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2021 (12) TMI 563 - AT - Income TaxDeduction u/s 80P(2)(a)(i) and 80P(2)(d) - AO denied the benefit of deduction u/s 80P(2)(a)(i) for the reason that the assessee was also dealing with associate / nominal members - CIT(A) upheld the view taken by the A.O. that the assessee has violated the principle of mutuality, and hence, it was concluded that assessee was not entitled to deduction u/s 80P(2)a)(i) and 80P(2)(d) - HELD THAT:- The Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors [2021 (1) TMI 488 - SUPREME COURT] had held that the expression “members” is not defined under the Income-tax Act. Hence, it is necessary to construe the term “members” in section 80P(2)(a)(i) of the I.T.Act as it is contained in the respective State Co-operative Act. The Hon’ble Apex Court had held that providing credit facilities to associate or nominal members would be entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act unless they are not considered as “members” of the co-operative societies under the respective State Act. The Hon’ble Apex Court has also considered the judgment in case of Citizen Co-operative Society Ltd. [2017 (8) TMI 536 - SUPREME COURT] - A.O. has merely denied the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act for the reason that the assessee was also dealing with associate / nominal members, which is against the dictum laid down by the Hon’ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. & Ors. (supra). The Hon’ble Apex Court has settled many issues We are of the view that the issue of deduction u/s 80P(2)(a)(i) of the Act, needs to be examined by the A.O., in the light of the principles enunciated by the Hon’ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. & Ors. (supra). Accordingly, the CIT(A) order on this issue is set aside and the same is restored to the files of the A.O. for examination of the case in the light of the principles laid down. Rejection of claim of deduction u/s 80P(2)(a)(i) of the Act with regard to interest income earned from fixed deposits kept with co-operative banks - Insofar as deduction u/s 80P(2)(d) we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction. Deduction u/s 57 - Assessee’s claim that if interest income is to be assessed income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction u/s 57 of the I.T.Act, we find an identical issue was considered by the Hon’ble jurisdictional High Court in the case of Totgars Co-operative Sales Society Ltd [2017 (7) TMI 1049 - KARNATAKA HIGH COURT] The assessee has not raised the plea before the Income Tax Authorities that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised before the lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only net income has to be taxed (i.e., gross receipt minus allowable expenditure), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of in the case of Totagars Sale Co-operative Society Limited [supra] - Accordingly, the issue of deduction u/s 57 of the I.T.Act is restored to the files of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources’. If so, the same shall be allowed as deduction u/s 57 - Appeal filed by the assessee is allowed for statistical purposes.
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