2024 (7) TMI 1654 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) - AO assessed the interest income as income from other sources without providing deduction of corresponding expenses - AO also disallowed certain provisions made by the assessee on the ground that the same are not ascertained liabilities and hence not allowable - HELD THAT - It is settled position of law that in the case of the co-operative society if any disallowance is to be made and income of the assessee is increased then such income/profits are eligible for deduction u/s. 80P(2)(a)(i) of the Act. Similarly if the interest income is to be taxed under the head income from other sources then expenses attributable to earning of such income is to be allowed the profits arrived after such allowance would be going to increase the deduction of 80P(2)(a)(i). Our view is fortified by various decisions of Coordinate Benches of the Tribunal relying on the judgement of Gem plus Jewellary India Ltd 2010 (6) TMI 65 - BOMBAY HIGH COURT Therefore the matter is remitted back to the AO for recomputation of the profit eligible for deduction u/s. 80P (2)(a)(i) of the Act to the present assessee. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

a) Whether, when interest income of a cooperative society is assessed under the head "Income from Other Sources," the corresponding expenses incurred to earn such interest income should be allowed as a deduction.

b) Whether the profits computed after allowing such expenses should be considered for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

c) Whether provisions made by the cooperative society, which were disallowed by the Assessing Officer (AO) on the ground of being unascertained liabilities, should be considered as part of profits eligible for deduction under Section 80P(2)(a)(i).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Deduction of expenses attributable to interest income assessed under "Income from Other Sources"

Relevant legal framework and precedents: Section 80P(2)(a)(i) provides deduction in respect of profits and gains of cooperative societies engaged in specified activities. The question arises when interest income is taxed under "Income from Other Sources," whether expenses related to earning such income should be allowed for deduction before computing profits eligible under Section 80P(2)(a)(i).

The AO relied on the Karnataka High Court judgment in PCIT v. Totgars Co-operative Sale Society [2017] 395 ITR 611 (Kar), which held that the cooperative society was not governed by principles of mutuality and thus interest income was taxable without corresponding expense deduction.

Court's interpretation and reasoning: The Tribunal observed that it is a settled position of law that if the income of a cooperative society is increased by disallowance, such increased income should be considered for deduction under Section 80P(2)(a)(i). Additionally, if interest income is taxed under "Income from Other Sources," expenses attributable to earning such income must be allowed to arrive at the correct profits eligible for deduction.

Key evidence and findings: The Tribunal referred to various decisions of Coordinate Benches of the Tribunal and the Hon'ble Bombay High Court judgment in Gem Plus Jewellery India Ltd (330 ITR 250), which supported the proposition that any increase in income or profits of the assessee is eligible for deduction under Section 80P(2)(a)(i).

Application of law to facts: The Tribunal found that the AO erred in disallowing expenses related to interest income. The profits should be recomputed after allowing such expenses, and the resulting profits should be considered for deduction under Section 80P(2)(a)(i).

Treatment of competing arguments: The Revenue relied on the AO and CIT(A) orders and the Karnataka High Court decision, but the Tribunal distinguished these by emphasizing the settled legal position and consistent Tribunal precedents allowing deduction of expenses and corresponding treatment under Section 80P(2)(a)(i).

Conclusion: The Tribunal held that expenses attributable to interest income taxed under "Income from Other Sources" must be allowed, and the profits so computed are eligible for deduction under Section 80P(2)(a)(i).

Issue (b): Treatment of disallowance of provisions as part of profits eligible for deduction under Section 80P(2)(a)(i)

Relevant legal framework and precedents: Provisions disallowed by the AO on the ground that they are unascertained liabilities are generally not allowable as deductions. The assessee contended that such disallowance increases profits and should be considered for deduction under Section 80P(2)(a)(i).

Court's interpretation and reasoning: The Tribunal admitted the additional grounds raised by the assessee based on the Apex Court judgments in NTPC (229 ITR 383) and Jute Corporation (187 ITR 688), which emphasize that legal questions going to the root of the matter must be considered.

Key evidence and findings: The Tribunal noted that if the AO disallows provisions, thereby increasing the income, such increased income or profits are eligible for deduction under Section 80P(2)(a)(i).

Application of law to facts: Since the matter was remitted to the AO for recomputation of profits eligible for deduction, the issue of provisions became academic for the present appeal.

Treatment of competing arguments: The Revenue did not specifically counter the legal proposition but relied on lower authorities' orders. The Tribunal gave precedence to the legal principle established by higher courts.

Conclusion: The disallowance of provisions, which results in increased profits, should be considered for deduction under Section 80P(2)(a)(i), but the issue requires recomputation and is thus remitted to the AO.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following legal principles and determinations:

"It is settled position of law that in the case of the co-operative society if any disallowance is to be made and income of the assessee is increased then such income/profits are eligible for deduction u/s. 80P(2)(a)(i) of the Act."

"Similarly, if the interest income is to be taxed under the head income from other sources then expenses attributable to earning of such income is to be allowed the profits arrived after such allowance would be going to increase the deduction of 80P(2)(a)(i)."

The Tribunal remitted the matter to the AO for recomputation of profits eligible for deduction under Section 80P(2)(a)(i), directing that expenses related to interest income be allowed and disallowance of provisions be treated accordingly.

The appeal was allowed for statistical purposes, with the additional grounds raised by the assessee becoming academic due to remand.