2022 (1) TMI 292 - AT - Income Tax

Deduction u/s 80P - claim for deduction on interest income - AO denied the deduction u/s.80P(2)(a)(i) for the reason that as per the decision rendered in the case of Totagars Co-operative Sale Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT Interest income is taxable under the head income from other sources and will not be entitled to deduction under section 80P(2)(a)(i) - HELD THAT - Supreme Court in Totgars Co-operative Sale Society 2010 (2) TMI 3 - SUPREME COURT held that interest on such investments, cannot fall within the meaning of the expression profits and gains of business and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as investment are ineligible for deduction under section 80P(2)(a)(i) It can thus be seen that the ratio laid down by the Hon ble Karnataka High Court in the case of Totalgars Cooperative Sales Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT is that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d). Allowance of corresponding expenditures proportionately on income earned by the appellant from investments which was claimed as deduction, alternatively under section 80 P 2 d - HELD THAT - Hon ble ITAT, Bengaluru Bench in the case of Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., 2021 (6) TMI 460 - ITAT BANGALORE for Assessment Year 2016-17, held that the Assessee should be allowed expenses and the entire gross interest cannot be taxed. We remit the question of quantum of disallowance of interest income to be decided by the AO afresh in the light of the directions by the Tribunal in the decision referred to above. The 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.

Summary

Issues Involved:
1. Eligibility of deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for interest and dividend income.
2. Applicability of section 80P(2)(d) of the Income Tax Act, 1961 for interest income from deposits with cooperative banks.
3. Proportionate deduction of expenses related to interest income.

Issue-wise Detailed Analysis:

1. Eligibility of Deduction under Section 80P(2)(a)(i) for Interest and Dividend Income:

The assessee, a Credit Co-operative Society, claimed a deduction under section 80P of the Income Tax Act, 1961 for interest and dividend income. The AO rejected this claim, stating that interest received from deposits with cooperative banks is not eligible for deduction under section 80P(2)(d) and should be taxed as income from other sources. The AO based this decision on the Karnataka High Court's ruling in Totagars Co-operative Sale Society, which followed the Supreme Court's decision that such interest income is taxable under the head "income from other sources" and not eligible for deduction under section 80P(2)(a)(i).

2. Applicability of Section 80P(2)(d) for Interest Income from Deposits with Cooperative Banks:

The AO and CIT(A) both denied the deduction under section 80P(2)(d), referring to the Karnataka High Court's decision in PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY, which held that interest income from deposits with cooperative banks is income from other sources and not from business. The Tribunal reaffirmed this view, noting that section 80P(2)(d) specifically exempts interest earned from investments in cooperative societies, not cooperative banks. The Tribunal emphasized that the business of cooperative banks is distinct from that of cooperative societies and is governed by the Banking Regulation Act, 1949.

3. Proportionate Deduction of Expenses Related to Interest Income:

The assessee made an alternative claim for the deduction of corresponding expenses proportionately on income earned from investments. The Tribunal referred to its earlier decision in Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., which allowed for the deduction of proportionate cost, administrative, and other expenses if the AO assesses the interest income under the head "other sources." The Tribunal directed the AO to allow such deductions proportionately, following the Karnataka High Court's decision in Totgars Co-operative Sale Society Ltd. vs. ITO.

Conclusion:

The Tribunal concluded that the assessee is not entitled to deduction under section 80P(2)(a)(i) for interest income from deposits with cooperative banks and upheld the AO's and CIT(A)'s decisions. However, it remitted the issue of the quantum of disallowance of interest income to the AO to allow proportionate deductions for expenses related to interest income, following the directions in the Tribunal's earlier decision. The appeal was treated as partly allowed for statistical purposes, with the AO required to provide an opportunity for the assessee to present evidence in the set-aside proceedings.