2022 (11) TMI 823 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - deduction with respect to the interest income earned from the bank - HELD THAT - The provisions of section 80P(2)(a)(i) of the Act provides the deduction to a co-operative society engaged in the business of banking or providing credit facilities to its members. The provisions of the section are without any ambiguity - the income from the activity of financing from the members is only eligible for deduction under section 80P(2)(a)(i) - If there is any income arising to the co-operative society from the non-members that will not be subject to deduction under section 80P(2)(a)(i) - In holding so draw support and guidance from the judgment of the Hon ble Gujarat High Court in the case of State Bank of India 2016 (7) TMI 516 - GUJARAT HIGH COURT It is only the interest derived from the credit facilities provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the nationalized/commercial bank i.e. Bank of Baroda is not being attributable to the business as envisaged under the provisions of the Act. Thus the same cannot be deducted under section 80P(2)(a)(i) - there remains no ambiguity that income received by the assessee on the money deposited with the Bank of Baroda is not eligible for deduction under section 80P(2)(a)(i) Whether gross amount of interest should be reduced from the claim made by the assessee for the deduction under section 80P(2)(a)(i) of the Act ? - As direct interest expenses if any incurred by the assessee against such interest income on the fixed deposits made with the nationalized bank should be considered for calculating the net income which is not eligible for deduction under the provisions of section 80P(2)(a)(i) of the Act. Thus, hold that there is no infirmity in the order of the learned CIT (A), requiring any interference except the allowability of interest expenses against the interest income. Hence,uphold the same to the extent discussed above. Hence, the ground of appeal of the assessee is partly allowed.

Summary

Issues:
Disallowance of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of a deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961 for the Assessment Year 2017-18. The only issue raised was the confirmation of the addition of Rs. 4,52,905/- by disallowing the deduction. The Assessee, a cooperative society, had surplus funds deposited in banks to generate interest income and maintain liquidity for member deposits repayment. The Assessing Officer (AO) disallowed the interest income as not arising from financing activities for members, which the Assessee contested. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the current appeal.

The Assessee's representative acknowledged in the appeal that the interest income from banks was not eligible for deduction under section 80P(2)(a)(i) of the Act but requested to adjust interest costs against it for deduction calculation. The Department's representative supported the lower authorities' decisions. The Tribunal analyzed section 80P(2)(a)(i) which allows deductions for cooperative societies engaged in banking or providing credit facilities to members. The Tribunal referred to a judgment by the Gujarat High Court, emphasizing that only income from member activities is deductible under this section, not income from non-members. Thus, interest earned from depositing surplus funds in banks was not eligible for deduction. The Tribunal allowed adjusting direct interest expenses against interest income for deduction calculation, upholding the lower authorities' decision partially, and partly allowing the Assessee's appeal.

In conclusion, the Tribunal partly allowed the Assessee's appeal, emphasizing that interest income from bank deposits was not eligible for deduction under section 80P(2)(a)(i) as it was not related to member activities. The Tribunal clarified the treatment of interest expenses against interest income for deduction calculation, maintaining the lower authorities' decision with a partial allowance to the Assessee.