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Facts
The assessee, a credit co-operative society, declared Nil income after claiming deduction under Section 80P. The AO disallowed the deduction. The CIT(A) partly allowed the appeal, allowing deduction under Section 80P(2)(a)(i) on business income but disallowing it on interest income from investments. The assessee appealed against the disallowance of interest income deduction.
Held
The Tribunal held that the assessee is entitled to deduct expenses incurred in earning interest income taxable under 'Income from Other Sources' as per Section 57 of the Act. The matter was remitted back to the Assessing Officer for fresh adjudication, allowing the deduction subject to substantiation by the assessee.
Key Issues
Whether the assessee is eligible for deduction of expenses incurred in earning interest income from investments, and if so, under which section, considering the disallowance of Section 80P deduction on such income.
Sections Cited
80P, 148, 57, 80P(2)(d), 80P(2)(a)(i), 250
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Income Tax Appellate Tribunal, “SMC” BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU
Per Laxmi Prasad Sahu, Accountant Member :
This appeal is filed by the assessee against the Order passed bythe CIT(A) vide DIN and Order No.ITBA/N FAC/S/250/2023-24/1059539634(1) dated 10.01.2024 on the following grounds of appeal :
1. The impugned Order u/s. 250 of the Act dated: 10-12-2018 passed by the Ld. CIT(A), National Faceless Appeal Centre, Delhi is opposed to law, facts and circumstances of the case.
2. The Ld. CIT(A) has erred in confirming the addition of Rs.13,83,452/- being the interest income derived from the investment made with the Banks without appreciating the facts and circumstances of the case.
3. The Ld. CIT(A) has erred in confirming the addition of Rs.13,83,452 by causing disallowance u/s 80P(2)(d) in respect Page 2 of 8 of the Interest income on investment made with the Banks without providing the Incidental charges attributable to earning of such interest as per Section 57 of the Act. 4. The Ld. CIT(A) has erred in confirming the addition of Rs.13,83,452/- based on certain Judicial decisions which are distinguishable. 5. TheAppellant craves leave to add, alter, amend and delete any of the grounds at the time of hearing.
At the outset of hearing, I noticed that the appeal filed by the assessee is delayed by 430 days before the Tribunal. In this regard, assessee has filed affidavit dated 04.06.2025 stating reason for delay in filing appeal. Considering the reason given that while filing appeal for Assessment Years 2013-14 to 2017-18 this appeal was not filed for the above period and management came to know when the meeting was held. Accordingly, there is a delay in filing the appeal. On going through the explanation submitted by the learned Counsel and by relying on the judgment of the Hon’ble Supreme Court in the case of Collector of Land Acquisition Vs. MST Katiji and Others, (1987) 2 SCC 107 : 1987 (2) SC, the delay in filing the appeal is condoned.
Briefly stated, the facts of the case are that assessee filed return of income on 09.02.2012 declaring Nil income after claiming deduction of Rs.26,62,456/- under section 80P of the Act. The notice was issued under section 148 of the Act on 28.03.2018 which was served to the assessee. Assessee filed return of income in pursuance to notice under section 148 of the Act. Accordingly, other statutory notices were issued to the assessee and the assessee submitted documents as called for. Assessee is engaged in the business of providing credit facilities to its members. The AO after discussing in detail did not allow deduction under section 80P of the Act and added back into the income of the assessee to the entire deduction claimed.
Aggrieved from the above Order, assessee filed appeal before the learned CIT(A). The learned CIT(A) allowed deduction to the assessee under section 80P(2)(a)(i) of the Act on this business income earned from the credit facilities provided to its members and assessee has earned interest income on this investment to the extent of Rs.13,83,452/- out of which Rs.12,06,264/- has been earned from deposit with scheduled co-operative bank. Accordingly, he did not allow deduction under section 80P(2)(d) of the Act on this income of Rs.13,83,452/- and he partly allowed appeal of the assessee.
Aggrieved from the above Order, assessee filed appeal before the Tribunal. The learned Counsel reiterated the submissions made before the lower authorities and submitted that learned CIT(A) has not considered the corresponding expenditure to earn interest from scheduled bank and submitted that in assessee’s own case the Co-ordinate Bench for the Assessment Years 2013-14 to 2017-18 in to 1947/Bang/2024, Order dated 29.11.2024 has allowed the expenditure incurred towards earning of income under section 57(iii) of the Act and he placed copy of the Order.
6. On the other hand, learned DR relied on the Order of the lower authorities and further submitted that for deduction purpose strict interpretation should be considered. As per section 80P(2)(d) of the Act, only interest and dividend received from the Co-operative Society is eligible for deduction under section 80P(2)(d) of the Act but here in the case assessee has received interest on this investment from scheduled bank and cooperative bank carrying banking business which cannot be considered as co-operative society therefore, it is not eligible for deduction under section 80P(2)(d) of the Act and in respect of cost of expenditure, he was aggreed and he could not bring any contrary judgment towards cost of fund.
Considering the rival submissions we noted that learned CIT(A) has not given deduction under section 80P(2)(d) of the Act on the interest received from its investment from scheduled bank or from co=operative bank. Co- ordinate Bench in assessee’s own case for Assessment Years 2013-14 to 2017- 18 in to 1947/Bang/2024 had decided as follows:
“6. The assessee, a credit co-operative society, is engaged in the business of providing banking-related services. During the relevant assessment year, the assessee claimed a deduction under section 80P of the Act amounting to ₹56,48,107/- only. However, the Assessing Officer (AO) disallowed the deduction on the reasons detailed below:
"5. It is a settled legal position that ability to induct nominal members who can only contribute profits but can not participate in such profits, itself negates the existence of Principle of Mutuality in the case of assessee. Further from the Bye-laws it is evident that any member of the public can become a nominal member and can avail loan facility from the assessee society. As held by the Hon'ble Supreme Court of India in the case of Citizen Co-Operative Societies, income earned from providing credit facilities to such nominal members does not satisfy the test of mutuality. Thus in the assessee's case the test of mutuality is not satisfied and as such it is no possible for deduction u/s 80P of the IT Act.
Assessee society is one legal entity and cannot have two different parts one which is adhering to Principle of Mutuality and the other not satisfying the Principle of Mutuality. As per the ratio of Hon'ble Supreme Court of India in Citizen Co- Operative Societies (Supra), since assessee is single legal person, just one instance of non-compliance to Principle of Mutuality will make it a non-mutual organization and not eligible u/s 80P.
In view of the above legal position, I hold that assessee society does not satisfies the I test of mutuality and hence not eligible to deduction u/s 80P. Accordingly the assessment is completed as under rejecting the assessee's claim of deduction u/s 80P of the IT Act, 1961."
7. Aggrieved by the disallowance made by the Assessing Officer (AO), the assessee filed an appeal before the learned Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A), after considering the submissions, partly allowed the assessee's appeal with the following observations: "This view of Hon'ble Bangalore High Court has been upheld in number of subsequent decision of ITAT Bangalore including in the case of M/s.Vasavamba Co-operative Society Ltd. (ITA No.453/Bang/2020 (order dated 13.08.2021 had held that the assessee is not entitled to deduction u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the I. T. Act with regard to the interest income earned from investments made with cooperative banks either. Accordingly, it is held that assessee shall not be eligible for deduction u/s 80P(2)(d) on its entire income earned as interest, be it from scheduled commercial bank or from cooperative banks. 5.12 On the basis of discussion in paragraph no. 5.10 and para 5.11 it is hereby decided that the entire amount of Rs. 18,59,846/- earned by the assessee which was held to be income chargeable under the head income from other sources and therefore, not eligible for deduction u/s 80P(2)(a)(i) shall also not be eligible for deduction u/s 80P(2)(d).
In the background of above decision let us direct ourselves to individual grounds of appeal. 5.13 Ground no. 1, 2, 3 and 11: These grounds are general in nature, therefore, they are not being decided separately. 5.14 Ground no. 4,5,6 and 7: In terms of discussion in para-5.1 to para-5.12 these grounds are partly allowed. It has been held that the assessee shall be eligible to deduction u/s 80P(2)(a)(i) to the extent of Rs. 45,88,261/- and shall not be eligible for deduction u/s 80P(2)(d) on Rs. 18,59,846/-. 5.15. Ground no.8: The entire expenditure claimed by the assessee be it relating to its business activity or be it related to its investments activity has been allowed in computing the income of the appellant under the head business and profession. In this ground, the appellant has rightly argued that if deduction u/s 80P(2)(d) is being disallowed Page 6 of 8 he should be allowed expenditure directly relating to this income. However, the main business of the assessee is that of accepting deposits, maintain accounts giving credits ensuring timely payment to interest of depositors and ensuring timely collection of principle an interest from the borrowers therefore, merely an insignificant and non- material amount must have been spend by the appellant in making investment on which the interest has been earned. Any pro- rata apportionment of expenditure relatable to earning of the appellant under the head income from business and profession and income under head other sources shall not give the true picture of the activities of the appellant. Be as it may, the appellant has not ear marked or indentified any specific expenditure for its eligibility for deduction u/s 57, no amount is being allowed u/s 57."
8. Dissatisfied with the partial relief granted by the learned CIT(A), the assessee has preferred the present appeal before this Tribunal, seeking appropriate adjudication on the matter.
During the hearing, the learned Authorized Representative (AR) for the assessee conceded that the interest income earned from deposits with the co-operative bank does not qualify for deduction under section 80P(2)(d) of the Income Tax Act, 1961. However, the learned AR argued that the assessee is entitled to claim a deduction under Section 57 of the Act for the expenses incurred in earning such interest income from the co-operative bank.
On the other hand, the learned Departmental Representative (DR) did not present any substantive rebuttal to the arguments put forth by the learned AR. However, the learned DR strongly supported the orders passed by the lower authorities. 11. After hearing the contentions of both parties and examining the materials available on record, we note that it is well established in law that an assessee is entitled to deduct the expenses incurred in earning income taxable under the head "Income from Other Sources." Such a deduction is allowable under the provisions of Section 57 of the Act. Considering this legal position, we agree with the arguments advanced.
by the learned AR. Accordingly, we hold that the assessee cannot be denied the benefit of deducting the costs incurred in earning the interest Page 7 of 8 income from the co-operative bank under Section 57 of the Act. However, the burden lies on the assessee to substantiate its claim for such a deduction by providing adequate evidence and complying with the relevant provisions of law. Hence, in light of the above, we set aside the findings of the learned CIT(A) on this issue and remit the matter back to the file of the Assessing Officer for fresh adjudication. The Assessing Officer is directed to allow the deduction under Section 57 of the Act against the interest income from the co-operative bank, subject to verification of the assessee's claim. Consequently, the assessee's ground of appeal is partly allowed for statistical purposes. Coming to 446 & 447/Bang/2024 for the assessment years 2013-14, 2015-16 & 2017-18
12. The facts of the present case are identical to those discussed and adjudicated above. Therefore, following the principle of judicial consistency and considering the findings in the preceding paragraphs, we set aside the order of the learned CIT(A) and remit the matter back to the file of the Assessing Officer. The Assessing Officer is directed to adjudicate the issue afresh, allowing the benefit of deduction under Section 57 of the Income Tax Act, 1961, against the interest income earned from the co-operative bank, subject to the assessee substantiating its claim with necessary evidence and as per the provisions of law. The grounds of appeal s filed by the assessee are partly allowed for statistical purposes.
13. In the result, the appeals filed by the assessee are partly allowed for statistical purposes.
14. In the combined result, all the appeals filed by the assessee are partly allowed for statistical purposes.”
Respectfully following the above judgment, I remit this issue back to the file of AO as per above terms. Accordingly, appeal of the assessee is partly allowed for statistical purposes.