2021 (12) TMI 929 - AT - Income Tax

Eligibility of deduction u/s 80P(2)(a)(i) - Receipt of interest income from non-members - HELD THAT - It is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India is not being attributable to the business as envisaged under the provisions of the Act. Thus the same cannot be deducted under section 80P(2)(a)(i) of the Act. Thus, there remains no ambiguity that income received by the assessee from non-members is not eligible for deduction under section 80P(2)(a)(i) - the profits and gains attributable to non-members arising as a result of advancement of loans was held to be not an allowable deduction under Section 80P(2)(a)(i) of the Act. In view of the above, we do not find any merits in the argument advanced by the learned counsel for the assessee. Determine the income which is not eligible for deduction under section 80P(2)(a)(i) - Assessee is not maintaining any separate books of accounts qua the income from nonmembers as discussed above. The income on the deposits from the non-members has been treated as income from other sources but the gross income cannot be excluded from the deduction available to the assessee under the provisions of section 80P(2)(a)(i) of the Act. It is the net interest income on the deposits from the non-members which needs to be excluded from the amount of deduction claimed under section 80P(2)(a)(i) of the Act and the same should be brought to tax under the head income from other sources under the provisions of section 56 of the Act. To determine, the net income from the non-members, amount of expenses incurred in generating such interest income should be allowed as deduction from the gross income of interest in pursuance to the provisions of section 57 - The above provisions require to deduct the expenses from the income which have been incurred wholly and exclusively for the purpose of earning such income Thus we direct the AO to work out the interest income from the non-members after deducting the corresponding expenses incurred by the assessee in generating the interest income. To our understanding such expenses have to be brought on record by the assessee based on cogent materials. Furthermore, if the assessee has made deposits in the banks out of the money borrowed from the members, then the corresponding interest cost borne by the assessee should be allowed as deduction.

Summary

Issues:
1. Disallowance of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act for interest income from non-members.

Analysis:
For the assessment year 2014-15, the assessee, a cooperative society, claimed a deduction under section 80P(2)(a)(i) of the Act for interest income, including income from non-members. The Assessing Officer disallowed the deduction, leading to an appeal before the CIT (A) and subsequently before the ITAT. The ITAT upheld the disallowance, citing the specific provisions of section 80P(2)(a)(i) which allow deduction only for income arising from activities with members. The judgment referred to the Gujarat High Court's decision in a similar case to support this interpretation.

The judgment further referenced a Supreme Court decision regarding primary agricultural credit societies, emphasizing that only profits attributable to non-members should be excluded from the deduction under section 80P(2)(a)(i). The ITAT directed the AO to determine the net interest income from non-members by deducting related expenses, following the provisions of section 57 of the Act. It was clarified that expenses wholly and exclusively for earning such income should be deducted. Additionally, if the assessee made deposits with borrowed money, the corresponding interest cost should be allowed as a deduction. Ultimately, the ITAT dismissed the appeal for the assessment year 2014-15, upholding the CIT (A)'s order.

Regarding the assessment year 2015-16, the issues raised by the assessee were found to be identical to those in the previous year. The ITAT applied the findings from the earlier year and dismissed the appeal for 2015-16 as well. The judgment concluded by allowing both appeals for statistical purposes.

In summary, the ITAT's judgment clarified the eligibility criteria for deduction under section 80P(2)(a)(i) of the Income Tax Act, emphasizing the need to exclude profits attributable to non-members. The decision provided detailed directions for determining net interest income from non-members and allowed corresponding deductions for related expenses and interest costs.