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2022 (2) TMI 40 - AT - Income TaxRevision u/s 263 by CIT - eligibility for deduction u/s 80P(2)(a)(i) - HELD THAT - A.O. in the original assessment order has not taken note of the judgment of the Hon ble jurisdictional High Court in the case of Pr.CIT Anr. v. Totagars Co-operative Sale Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT while granting deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of the entire claim wherein as categorically held that interest income earned out of investment with co-operative banks are not entitled to deduction u/s 80P(2)(a)(i) nor u/s 80P(2)(d) of the I.T.Act. Since the A.O. has not taken notice of above mentioned jurisdictional High Court judgment, the CIT has correctly exercised the revisionary powers u/s 263 of the I.T.Act. Majority of the interest income is earned out of investments made with Central Co-operative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co-operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, we make it clear that interest income received out of investments with cooperative societies alone is to be allowed as a deduction. AR had claimed that if interest income is to be assessed as 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 Totagars Co-operative Sale Society Ltd. v. ITO 2015 (4) TMI 829 - 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. after deducting expenditure incurred for earning such income), this plea of the assessee has to be necessarily entertained. Therefore, in the light of the judgment of the Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. v. CIT Anr. 2021 (1) TMI 488 - SUPREME COURT AND the judgment of Totagars Co-operative Sale Society Supra and order of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd 2021 (8) TMI 706 - ITAT BANGALORE , the matter needs to be examined afresh by the A.O. de hors the observations of the CIT. The A.O. is directed to follow the dictum laid down by the above mentioned judicial pronouncements, while framing the fresh assessment. Appeal filed by the assessee is partly allowed.
Issues Involved:
1. Validity of invoking powers under Section 263 of the Income Tax Act. 2. Deduction eligibility under Section 80P(2)(a)(i) for interest income earned from deposits with co-operative banks. 3. Deduction eligibility under Section 80P(2)(d) for interest income earned from investments with co-operative societies. 4. Consideration of statutory compulsions for investments and their impact on deduction eligibility. 5. Allowability of deduction under Section 57 for expenditure incurred in earning interest income. Detailed Analysis: 1. Validity of Invoking Powers under Section 263: The CIT invoked Section 263, arguing that the AO wrongly allowed a deduction under Section 80P(2)(a)(i) for interest income earned from Mysore & Chamaraja Nagar District Co-operative Central Bank and Canara Bank. The Tribunal upheld this invocation, stating that the AO did not consider the jurisdictional High Court's judgment in Pr.CIT & Anr. v. Totagars Co-operative Sale Society (2017) 395 ITR 611 (Kar.), which categorically held that such interest income is not eligible for deduction under Section 80P(2)(a)(i) or Section 80P(2)(d). 2. Deduction Eligibility under Section 80P(2)(a)(i): The Tribunal noted that the AO's original assessment did not consider the binding precedent set by the jurisdictional High Court. The CIT correctly exercised revisionary powers because the AO's decision was contrary to the law. The Tribunal cited its own recent order in M/s. Vasavamba Co-operative Society Ltd. v. The Pr.CIT, which held that interest income from surplus funds is taxable under 'income from other sources' and not eligible for deduction under Section 80P(2)(a)(i). 3. Deduction Eligibility under Section 80P(2)(d): The Tribunal reiterated that only interest income from investments with co-operative societies qualifies for deduction under Section 80P(2)(d). Interest from co-operative banks does not qualify. The Tribunal referred to multiple judgments, including the Hon'ble Karnataka High Court's decision in PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 395 ITR 0611 (Karn), which clarified that co-operative banks are not the same as co-operative societies for the purpose of Section 80P(2)(d). 4. Consideration of Statutory Compulsions: The Tribunal acknowledged the assessee's argument that investments were made in compliance with statutory requirements under the Karnataka Co-operative Societies Act and Rules. The Tribunal remanded this issue to the AO for fresh examination, directing that if investments are statutory compulsions, the interest income should be considered as business income eligible for deduction under Section 80P(2)(a)(i). 5. Allowability of Deduction under Section 57: The Tribunal agreed with the assessee's argument that if interest income is assessed as 'income from other sources,' then the cost incurred for earning such income should be deductible under Section 57. This argument was supported by the jurisdictional High Court's decision in Totagars Co-operative Sale Society Ltd. v. ITO (2015) 58 Taxmann.com 35 (Karnataka), which held that proportionate costs and administrative expenses should be deducted from such income. Conclusion: The Tribunal partly allowed the appeal, remanding the issue of statutory compulsions and the deduction under Section 57 to the AO for fresh examination. The AO is directed to follow the judicial pronouncements while framing the fresh assessment. Order Pronounced: The appeal filed by the assessee is partly allowed. Order pronounced on January 27, 2022.
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