2025 (5) TMI 1548 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income earned from the deposits made with the Co-operative Banks and treated the said income as income from other sources - HELD THAT - In view of the law laid down in case of Lalitamba Pattina Souharda Sahakari Niyamita 2018 (3) TMI 224 - KARNATAKA HIGH COURT the interest income earned by the assessee out of the surplus funds of the society could not be treated as income from other sources. Further it is the case of the assessee that the assessee has to deposit its funds with the co-operative banks as per the provisions of the Karnataka Co-operative Societies Act and therefore the interest income earned out of compulsion could be treated as income obtained from the profits and gains of business/profession and they are entitled for deduction u/s. 80P(2)(a)(i) of the Act. AO as well as the Ld.CIT(A) had not considered the earlier judgment of Tumkur Merchants Souharda Credit Co-operative Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT and Lalitamba Pattina Souharda Sahakari Niyamita 2018 (3) TMI 224 - KARNATAKA HIGH COURT in order to appreciate the fact whether the interest income earned is attributable to the business of banking activities done by the assessee. Even though in the earlier round this Tribunal had remitted the issue to the AO to re-examine the plea raised by the assessee that the investments which yielded interest income were all investments that are statutorily required to be maintained under the Karnataka Co-operative Societies Act the AO had not considered the said direction. Therefore the interest income received by way of mandatory / statutory deposits would also eligible for deduction u/s. 80P(2)(a)(i) of the Act by treating the said income as business income. We are of the view that the order of the authorities below are liable to be set aside and again we remit the issue to the AO to consider the statutory deposit plea as well as the judgment of Lalitamba Pattina Souharda Sahakari Niyamita supra and thereafter decide the issue afresh after giving notice to the assessee. Appeals filed by the assessee are allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether the interest income earned by the appellant co-operative society on deposits made with co-operative banks and scheduled commercial banks is eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961, treating such interest as income from the business of banking or credit facilities provided to members.
• Whether the deposits made by the co-operative society in co-operative banks are statutory or mandatory under the Karnataka Co-operative Societies Act, 1959, specifically sections 57 and 58, and if so, whether interest income arising from such deposits qualifies as business income eligible for deduction under section 80P(2)(a)(i).
• Whether the assessing officer and appellate authorities erred in denying the deduction and treating the interest income as income from other sources.
• Whether the expenditure and administration costs incurred to earn such interest income are allowable under section 57 of the Income Tax Act.
• The applicability and interpretation of relevant judicial precedents, including the Supreme Court's decision in Totagars Co-operative Sales Society vs. ITO and judgments of the Karnataka High Court and other Tribunals, in the context of the facts of the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility of Interest Income for Deduction under Section 80P(2)(a)(i) of the Income Tax Act

Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) provides deduction to co-operative societies engaged in carrying on the business of banking or providing credit facilities to its members in respect of income derived from such business. The Karnataka Co-operative Societies Act, 1959, particularly sections 57 and 58, mandates co-operative societies to invest surplus funds and reserve funds in co-operative banks. The Supreme Court judgment in Totagars Co-operative Sales Society vs. ITO (2010) 188 Taxmann 282 (SC) and subsequent Karnataka High Court decisions are pivotal precedents.

Court's Interpretation and Reasoning: The Tribunal noted that the appellant society is registered under the Karnataka Co-operative Societies Act and is engaged in accepting deposits, providing credit facilities, and investing surplus funds. The society's bye-laws and statutory provisions (sections 57 and 58) require it to deposit surplus and reserve funds in co-operative banks. This statutory compulsion establishes a business nexus for the interest income earned on such deposits.

The Tribunal distinguished the facts of the present case from the Supreme Court's Totagars decision, where the funds deposited were proceeds from sale of agricultural produce and not surplus or reserve funds. In contrast, the appellant's deposits were statutory and integral to its business operations.

Further, the Tribunal relied on the Karnataka High Court's decision in Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO (2018) which held that interest earned on investments made pursuant to statutory provisions is attributable to business income and eligible for deduction under section 80P(2)(a)(i). The Tribunal emphasized that the lower authorities failed to consider these statutory provisions and relevant precedents.

Key Evidence and Findings: The appellant submitted the bye-laws authorizing deposits in co-operative banks, audited financial statements showing deposits as investments and not liabilities, and detailed breakup of interest income from statutory and reserve funds. The AO had initially rejected the breakup but the Tribunal found the appellant's evidence sufficient to establish the statutory nature of deposits and business nexus of interest income.

Application of Law to Facts: The Tribunal applied the statutory provisions mandating deposits and the judicial precedents to hold that the interest income earned is business income derived from carrying on banking activities and thus eligible for deduction under section 80P(2)(a)(i). The interest income cannot be treated as income from other sources merely because it arises from deposits.

Treatment of Competing Arguments: The Revenue relied heavily on the Supreme Court's Totagars decision and the lower authorities' orders to deny deduction. The Tribunal differentiated Totagars on facts and pointed out the failure of the lower authorities to consider the statutory mandate and the Karnataka High Court's binding precedent. The Revenue's argument that deposits in co-operative banks do not qualify under section 80P(2)(d) was also addressed, clarifying that section 80P(2)(a)(i) and 80P(2)(d) are distinct and deduction under one does not preclude the other.

Conclusions: The Tribunal concluded that the interest income earned on statutory deposits with co-operative banks is eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act.

Issue 2: Allowability of Expenditure and Administration Costs under Section 57

Relevant Legal Framework: Section 57 allows deduction of expenditure incurred to earn income chargeable under the head "Income from Other Sources". The appellant claimed 25% administrative expenses incurred to earn the interest income.

Court's Interpretation and Reasoning: The AO allowed 25% of the interest income as expenditure but denied the balance claim. The Tribunal noted that since the interest income is business income under section 80P(2)(a)(i), the expenditure should be allowed in accordance with section 57, and the AO should examine the actual expenses incurred.

Key Evidence and Findings: The appellant submitted audited financials and ledger accounts detailing interest paid to members and administrative costs. The Tribunal found these records sufficient to substantiate the claim.

Application of Law to Facts: The Tribunal directed the AO to reconsider the expenditure claim on the interest income in light of the business income classification and allow appropriate deductions under section 57.

Treatment of Competing Arguments: Revenue contended that since the interest income was treated as income from other sources, the expenditure claim was limited. The Tribunal rejected this stance based on its finding on the nature of income.

Conclusions: The appellant is entitled to claim expenditure and administrative costs incurred to earn the interest income under section 57, subject to verification by the AO.

Issue 3: Interpretation of Sections 57 and 58 of the Karnataka Co-operative Societies Act, 1959

Relevant Legal Framework: Section 57 mandates transfer of at least 25% of net profits to a reserve fund, which must be deposited in a co-operative bank and cannot be used as working capital. Section 58 authorizes investment of funds in government savings banks, securities, other co-operative societies, co-operative banks, or scheduled banks approved by the general body.

Court's Interpretation and Reasoning: The Tribunal held that these statutory provisions impose an obligation on the society to deposit surplus and reserve funds in co-operative banks, creating a business nexus for the interest income arising from such deposits. The deposits are not voluntary but statutory, integral to the business of the society.

Key Evidence and Findings: The appellant's bye-laws and statutory provisions were examined and found to authorize and mandate such deposits.

Application of Law to Facts: The statutory requirement to deposit funds in co-operative banks means the interest income earned is derived from business activities, qualifying for deduction under section 80P(2)(a)(i).

Treatment of Competing Arguments: The Revenue argued that deposits in scheduled banks and co-operative banks do not qualify under section 80P(2)(d). The Tribunal clarified that section 80P(2)(a)(i) applies to interest income from business activities, including statutory deposits, and is distinct from section 80P(2)(d).

Conclusions: The statutory provisions under the Karnataka Co-operative Societies Act mandate deposits in co-operative banks, and interest income therefrom is business income eligible for deduction under section 80P(2)(a)(i).

Issue 4: Applicability and Distinguishing of Judicial Precedents

Relevant Legal Framework and Precedents: The Supreme Court's Totagars decision, Karnataka High Court's decisions in Lalitamba Pattina Souharda Sahakari Niyamita and Tumkur Merchants Souharda Credit Co-operative Ltd., and other Tribunal judgments were considered.

Court's Interpretation and Reasoning: The Tribunal distinguished the facts of Totagars, noting that in that case the funds deposited were proceeds from members' agricultural produce, not surplus or reserve funds. The Karnataka High Court decisions clarified that interest income from statutory deposits is business income eligible for deduction. The Tribunal also relied on a CBDT Circular No. 18/2015 which directs that income from investments by banks is business income.

Key Evidence and Findings: The appellant submitted relevant judgments and circulars, which the Tribunal found supportive of their claim.

Application of Law to Facts: The Tribunal applied the principles laid down in these precedents to the factual matrix of the case, concluding in favor of the appellant.

Treatment of Competing Arguments: The Revenue's reliance on Totagars was rejected on factual distinction and the failure to consider binding High Court precedents.

Conclusions: The precedents support the appellant's claim for deduction under section 80P(2)(a)(i) on interest income earned from statutory deposits.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"When the assessee had relied on the provision of the Karnataka Co-operative Societies Act for depositing the funds with the co-operative banks, it has to be considered as an income received from the profits and gains of business and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. If there is no statutory requirement, the assessee would not have deposited the said amount in a co-operative bank and therefore the assessee is eligible for deduction u/s. 80P(2)(a)(i) of the Act."

"Interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. The placement of such funds being imperative for the purpose of carrying on banking business the income there-from would be income from the assessee's business."

"Deduction given under Section 80P(2)(d) of the Act would not disentitle the assessee to claim deduction under Section 80P(2)(a)(i) of the Act. Even assuming as submitted by the learned counsel for the assessee, M/s. Totgar's Co-operative Sale Society Limited supra is applicable to the facts and circumstances of the present case, it was obligatory on the part of the Tribunal being a last fact finding authority to examine the factual aspect in respect of the proportionate costs and administration expenses to be incurred by the appellant regarding the interest earned under Section 56 of the Act and the availability of deduction under Section 57 of the Act to the assessee."

"The order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue."

Core principles established include:

• Interest income earned on statutory deposits made pursuant to the Karnataka Co-operative Societies Act is business income attributable to carrying on banking or credit activities.
• Such income is eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act.
• Section 80P(2)(a)(i) and section 80P(2)(d) are distinct; deduction under one does not preclude the other.
• Expenditure incurred to earn such interest income is allowable under section 57.
• Judicial precedents must be applied considering the factual matrix; mere reliance on Supreme Court decisions without considering statutory provisions and binding High Court rulings is erroneous.

Final determinations on each issue were in favor of the appellant, setting aside the orders of the lower authorities and remitting the matter to the assessing officer to reconsider the claim for deduction under section 80P(2)(a)(i) and allow expenditure under section 57 after proper verification.