2023 (6) TMI 1273 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) - interest income earned from the credits given to its members and interest income earned from the funds parked/invested in the commercial bank i.e United Bank of India - claim denied on interest income earned from the funds invested in the United Bank of India stating that the said interest income was not earned by the assessee from the activity of providing credit facilities to its members but the same was an interest income from the funds deposited with commercial bank - HELD THAT - The interest which accrues on funds not required immediately by the assessee for its business purposes and which have been invested as investment in commercial banks cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Act or in section 80P(2)(a)(iii) of the Act and that the said interest income is liable to be taxed u/s 56 - the claim of the assessee that the said interest income earned by the assessee from its funds deposited in commercial bank is eligible for deduction u/s 80P(2) of the Act, has rightly been rejected by the lower authorities. Interest income be treated as business income of the assessee has also been rightly rejected by the lower authorities in the light of the aforesaid decision of the hon ble Supreme Court in the case of Totgar s Co-operative Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT . Interest earned on the bad debt fund and reserve fund maintained as per the provisions of section 81 82 of the West Bengal Co-operative Societies Act, 2006 - As in South Eastern Railway Employees Cooperative Credit Society Ltd 2016 (9) TMI 814 - CALCUTTA HIGH COURT held that the expenditure incurred for earning of interest income from the funds parked in the commercial bank is liable to be set off/deducted from the said income, which is the amount of interest paid for that funds to the members. Such interest expenditure held to be deductible out of the interest income earned from deposits in the commercial bank, is further liable to be deducted from the business expenditure of the eligible business and after subtracting the said interest expenditure related to the deposits in the commercial bank, the business profits of the assessee would increase which would be accordingly eligible for deduction u/s 80P of the Act. Thus the matter is remanded to AO with a direction (a) to work out the interest earned on the bad debt fund and reserve fund maintained as per the provisions of section 81 82 of the West Bengal Co-operative Societies Act, 2006 and to allow benefit u/s 80P on that interest income and (b) to ascertain the interest paid to the members for the purpose of earning the interest on the funds deposited in the commercial bank and to allow deduction of such interest from the interest income earned by the assessee from investment in the commercial bank and (c) to subtract/deduct such interest from the expenses of eligible business and the consequent increased amount of profits of eligible business will be eligible as deduction u/s 80P of the Act. Thus, Ground Nos.1 to 3 are accordingly partly allowed in favour of the assessee. Income from holiday homes - Whatever the income earned by the assessee from the activity of providing of credit facilities to its members, is eligible for deduction u/s 80P - if such income is further invested for any other activity, the income generated from such an activity cannot be said to be attributable to the activity of providing credit facilities to its members. Therefore, this contention of the ld. counsel is not tenable. In view of this, it is held that the income from holiday homes is to be treated as business income of the assessee but the same will not be eligible for deduction u/s 80P - However, the assessee will be entitled to claim the deduction of admissible expenditure/depreciation etc. on such business income from holiday homes.

Summary

Issues involved:
The judgment involves issues related to the disallowance of deduction under section 80P(2)(a)(i), treatment of interest income, disallowance of holiday home rent, disallowance of expenses and depreciation, adequacy of personal hearing, and the nature of income from holiday homes.

Issue 1: Disallowance of deduction under section 80P(2)(a)(i)
The assessee, a cooperative credit society, claimed deduction under section 80P of the Income Tax Act for interest income earned from funds parked in a commercial bank. The Assessing Officer disallowed the deduction on the grounds that the interest income was not earned from providing credit facilities to members. The CIT(A) upheld this disallowance. The Tribunal referred to a Supreme Court decision and ruled that interest income from funds deposited in a commercial bank cannot be considered as business income eligible for deduction under section 80P. However, interest earned on statutory funds was allowed for deduction under section 80P.

Issue 2: Treatment of interest income
The Tribunal considered the statutory requirements for creating and maintaining bad debt and reserve funds by the cooperative society. Interest income from these funds was deemed linked to the business activity of providing credit facilities to members and hence eligible for deduction under section 80P. The Tribunal directed the Assessing Officer to calculate the interest earned on these funds and allow the benefit under section 80P. Additionally, the interest paid to members for funds deposited in the commercial bank was to be deducted from the interest income earned by the society.

Issue 3: Disallowance of holiday home rent
The Assessing Officer treated income from holiday homes as income from house property, disallowing business expenditure and depreciation claimed by the assessee. The Tribunal, after considering the commercial nature of the holiday home operations and the expenses incurred, ruled that income from holiday homes should be treated as business income. However, the income from holiday homes was not eligible for deduction under section 80P, but the assessee could claim deductions for business expenditure and depreciation.

Issue 4: Adequacy of personal hearing
The assessee contended that they were not granted sufficient personal hearing in the Appellate forum, violating principles of natural justice. The Tribunal did not delve deeply into this issue but allowed certain grounds of appeal in favor of the assessee.

Conclusion:
The Tribunal partly allowed the appeals of the assessee, granting deductions under section 80P for specific interest income and business expenditure related to holiday homes. The judgment provided clarity on the eligibility of certain income for deductions under the Income Tax Act, based on the nature and source of the income.