pronouncements referred supra.
Issues Involved:
1. Deduction under section 80P(2)(a)(i) of the Income Tax Act. 2. Classification of interest income from deposits with Scheduled Banks and Co-operative Banks. 3. Applicability of the Supreme Court judgment in Citizen Co-operative Society Ltd. v. ACIT. 4. Deduction under section 80P(2)(d) of the Income Tax Act. 5. Allowance of deduction under section 57 of the Income Tax Act for expenses incurred to earn interest income. Detailed Analysis: 1. Deduction under Section 80P(2)(a)(i): The assessee, a co-operative society engaged in providing credit facilities to its members, claimed a deduction under section 80P(2)(a)(i) of the Income Tax Act for the assessment year 2015-2016. The Assessing Officer (A.O.) disallowed this deduction, asserting that the assessee was primarily engaged in the business of banking and thus not entitled to the deduction due to the insertion of sub-section (4) to section 80P. The A.O. relied on the Supreme Court judgment in Citizen Co-operative Society Ltd. v. ACIT, which held that the assessee violated the principle of mutuality. 2. Classification of Interest Income: The A.O. also determined that ?64,90,752 received as interest from deposits with Scheduled Banks and Co-operative Banks was incorrectly disclosed under 'income from business' and should be taxable under 'income from other sources'. The A.O. cited the Karnataka High Court judgment in Pr.CIT v. Totagars Co-operative Sale Society, which ruled that surplus funds invested with Scheduled Banks and Co-operative Banks are not eligible for deduction under sections 80P(2)(a)(i) or 80P(2)(d). 3. Applicability of Citizen Co-operative Society Ltd. v. ACIT: The CIT(A) disagreed with the A.O., stating that the decision in Citizen Co-operative Society Ltd. v. ACIT was not applicable since the assessee dealt exclusively with its members, providing credit facilities for residential sites/flats. The CIT(A) relied on the Supreme Court judgment in CIT v. Karnataka State Co-operative Apex Bank, which held that interest from investments made in compliance with statutory provisions is exempt under section 80P(2)(a)(i). 4. Deduction under Section 80P(2)(d): The CIT(A) allowed the deduction under section 80P(2)(d) for interest earned from another Co-operative Bank, contrary to the Karnataka High Court's decision in Totagars Co-operative Sale Society, which held that interest from investments in banks, not being co-operative societies, is not deductible under section 80P(2)(d). 5. Deduction under Section 57: The assessee alternatively argued that if interest income is assessed as 'income from other sources', the cost incurred to earn such income should be deductible under section 57. The Tribunal acknowledged this argument, citing the Karnataka High Court judgment in Totagars Co-operative Sale Society Ltd. v. ITO, which allowed deduction of proportionate costs and administrative expenses incurred in earning interest income. Tribunal's Decision: The Tribunal concluded that the matter required further examination by the A.O. It directed the A.O. to verify the assessee's claims under sections 80P(2)(a)(i) and 80P(2)(d), considering the judicial pronouncements. The Tribunal also instructed the A.O. to assess whether the assessee incurred any expenses for earning interest income, which should be deductible under section 57. The Tribunal noted the recent Supreme Court judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT, which clarified the scope of 'members' under section 80P(2)(a)(i) and the applicability of section 80P(4) to co-operative banks but not to co-operative societies extending credit facilities to members. Conclusion: The Tribunal set aside the CIT(A)'s order and remanded the case to the A.O. for a fresh examination of the claims under sections 80P(2)(a)(i) and 80P(2)(d), and the applicability of section 57 for expenses incurred in earning interest income. The appeal filed by the Revenue was allowed for statistical purposes.
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