2025 (3) TMI 295 - AT - Income Tax

Disallowance u/s 80P - assessee has earned the alleged sum towards the interest earned from the scheduled banks - CIT(A) confirming the action of Ld. AO in treating the interest received from bank as Income From Other Sources and denying the benefit of deduction u/s 80P HELD THAT - We find assessee argument have no merits because in the judgment of Nawanshahar Central Cooperative Bank Ltd 2005 (8) TMI 28 - SC ORDER the assessee was a cooperative bank having banking licensing whereas in the instant case the assessee is not cooperative bank and it does not have any banking license but is merely a cooperative society engaged in providing credit facility to its members. Therefore the ratio laid down in the case of Nawanshahar Central Cooperative Bank Ltd (supra) is not applicable on the facts of the instant case. Even the CBDT circular No.18/2015 is not applicable on the assessee society because this circular has been given referring to the judgment of Nawanshahar Central Cooperative Bank Ltd (supra) and it was only with regard to bank/commercial bank to which banking license applies. Since the assessee is not registered under banking Act 1949 and is merely a cooperative society CBDT Circular No.18/2015 (supra) will not apply on it. We fail to find any merit in the grounds of appeal raised by the assessee and thus no infirmity is called for in the finding of Ld. CIT(A). Appeal of the assessee is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

1. Whether the interest income earned by the assessee cooperative society from deposits with scheduled banks qualifies for deduction under Section 80P of the Income Tax Act.

2. Whether the interest income should be classified as "Income from Other Sources" or as business income attributable to the cooperative society's primary activities.

3. The applicability of the Supreme Court's decision in the case of Totgar Cooperative Sale Society and the relevance of the CBDT Circular No.18/2015.

4. The entitlement of the assessee to claim deductions for expenditures incurred in earning the interest income.

5. The jurisdictional validity of the assessment order passed under Section 143(3) read with Section 144B.

ISSUE-WISE DETAILED ANALYSIS

1. Deduction under Section 80P for Interest Income

- Legal Framework and Precedents: Section 80P of the Income Tax Act provides deductions for income earned by cooperative societies from specified activities. The key question was whether the interest income from bank deposits qualifies under this section. The decision in Totgar Cooperative Sale Society by the Supreme Court was pivotal, which held that interest income from surplus funds invested in banks does not qualify for deduction under Section 80P(2)(a)(i).

- Court's Interpretation and Reasoning: The Tribunal noted that the interest income was not derived from the cooperative society's primary activity of providing credit facilities to its members. Instead, it was earned from surplus funds deposited in banks, thus classifying it as "Income from Other Sources."

- Key Evidence and Findings: The Tribunal relied on the precedent set by the Supreme Court and the Karnataka High Court's interpretation of "attributable to" versus "derived from" in Section 80P. The Tribunal emphasized that the interest income was not directly linked to the society's business activities.

- Application of Law to Facts: The Tribunal applied the legal interpretation from the Totgar Cooperative Sale Society case, concluding that the interest income does not qualify for deduction under Section 80P(2)(a)(i) since it was not directly attributable to the society's business of providing credit facilities.

- Treatment of Competing Arguments: The assessee's argument, referencing the Nawanshahar Central Cooperative Bank Ltd case and the CBDT Circular, was dismissed. The Tribunal noted that the circular and the cited case pertained to cooperative banks with banking licenses, which did not apply to the assessee, a cooperative society without such a license.

- Conclusions: The Tribunal upheld the lower authorities' decision to deny the deduction under Section 80P for the interest income from bank deposits.

2. Classification of Interest Income

- Legal Framework and Precedents: The classification of income as "Income from Other Sources" versus business income was central. The Tribunal examined the nature of the interest income and its connection to the society's primary activities.

- Court's Interpretation and Reasoning: The Tribunal found that the interest income from bank deposits was not part of the society's core business activities. The funds were surplus and not immediately required for lending to members, thus classifying the income as "Income from Other Sources."

- Key Evidence and Findings: The Tribunal highlighted that the funds were not liabilities owed to members but rather surplus funds, reinforcing the classification as non-business income.

- Application of Law to Facts: The Tribunal applied the legal definitions and precedents to determine the proper classification of the interest income, affirming the lower authorities' treatment as "Income from Other Sources."

- Treatment of Competing Arguments: The assessee's argument that the interest income should be considered business income attributable to the society's activities was rejected based on the nature and source of the income.

- Conclusions: The Tribunal confirmed the classification of the interest income as "Income from Other Sources."

3. Deduction of Expenditure Incurred in Earning Interest Income

- Legal Framework and Precedents: The Tribunal considered whether expenditures incurred in earning interest income should be deductible.

- Court's Interpretation and Reasoning: The Tribunal agreed that expenditures related to earning interest income should be deductible, but only against the interest income classified as "Income from Other Sources."

- Key Evidence and Findings: The Tribunal acknowledged the necessity to allow deductions for expenditures directly linked to the earning of interest income.

- Application of Law to Facts: The Tribunal directed the Assessing Officer to allow deductions for expenditures incurred in earning the interest income, but limited to the portion classified as "Income from Other Sources."

- Treatment of Competing Arguments: The Tribunal addressed the assessee's claim for deductions, aligning with the legal principle that expenditures related to income generation are deductible.

- Conclusions: The Tribunal allowed deductions for expenditures incurred in earning interest income, restricted to the portion classified as "Income from Other Sources."

4. Jurisdictional Validity of Assessment Order

- Legal Framework and Precedents: The validity of the assessment order under Section 143(3) read with Section 144B was questioned.

- Court's Interpretation and Reasoning: The Tribunal found no jurisdictional errors in the assessment order, dismissing the assessee's claims of procedural violations.

- Key Evidence and Findings: The Tribunal reviewed the procedural aspects of the assessment order and found them compliant with statutory requirements.

- Application of Law to Facts: The Tribunal applied the relevant procedural laws and found the assessment order legally sound.

- Treatment of Competing Arguments: The assessee's arguments regarding jurisdictional errors were dismissed due to lack of substantive evidence.

- Conclusions: The Tribunal upheld the jurisdictional validity of the assessment order.

SIGNIFICANT HOLDINGS

- The Tribunal upheld the classification of interest income from bank deposits as "Income from Other Sources," denying the Section 80P deduction.

- Expenditures incurred in earning interest income were deemed deductible, but only against the portion classified as "Income from Other Sources."

- The Tribunal confirmed the jurisdictional validity of the assessment order, dismissing claims of procedural errors.

The appeal of the assessee was dismissed, with the Tribunal affirming the findings and decisions of the lower authorities.