2022 (12) TMI 30 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income received by the assessee on investments made with co-operative banks - HELD THAT - Tribunal in the case of M/s.Vasavamba Cooperative Society Ltd. 2021 (8) TMI 706 - ITAT BANGALORE after considering the judicial pronouncements on the issue had held that interest income earned out of investments made from surplus funds would be taxable under the head income from other sources and would not be eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. It was further held by the Tribunal insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, only those interest received from investments with co-operative societies alone would be entitled to deduction. Thus we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction. Assessee s claim that if interest income is to be assessed income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction u/s 57 - 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., gross receipt minus allowable expenditure), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of Totagars Sale Co-operative Society Limited 2015 (4) TMI 829 - KARNATAKA HIGH COURT . Accordingly, the issue of deduction u/s 57 of the I.T.Act is restored to the files of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head income from other sources . If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. The assessee is directed to co-operate with the department and furnish the necessary evidence for expeditious disposal

Summary

Issues Involved:
1. Denial of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Classification of interest income as "income from other sources."
3. Eligibility for deduction under Section 80P(2)(d) of the Income Tax Act.
4. Deduction under Section 57 of the Income Tax Act for expenses incurred to earn interest income.

Detailed Analysis:

1. Denial of Deduction under Section 80P(2)(a)(i):
The assessee, a co-operative credit society, claimed a deduction under Section 80P(2)(a)(i) of the Income Tax Act for the assessment year 2015-2016. The Assessing Officer (A.O.) denied this claim, stating that the assessee is primarily engaged in the business of banking and thus not entitled to the deduction under Section 80P(2)(a)(i) as per Section 80P(4) applicable from A.Y. 2007-2008 onwards. The CIT(A) upheld the A.O.'s decision, confirming that the interest income of Rs. 26,34,597 received by the assessee from investments made with co-operative banks should be assessed as "income from other sources."

2. Classification of Interest Income as "Income from Other Sources":
The A.O. classified the interest income of Rs. 26,34,597 as "income from other sources" and not as income from business, thus denying the deduction under Section 80P(2)(a)(i). The Tribunal referenced the case of M/s. Vasavamba Cooperative Society Ltd., where it was held that interest income earned from surplus funds is taxable under "income from other sources" and not eligible for deduction under Section 80P(2)(a)(i). The Tribunal also cited the Hon'ble Supreme Court's decision in Totgars Co-operative Sale Society Ltd. v. ITO, which held that income from surplus funds is taxable as "income from other sources."

3. Eligibility for Deduction under Section 80P(2)(d):
The Tribunal noted that only interest received from investments with co-operative societies is eligible for deduction under Section 80P(2)(d). The Karnataka High Court in Totagars Co-operative Sale Society Ltd. v. ITO clarified that interest income from investments made in banks does not fall under Section 80P(2)(d). The Tribunal upheld the CIT(A)'s decision that interest income from co-operative banks is not deductible under Section 80P(2)(d).

4. Deduction under Section 57 for Expenses Incurred to Earn Interest Income:
The assessee argued that if the interest income is assessed as "income from other sources," the expenses incurred to earn this income should be deductible under Section 57. The Tribunal referenced the Karnataka High Court's decision in Totagars Co-operative Sales Society Ltd. v. ITO, which held that proportionate costs and administrative expenses incurred in earning interest income should be deductible under Section 57. The Tribunal remanded this issue to the A.O. for examination, directing the A.O. to allow deductions for any expenses incurred to earn the interest income.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes. It upheld the classification of interest income as "income from other sources" and denied the deduction under Section 80P(2)(a)(i) and 80P(2)(d). However, it directed the A.O. to examine and allow deductions under Section 57 for expenses incurred to earn the interest income. The assessee is required to provide necessary evidence for this examination.