2022 (5) TMI 371 - AT - Income Tax

Deduction u/s 80P - whether since assessee was not a bank, whether it would be entitled to deduction under section 80P(2)(a)(i) on its income from providing credit facilities to its members? - HELD THAT - As decided in EKTA CO-OP CREDIT SOCIETY LTD. 2018 (1) TMI 1244 - GUJARAT HIGH COURT held that section 80P(4) would not be applicable to cooperative credit society and assessee would be entitled to deduction under section 80P(2)(a)(i) on its income from providing credit facilities to its members. Therefore, it is seen that this caselaw cited by the assessee is not relevant to the facts and issues before us. In the case of Jafari Momin Vikas Co-op. Credit Society Ltd 2014 (2) TMI 28 - GUJARAT HIGH COURT the Gujarat High Court held that where assessee was not a credit co-operative bank but a credit co-operative society, its claim for deduction under section 80P(2)(a)(i) could not be rejected by invoking exclusion clause of subsection (4) of section 80P of the Act. Therefore, it is evident that the judicial precedent cited by the assessee in his grounds of appeal are not relevant to the facts of the case. In the instant facts, however, we note that there is no clarity as to how much interest has been earned by the assessee from deposits made in nationalised bank and how much interest has been earned from deposits made in cooperative bank. Having held that interest earned by the assessee on deposits held with nationalised banks are not eligible for deduction under section 80P of the Act, though only the net income would be taxable after allowing for administrative and other expenses incurred for earning such interest income and also that interest earned by the assessee on deposits made with cooperative banks are eligible for deduction under section 80 P(2)(d) of the Act, we are restoring the file to Learned Assessing Officer to ascertain how much interest pertains to interest earned from nationalised bank and the portion of interest relatable to cooperative bank, and then tax the same in accordance with decision above.

Summary

Issues:
Allowability of deduction under section 80P of the Income Tax Act on interest income from cooperative and nationalized banks.

Analysis:
The appeal was filed against the National Faceless Appeal Centre's order disallowing interest income of Rs. 24,81,224 earned by a cooperative society from investments in cooperative and nationalized banks. The Assessing Officer disallowed the income under section 80P of the Act, stating it was not earned from a cooperative society. The CIT(A) upheld the disallowance, citing relevant legal provisions and precedents.

The CIT(A) clarified that section 80P(2)(d) allows deduction only for interest and dividends from investments in other cooperative societies, not banks. Referring to the Totgars Co-op Sale Society Ltd. case, it was highlighted that interest earned from surplus funds in short-term deposits is taxable as "income from other sources." The judgment of the Hon'ble High Court of Gujarat in SBI Employees Co-op Credit & Supply Society Ltd v. CIT was also cited to support the denial of deduction for interest from bank deposits not related to the society's business activities.

The ITAT Ahmedabad, following the Gujarat High Court decision in SBI Employees case, ruled that interest income from nationalized banks is not eligible for deduction under section 80P. However, it specified that only the net interest income, after deducting expenses, should be taxed under section 56 of the Act. For interest from cooperative banks, the ITAT referred to judgments allowing deduction under section 80P(2)(d) for cooperative societies. The ITAT instructed the Assessing Officer to determine the interest earned from nationalized and cooperative banks separately for taxation purposes.

In conclusion, the appeal was partly allowed, with the ITAT directing the AO to assess the interest income from different bank sources accordingly. The decision emphasized the distinction between interest income from nationalized and cooperative banks for tax treatment under the Income Tax Act.