2023 (12) TMI 333 - AT - Income Tax

Deduction u/s 57 while computing interest income - bringing to tax the interest income as Income from Other Sources rejecting the assessee s claim as business income - CIT(A) confirmed the action of the AO in reducing the cost of funds to the extent of 15% of the amount of interest income earned and balance amount was brought to tax - DR submitted that on the interest income earned out of providing credit facilities to its members, the assessee is allowed deduction u/s 80P(2)(a)(i) and that the interest paid on deposit made by members of the assessee cannot be allowed as cost of funds. HELD THAT - Assessee is a co-operative society primarily engaged in providing credit facilities to its members. Naturally, the cost of funds will be primary cost for any entity engaged in such business / activities. It is well accepted that banking institutions which have similar operation to that of the assessee will also operate on net interest income which is arrived at by subtracting the interest they have to pay out of the interest income generated. The assessee had furnished detailed working with respect to the cost of funds which is coming to 77% of the interest income. The claim of assessee is backed by detailed workings which had not been refuted by the authorities. AO / CIT(A) had allowed deduction by restricting the of cost of funds to the extent of 15% on ad-hoc basis of the interest income without any legal basis. The working of the cost of funds as provided by the assessee on facts of the instant case has not been refuted. Therefore, direct the AO to accept the same as cost of funds for earning the interest income which was assessed as Income from Other Sources . Appeal of assessee allowed.

Summary

Issues:
The judgment involves issues related to deduction under section 57 of the Income Tax Act, 1961 for interest income, and the appealability of an order giving effect to the CIT(A)'s order under section 246A of the Act.

Deduction under Section 57 - Cost of Funds:
The assessee, a cooperative society providing credit facilities, filed an appeal against the CIT(A)'s decision to reduce the cost of funds to 15% of the interest income. The AO had calculated the cost of funds on an ad-hoc basis without proper justification. The Tribunal noted that the cost of funds is a primary cost for entities like the assessee and should be determined based on detailed workings. The assessee's claim, supported by detailed calculations amounting to 77% of the interest income, was found to be reasonable and unrefuted by the authorities. The Tribunal directed the AO to accept the assessee's calculation as the cost of funds, specifically for the amount assessed as 'Income from Other Sources'. The decision was made in favor of the assessee, allowing the appeal.

Appealability of Order Giving Effect to CIT(A)'s Order:
The CIT(A) had stated that the order giving effect to the CIT(A)'s order was not appealable under section 246A of the Act. However, the Tribunal disagreed, emphasizing that the AO's order modifying the earlier Assessment Order was indeed appealable under section 246A. This clarification was provided in the judgment, ensuring the correct understanding of the appealable orders under the Act.