2021 (12) TMI 563 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) and 80P(2)(d) - AO denied the benefit of deduction u/s 80P(2)(a)(i) for the reason that the assessee was also dealing with associate / nominal members - CIT(A) upheld the view taken by the A.O. that the assessee has violated the principle of mutuality, and hence, it was concluded that assessee was not entitled to deduction u/s 80P(2)a)(i) and 80P(2)(d) - HELD THAT - The Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors 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. 2017 (8) TMI 536 - SUPREME COURT - A.O. has merely denied the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act for the reason that the assessee was also dealing with associate / nominal members, which is against the dictum laid down by the Hon ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. Ors. (supra). The Hon ble Apex Court has settled many issues We are of the view that the issue of deduction u/s 80P(2)(a)(i) of the Act, needs to be examined by the A.O., in the light of the principles enunciated by the Hon ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. Ors. (supra). Accordingly, the CIT(A) order on this issue is set aside and the same is restored to the files of the A.O. for examination of the case in the light of the principles laid down. Rejection of claim of deduction u/s 80P(2)(a)(i) of the Act with regard to interest income earned from fixed deposits kept with co-operative banks - Insofar as deduction u/s 80P(2)(d) we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction. Deduction u/s 57 - Assessee s claim that if interest income is to be assessed income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction u/s 57 of the I.T.Act, we find an identical issue was considered by the Hon ble jurisdictional High Court in the case of Totgars Co-operative Sales Society Ltd 2017 (7) TMI 1049 - KARNATAKA HIGH COURT 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 in the case of Totagars Sale Co-operative Society Limited supra - 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 - Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Claim of deduction under Section 80P(2)(d) of the Income Tax Act.
3. Assessment of interest income from fixed deposits with co-operative banks.
4. Deduction under Section 57 of the Income Tax Act for expenditure incurred in earning interest income.

Detailed Analysis:

1. Claim of Deduction under Section 80P(2)(a)(i):
The assessee, an agricultural credit co-operative society, claimed a deduction of ?1,06,78,048 under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (A.O.) denied this claim, citing the judgment of the Hon'ble jurisdictional High Court in Pr.CIT & Anr. v. Totagars Co-operative Sale Society, which held that the principle of mutuality was violated as the assessee was dealing with non-members. The CIT(A) upheld the A.O.'s decision.

However, the Tribunal referred to the Hon'ble Apex Court's judgment in Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT, which clarified that the term "members" should be construed as per the respective State Co-operative Act. The Apex Court held that providing credit facilities to associate or nominal members qualifies for the deduction under Section 80P(2)(a)(i) unless they are not considered "members" under the State Act. The Tribunal set aside the CIT(A)'s order and remanded the issue back to the A.O. for examination in light of the principles laid down by the Apex Court.

2. Claim of Deduction under Section 80P(2)(d):
The A.O. also denied the benefit under Section 80P(2)(d), arguing that the interest income was received from co-operative banks and not from co-operative societies. The Tribunal noted that the Hon'ble Karnataka High Court in Totagars Cooperative Sales Society had held that interest income from investments with co-operative societies alone qualifies for the deduction under Section 80P(2)(d). However, interest income from investments with co-operative banks does not qualify for this deduction. The Tribunal upheld this view and clarified that only interest income from investments with co-operative societies is deductible under Section 80P(2)(d).

3. Assessment of Interest Income from Fixed Deposits:
The Tribunal considered the recent order in M/s. Vasavamba Co-operative Society Ltd. v. The Pr.CIT, which held that interest income from surplus funds invested in fixed deposits is taxable under "income from other sources" and not eligible for deduction under Section 80P(2)(a)(i). The Tribunal noted that if the investments are made in compliance with the Karnataka Co-operative Societies Act, the interest income should be assessed as business income, qualifying for deduction under Section 80P(2)(a)(i). This aspect was remanded to the A.O. for re-examination.

4. Deduction under Section 57 for Expenditure Incurred:
The Tribunal acknowledged that the assessee had not raised the plea for deduction under Section 57 before the lower authorities. However, it emphasized that only net income should be taxed, and thus, the plea must be entertained. The Hon'ble jurisdictional High Court in Totgars Co-operative Sales Society Ltd. v. ITO had held that proportionate expenditure incurred for earning interest income should be allowed as a deduction under Section 57. The Tribunal remanded this issue to the A.O. to examine if any expenditure was incurred for earning the interest income and to allow the deduction accordingly.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, with directions to the A.O. to re-examine the issues in light of the principles laid down by the Hon'ble Apex Court and the Hon'ble jurisdictional High Court. The A.O. was instructed to assess the eligibility for deductions under Sections 80P(2)(a)(i), 80P(2)(d), and 57 of the Income Tax Act, based on compliance with statutory requirements and incurred expenditures.