2022 (1) TMI 1027 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest/dividend income received by the assessee on the deposits made with the co-operative bank - whether the learned CIT (A) has power to set aside the issue to the file of the AO for verification? - HELD THAT - CIT (A) has no power to remit the issue back to the AO for fresh adjudication. In fact, if the learned CIT (A) requires some clarification, then the option available to the learned CIT (A) is to call for the remand report from the AO and decide the issue thereafter. However the facts of the case on hand are different in the sense that the learned CIT (A) has given very specific direction to verify whether interest income includes the income from the nationalized bank which is not eligible for deduction under the provisions of section 80P(2)(a)(i) of the Act. If such interest income is included in the interest income shown by the assessee, then to that extent the assessee will not be eligible for the deduction under the provisions of section 80P(2)(a)(i) of the Act. The direction of the learned CIT(A) was unambiguous and clear. Therefore we do not find any merit in the ground of appeal raised by the assessee. Interest expenses incurred against income of the other sources - As provisions of section 57 of the Act provides for the deduction of the expenses which have been incurred in generating the income i.e. income from other sources. In the present case if there is income on the deposits made with the nationalized bank, then the corresponding expenses in the nature of interest which has been incurred by the assessee in generating such income shall be allowed. In other words, the only net of interest income from the deposits made with the banks will only be excluded while calculating the amount eligible for deduction under section 80P(2)(a)(i) of the Act. With this observation, we modify the order of the learned CIT (A) to this limited extent i.e. by allowing the interest expenses incurred against such income of the other sources. Whether the assessee was eligible for deduction of the interest/dividend income received from the co-operative bank? - As relying on NARSANDA MERCANTILE CO. OP. CREDIT SOCIETY LTD 2018 (8) TMI 1844 - ITAT AHMEDABAD the assessee is eligible to claim the deduction for the expenditures incurred by it against the earning of interest/dividend income from the co-operative banks. Hence, ground of appeal of the assessee is partly allowed.

Issues Involved:
1. Power of the CIT (A) to remit issues back to the AO for verification.
2. Eligibility of interest income for deduction under section 80P(2)(a)(i) of the Income Tax Act.
3. Eligibility of interest and dividend income from co-operative banks for deduction under section 80P(2)(d) of the Income Tax Act.
4. Applicability of section 80P(4) to the deductions claimed.

Issue-wise Detailed Analysis:

1. Power of the CIT (A) to Remit Issues Back to the AO for Verification:
The primary issue was whether the CIT (A) had the authority to direct the AO to verify the interest income to determine if it included income from nationalized banks, which is not eligible for deduction under section 80P(2)(a)(i). The Tribunal noted that section 251 of the Act provides the CIT (A) with the power to confirm, reduce, enhance, or annul the assessment but not to remit the issue back to the AO for fresh adjudication. The Tribunal observed that if clarification was required, the CIT (A) should have called for a remand report from the AO. However, the CIT (A)'s direction was specific and clear, thus no merit was found in the assessee's appeal on this ground. The Tribunal modified the CIT (A)'s order to allow the deduction of expenses incurred in generating such interest income.

2. Eligibility of Interest Income for Deduction under Section 80P(2)(a)(i):
The assessee claimed a deduction for interest income under section 80P(2)(a)(i), which was contested by the AO on the grounds that income from deposits with nationalized banks is not eligible for this deduction. The Tribunal upheld the CIT (A)'s direction to verify if the interest income included income from nationalized banks and allowed the deduction of corresponding expenses incurred in generating such income. This means only the net interest income from nationalized banks would be excluded when calculating the eligible amount for deduction under section 80P(2)(a)(i).

3. Eligibility of Interest and Dividend Income from Co-operative Banks for Deduction under Section 80P(2)(d):
The assessee argued that interest and dividend income from co-operative banks should be eligible for deduction under section 80P(2)(d). The CIT (A) denied this deduction, reasoning that deposits in co-operative banks do not equate to deposits in co-operative societies as required by the section. The Tribunal cited previous decisions, including a Karnataka High Court ruling, which clarified that interest income from surplus funds deposited with co-operative banks is not eligible for deduction under section 80P(2)(d). The Tribunal concluded that the character of the income does not change based on whether it is earned from a nationalized bank or a co-operative bank, and such income is not operational income from providing credit facilities to members. However, the Tribunal allowed for the deduction of expenses incurred in earning this interest/dividend income.

4. Applicability of Section 80P(4) to the Deductions Claimed:
The AO's disallowance of the deduction was based on the amendments in sections 2(24)(viia) and 80P(4), which exclude co-operative banks from the benefits of section 80P. The Tribunal upheld the CIT (A)'s finding that section 80P(4) does not deny the benefit of deduction to co-operative societies but clarified that the specific income in question (interest from nationalized banks and co-operative banks) does not qualify for the deduction under the respective subsections of section 80P.

Conclusion:
The Tribunal partly allowed the appeal, confirming the CIT (A)'s directions for verification and denying the deduction for interest/dividend income from co-operative banks while allowing for the deduction of related expenses. The Tribunal emphasized the nature and character of the income in determining eligibility for deductions under section 80P.

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