2022 (1) TMI 987 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - deduction to a co-operative society engaged in the business of banking or providing credit facilities to its members - income eligible for deduction u/s 57 - CIT-A dis-allowing proportionate expenses against the income - assessee is not maintaining any separate books of accounts qua the income on the deposits from the bank - HELD THAT - The income on the deposits from the bank 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) - It is the net interest income on the deposits from the bank which needs to be excluded from the amount of deduction claimed under section 80P(2)(a)(i) and the same should be brought to tax under the head income from other sources under the provisions of section 56. To determine, the net income on the deposits from the bank, 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(iii). Expenses which have been erred directly by the assessee in the earning of such income should only be eligible for deduction under section 57 of the Act. To put it differently, the expenses such as electricity, rental, audits, printing and stationery which cannot be said to have been incurred wholly and exclusively for the purpose of earning the interest income. Thus, we are not in agreement with the contention of the assessee. But it is also equally important to note that there is no mechanism provided under the provisions of section 57 of the Act for making the disallowance on ad hoc manner. Thus we direct the AO to work out the interest income on the deposits from the bank 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. Deduction u/s 80P(2)(c) - In case of co-operative credit society, income to which benefit of section 80P(2)(a)(i) is not allowed, e.g., rental income, interest income from surplus funds kept in FDs' of banks, etc., basic exemption of ₹ 50,000 as provided for in section 80P(2)(c)(ii) must be granted. It also appears that, though the word 'activity' is not defined, yet the investment activity, activity of renting of immovable property, etc., and the consequent income attributable to such activities would be covered under section 80P(2)(c). Hence, we direct the AO to allow the deduction under section 80P(2)(c) of the Act. Thus the ground of appeal of the assessee is allowed.

Summary

Issues:
- Deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for interest income from fixed deposits with a bank.
- Allowance of proportionate expenses against the interest income.
- Basic deduction of ?50,000 under section 80P(2)(c) of the Act.

Analysis:

Deduction under section 80P(2)(a)(i):
The case involved appeals by a co-operative credit society against the denial of deduction under section 80P(2)(a)(i) of the Act for interest income earned from fixed deposits with a bank. The Assessing Officer (AO) disallowed the deduction, considering the interest income not directly related to providing credit facilities to members. The Appellate Tribunal upheld this decision, citing precedents where interest income from non-member sources was not eligible for the deduction. The Tribunal emphasized that only income directly linked to providing credit to members qualifies for the deduction under section 80P(2)(a)(i).

Allowance of Proportionate Expenses:
The appellant argued for the allowance of proportionate expenses against the interest income. The Tribunal noted the absence of separate accounts for interest income from bank deposits but allowed deduction of expenses incurred wholly and exclusively for earning such income. It directed the AO to calculate net income after deducting relevant expenses, emphasizing that only directly related expenses should be considered for deduction under section 57 of the Act.

Basic Deduction under section 80P(2)(c):
Regarding the basic deduction of ?50,000 under section 80P(2)(c) of the Act, the Tribunal held that in cases where income does not qualify for section 80P(2)(a)(i) deduction (e.g., rental income, interest from bank deposits), the basic exemption must be granted. Citing a Bombay High Court judgment, the Tribunal clarified that income from activities not covered under section 80P(2)(a)(i) is eligible for the basic deduction. It directed the AO to allow the deduction under section 80P(2)(c) for such income.

In conclusion, the Tribunal partially allowed the appeals, granting deductions under section 80P(2)(a)(i) for eligible income, directing calculation of net income after deducting relevant expenses, and allowing the basic deduction under section 80P(2)(c) for income not covered under section 80P(2)(a)(i). The decisions were based on the specific provisions of the Act and relevant judicial precedents, ensuring adherence to the legal framework governing deductions for co-operative credit societies.