2023 (5) TMI 631 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - whether the assessee is a Credit Co-operative Society and cannot be denied of the benefit of deduction u/s 80P? - as per AR the assessee Credit Society has derived interest on the reserve fund and the same should have been allowed - HELD THAT - As per the Gujarat Co-operative Societies Act, 1961 more particularly that of Section 71, a society may invest or deposit its funds in the State Bank of India in consonance with the provisions of reserve fund as provided in Section 67 of the said Act. The decision quoted by the Ld. AR in case of Karnataka State Co-operative Apex Bank 2001 (8) TMI 9 - SUPREME COURT the fixed deposit or rather government securities coming out of reserve fund which cannot be easily encashed and which could be utilised only when the contingencies mentioned arose, was taken into account while citing question of law i.e. wherein case of assessee being cooperative society, any income recorded in sub-section 2 there shall be in accordance with and sub-section to the provisions of Section i.e. Section 80P, the same is specified in sub-section 2 in computing the total income of the assessee, therefore, whether the Tribunal was right in law in holding that the interest income arising from the investments made out of reserve fund is exempt under Section 80P(2)(a)(i) of the Act. The component of reserve fund has not been verified by the AO as well as by the CIT(A). Therefore, it will be appropriate to remand back this issue to the file of the AO to verify the same and if the same is coming under the threshold of Section 67 of the Gujarat Co-operative Societies Act, 1961 related to reserve fund and the interest derived from State bank of India and State Bank of Bikaner Jaipur, then in the light of decision of Hon ble Apex court, the Assessing Officer to adjudicate the same in accordance with law. Ground no.1 is partly allowed for statistical purpose. Claim of proportionate expenditure - HELD THAT - It is not disputed that the assessee derived interest income and the assessee must have incurred expenditure for earning the same interest income. The proximity of earning the interest income is rightly claimed in respect of expenditure spent on earning that interest income. The decision in the case of Totagars Co-operative Sale Society Limited 2015 (4) TMI 829 - KARNATAKA HIGH COURT as well as the decision of Upkar Retail Pvt. Ltd 2018 (6) TMI 1035 - ITAT AHMEDABAD is also applicable and the most favoured view should be taken into account as per the decision of the Hon ble Supreme Court in the case of CIT vs. Vegetable Products Limited 1973 (1) TMI 1 - SUPREME COURT Therefore, ground no.2 is allowed.

Summary

Issues:
The appeal is filed against the order passed by the CIT(A), Gandhinagar for the Assessment Year 2017-18.

Issue 1: Disallowance under Section 80P of the IT Act, 1961
The assessee, a Co-operative Credit Society, claimed deduction under Section 80P of the Act, which was disallowed by the Assessing Officer. The Assessing Officer observed interest income from various banks, leading to disallowance of a specific amount. The CIT(A) partly allowed the appeal. The Ld. AR argued that the assessee, being a Credit Co-operative Society, should not be denied the benefit of deduction under Section 80P. Reference was made to the decision of the Hon'ble Supreme Court in a similar case. The Tribunal remanded the issue to verify if the interest income derived from investments made out of the reserve fund is exempt under Section 80P(2)(a)(i) of the Act. The Assessing Officer was directed to adjudicate the matter after verification, giving the assessee an opportunity of hearing.

Issue 2: Claim of Proportionate Expenditure
The assessee claimed proportionate expenditure related to earning interest income, which was not allowed by the Assessing Officer. The Ld. AR argued that the expenditure has a proximate connection with earning interest income, citing relevant case law. The Tribunal allowed this claim, considering the principle that expenditure spent on earning interest income should be allowed. Reference was made to decisions of the Hon'ble Karnataka High Court and ITAT Ahmedabad Bench. The Tribunal upheld the claim of proportionate expenditure.

In conclusion, the appeal filed by the assessee was partly allowed for statistical purposes, with specific directions given for the verification of certain issues and allowance of proportionate expenditure.