2024 (10) TMI 1198 - AT - Income Tax

Disallowance u/s 80P(2)(a)(i) - interest received from Bank of Baroda (on FDR) - Assessee submitted that the assessee was carrying on business of providing credit facilities to its members and, therefore, it was eligible for deduction - also surplus funds were invested in FDRs with Bank of Baroda and, therefore, the interest received on such FDRs was part of business activity of the society and should have been allowed as deduction - HELD THAT - The provision of Section 80P(2)(a)(i) of the Act stipulates that the income derived by a cooperative society engaged in carrying business of banking or providing credit facilities to its members shall be allowed as deduction. The assessee is not engaged in banking business. Further, the interest earned by the assessee on the FDRs made with Bank of Baroda cannot be held as income derived from providing credit facilities to its members. Therefore, the AO had rightly treated this interest income as ineligible for deduction u/s. 80P(2)(a)(i) of the Act. As in the case of State Bank of India 2016 (7) TMI 516 - GUJARAT HIGH COURT had categorically held that investing the surplus funds with State Bank of India was no part of business of providing credit to its members and that the character of the interest derived on FDRs with Banks was different from the income attributable to the business of the society of providing credit facilities to its members. No merit in the ground as taken by the assessee and interest derived by the assessee on FDR with Bank of Baroda was rightly disallowed u/s. 80P(2)(a)(i). Alternate claim of the assessee to allow pro-rata expenses on earning this interest - In the present case, the AO had already examined this contention of the assessee and given a categorical finding in the assessment order that the assessee was not eligible for proportionate interest expenditure as the assessee had not made any expenditure towards earning of this interest income from the above bank/institutions. In order to be eligible for any deduction in respect of earning of interest on FDRs, the assessee has to first establish that it had incurred certain expenditure for earning this income. No such evidence has been brought on record. Further, the assessee has also not controverted the findings as given by the AO. Under the circumstances, we do not find any merit in the claim of the assessee to allow proportionate expense. Disallowance u/s. 80P(2)(d) - AO held that the interest earned on the deposit with Cooperative Bank was not allowable as deduction - whether the investment made by the assessee, which is a cooperative society, with a cooperative bank, shall be considered as investment with other cooperative society in order to avail the deduction u/s 80P(2)(d) ? - HELD THAT - It is clear from the amended order of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. 2022 (1) TMI 1309 - GUJARAT HIGH COURT that the interest derived on FDRs with other cooperative banks will now be eligible for deduction u/s. 80P(2)(d) of the Act. In view of the amended order of the Jurisdictional High Court and also the fact that the cooperative banks are registered as cooperative societies, the disallowance of interest derived by the assessee from The Mehsana District Central Co-operative Bank Ltd. cannot be sustained. Therefore, the disallowance u/s. 80P(2)(d) of the Act is deleted. The ground taken by the assessee is allowed.

Summary

Issues:
- Disallowance under Section 80P(2)(a)(i) of the Income Tax Act, 1961
- Disallowance under Section 80P(2)(d) of the Income Tax Act, 1961

Analysis:
1. The appeals were filed against the orders of the National Faceless Appeal Centre for different Assessment Years. The issue in all three appeals was identical, and they were heard together.

2. The first issue pertained to disallowance under Section 80P(2)(a)(i) of the Act. The assessee, a cooperative credit society, claimed deduction for interest received from Bank of Baroda, which was disallowed by the AO. The Tribunal upheld the disallowance, stating that the interest earned on FDRs with the bank did not qualify for deduction under Section 80P(2)(a)(i) as it was not income derived from providing credit facilities to members.

3. The second issue was regarding disallowance under Section 80P(2)(d) of the Act. The assessee earned interest income from a cooperative bank, which was disallowed by the AO. The Tribunal allowed the deduction based on the nature of the cooperative bank and the amended order of the High Court, which clarified that interest derived from investment with other cooperative banks was eligible for deduction under Section 80P(2)(d).

4. The Tribunal observed that cooperative banks are essentially cooperative societies subject to additional regulations under the Banking Regulation Act. The investment made by the assessee, a cooperative society, with a cooperative bank qualified for deduction under Section 80P(2)(d) as per the amended order of the High Court.

5. The Tribunal dismissed the alternate claim for pro-rata expenses on earning interest income as the assessee failed to establish incurring any expenditure for that purpose.

6. The Tribunal allowed the appeal in part, dismissing Ground No.1 and allowing Ground No.2 in all three appeals. The orders disallowing deductions under Section 80P(2)(a)(i) were confirmed, while disallowances under Section 80P(2)(d) were deleted.

7. The Tribunal upheld the decisions of the AO and the Ld. CIT(A) where applicable, based on the nature of income and the eligibility criteria under the Income Tax Act.