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Income Tax Appellate Tribunal, SMC “C” BENCH : BANGALORE
Date of hearing : 25.07.2023 Date of Pronouncement : 27.07.2023 O R D E R This appeal is filed by the assessee against the DIN & Order No.ITBA/NFAC/S/250/2022-23/1051175211(1) dated 23.3.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the AY 2018-19 on the following grounds:-
“1. The order passed by the Commissioner of Income Tax (Appeals), NFAC, Delhi, passed under section 250 of the Income Tax Act, 1961 (hereafter "the Act") is in so far as it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The appellant denies itself liable to be assessed at Rs. 13,57,400/- against the returned income of Rs. 38,260/- for the impugned assessment year 2018-19 on the facts and circumstances of the case.
The learned CIT(A) was not justified in disallowing the deductions of Rs. 13,1.9,140/- under section 80P(2)(a)(i) of the Act, on the facts and circumstances of the case.
4. The learned CIT(A) failed to appreciate that Co-operative Banks are primarily Co-operative Societies and the interest earned was allowable as a deduction under section 80P(2)(a)(d) of the Act, on the facts and circumstances of the case.
5. The learned CIT(A) failed to appreciate that the interest of Rs. 13,19,140/- was alternatively allowable under section 80P(2)(a)(i) of the Act as business income, on the facts and circumstances of the case.
6. The learned CIT(A) was not justified in stating that the interest earned was from non-members, when the appellant has not made a claim of mutuality, on the facts and circumstances of the case.
7. The appellant denies the liability to pay interest under section 234A and 234B of the Act in view of the fact that there is no liability to additional tax as determined by the assessing officer.
8. Without prejudice, the rate, period and on what quantum the interest has been levied are not in accordance with the law and are not discernable from the order and hence deserves to be cancelled on the facts and circumstances of the case.
9. The appellant craves leave to add, alter, modify, delete, or substitute any or all of the grounds.
10. In view of the above and other grounds that may be taken at the time of the hearing the appeal, the appellant prays that the appeal be allowed in the interest of justice and equity.”
2. The assessee has also filed additional grounds of appeal as follows:-
1. Grounds U/s 56 of the Act: a) The learned CIT(A) was not justified in appreciating that the direction of the supreme court has not been followed, in so far as allowing cost of funds, while directing the assessing officer to make a disallowance, on the facts and circumstances of the case. b) The learned CIT(A) was not justified in appreciating that the interest income on fixed deposits, when considered under the head other sources, the interest expenditure incurred was also required to be set off against the income, on the facts and circumstances of the case.
It is submitted that the above additional grounds of appeal
were not urged specifically in the grounds of appeal and these grounds do not involve any investigation of any facts otherwise on the record of the department and are also pure question of law. Hence the same may be admitted and disposed of on merits for the advancement of substantial cause of justice. Reliance is placed on the decision of the Hon'ble Apex Court in the case of National Thermal Power Company Limited Vs. CIT, reported in 229 ITR 383 and also on the ratio of the decision of the Hon'ble Karnataka High Court in the case of Gundathur Thimmappa & Sons Vs. CIT, reported in 70. ITR 70.
3. After hearing both the parties, since the additional grounds raised by the assessee do not require fresh investigation into facts, which otherwise are on the record and also pure question of law, Respectfully following the Hon'ble Apex Court judgment in the case of National Thermal Power Company Limited (supra), the additional grounds are admitted for adjudication.
During the course of hearing, the ld. AR argued only on the additional grounds. Accordingly the rest of the grounds taken by the assessee are dismissed as not pressed.
The brief facts of the case are that the assessee is a primary co- operative agricultural and rural development bank registered under Karnataka Co-operative Societies Act, 1959 and obtained license. The assessee filed return of income and the case was selected for limited scrutiny on (i) Investments/Advances/Loans, & (ii) Deduction from Total Income under Chapter VIA. Statutory notices were issued to the assessee and assessee filed reply from time to time.
The AO noticed that interest earned on deposits from other than co-operative societies of Rs.72,157 and Rs.12,50,066 totalling to Rs.13,19,183 was not allowable for deduction u/s. 80P of the Act. Relying on the Hon’ble Supreme Court judgment in the case of Totgars Co-operative Sale Society [2010] 188 Taxman 282 (SC), the AO made addition of Rs.13,19,183 with regard to interest earned from different co-operative banks and assessed it as income from other sources u/s. 56 of the Act. The CIT(Appeals) confirmed the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.
The sole issue raised in the additional grounds is that when interest income is treated as income from other sources, the cost of funds/interest expenditure was required to be set off against the income as per the Hon’ble Supreme Court judgment in the case of Totgars Co- operative Sale Society [2010] 188 Taxman 282 (SC) relied on by the AO. He also relied on the cases of Totgars Co-operative Sale Society decided by the Hon’ble High Court of Karnataka in [2015] 58 taxmann.com 35 [Kar] and ITAT order in to 379/Bang/2023 dated 18.7.2023 (Bang. Trib). The ld. AR submitted that the issue is squarely covered by the above decisions and accordingly the matter may be sent to the AO for allowing the cost of funds.
The ld DR relied on the orders of lower authorities.
After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, I note that this issue has been decided by the Hon’ble High Court of Karnataka in the case of Totgars Co-operative Sale Society [2015] 58 taxmann.com 35 [Kar] wherein it is held as under:-
“12. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as "other income" falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from "other sources", the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee.”
Respectfully following the above judgment of the Hon’ble High Court of Karnataka, I hold that the assessee is entitled for cost of funds and only the net interest income is taxable u/s. 56 of the Act. Therefore this issue is remitted to the file of AO for determination of net income after set off of cost of funds/interest expenditure in earning the interest income for the purpose of taxability u/s. 56 of the Act as per law. Needless to say that the assessee may be given reasonable opportunity of being heard and the assessee is directed to produce all the relevant documents to substantiate its claim and avoid seeking unnecessary adjournment for early disposal of the case.
In the result, the appeal by the assessee is partly allowed for statistical purposes.
Pronounced in the open court on this 27th day of July, 2023.