KHERALU TALUKA PRIMARY TEACHERS CO. OP. CREDIT SOCIETY NIYAMIT,MEHSANA vs. NFAC, DELHI PRESENT JURISDICTION -THE ITO, WARD-1, PATAN

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the counsel for the assessee reiterated the submissions made before Ld. CIT(A) to the Kheralu Taluka Primary Teachers Co. Op. Society Niyamit vs. ITO Asst. Year –2018-19 - 4– effect that the assessee should have been allowed set-off of interest expenses against interest income earned from nationalized banks u/s 57 of the Act. In response, the Ld. DR placed reliance on the observations made by the Assessing Officer and Ld. CIT(Appeals) in their respective orders.

We have heard the rival contentions and perused the material on record. We note that a similar issue came up before Ahmedabad ITAT in the case of Balwa Group Coop Society vs. ITO for the Assessment Year 2018-19 (ITA No. 1636/Ahd/2024), wherein the ITAT dealt with the issue of taxability of interest income earned from nationalized banks. The brief facts of the case were that the assessee, a credit co-operative society, had filed its return declaring NIL income after claiming deduction under Section 80P(2)(a)(i) of the Act. However, the Assessing Officer disallowed this claim, treating the interest income of ₹26,31,656 from various banks as not eligible for deduction under Section 80P, and taxed the same under the head "Income from Other Sources." Before ITAT, the assessee submitted that the interest earned was from surplus funds which were deposited to meet the objectives of the society and should therefore qualify for deduction under Section 80P. Alternatively, the assessee requested that if the income is taxable under Section 56, then proportionate expenses related to earning this income should be allowed under Section 57. The assessee further submitted that administrative and other operational expenses such as interest paid to members, salaries, and member welfare expenses were incurred in the process of managing funds and earning interest from bank deposits. The Kheralu Taluka Primary Teachers Co. Op. Society Niyamit vs. ITO Asst. Year –2018-19 - 5– Department, however, opposed this, arguing that the interest income from nationalized banks was from surplus or idle funds and had no direct connection to the society’s main business of providing credit to its members. The Departmental Representative contended that most of the expenses, especially the interest paid to members were directly related to the core lending activities and could not be deducted from income earned from other sources like bank deposits, to avoid double deduction. After hearing both sides, the Tribunal upheld the CIT(A)'s decision on the first ground, confirming that the interest income earned from nationalized banks is not eligible for deduction under Section 80P(2)(a)(i) of the Act. However, regarding the alternative claim of deduction of proportionate expenses under Section 57 of the Act, the Tribunal found merit in the assessee’s submission and noted that whether proportionate expenses could be allowed or not required further verification. The ITAT accordingly remanded this specific issue back to the Assessing Officer for fresh adjudication after examining the working of the proportionate expenses, with instructions to give the assessee an opportunity to be heard.

We are of the considered view that the facts of the case before us are similar to above decision of jurisdictional Ahmedabad ITAT. We concur with the view taken in the aforesaid decision that the assessee should be allowed proportionate expenditure against interest income subject to the assessee establishing connection between incurring of such expenditure towards earning of interest income from nationalized banks, which is a specific requirement for claim of such expenditure u/s section 57 of the Act. Accordingly, the appeal of the assessee is allowed for statistical purposes and matter with respect to claim of deduction of proportionate expense under Section 57 of the Act is remitted to the Assessing Officer for fresh consideration.

In the result, the appeal of the assessee is allowed for statistical purposes. This Order pronounced in Open Court on 25/08/2025