2025 (6) TMI 702 - AT - Income Tax

Disallowing expenditure being the expenditure incurred for the purpose of earning/ interest income - HELD THAT - Allowability of proportionate expenses where the assessee earned interest expenses from deposits in cooperative bank the same cannot be allowed as the assessee has already claimed deduction under section 80P(2)(d). Thus the ground no.2 is dismissed Deduction being the interest earned from Co-Operative Banks u/s 80P(2)(d) - HELD THAT - Assessee had derived interest income on the FDs in three cooperative banks and as per the decision in the case of Katlary Kariyna Merchant Sahkari Sarafi Mandali Ltd. 2022 (1) TMI 1309 - GUJARAT HIGH COURT the same has to be allowed. Thus the ground no.3 is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeal are as follows:

(a) Whether the deduction claimed by the assessee under section 80P(2)(d) of the Income Tax Act, 1961, amounting to Rs. 45,31,057/- as interest income earned from cooperative banks, is allowable.

(b) Whether the expenditure of Rs. 34,72,602/- incurred for earning interest income can be allowed as deduction under sections 57 or 37 of the Income Tax Act.

(c) Whether the deduction under section 80P(2)(d) amounting to Rs. 10,58,455/- relating to interest income from fixed deposits in cooperative banks is allowable.

(d) Whether the assessee is entitled to the benefit of set off under sections 70 or 71 of the Income Tax Act.

(e) Whether the interest charged under sections 234A, 234B, 234C, and 234D of the Income Tax Act is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Allowability of deduction under section 80P(2)(d) for interest income of Rs. 45,31,057/-

Relevant legal framework and precedents: Section 80P(2)(d) of the Income Tax Act provides deduction to cooperative societies in respect of income by way of interest on deposits with other cooperative societies or cooperative banks. The provision aims to exempt such income from taxation to promote cooperative activities.

Court's interpretation and reasoning: The Assessing Officer (AO) disallowed the deduction and treated the interest income as "income from other sources." The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed this disallowance. The Tribunal noted that the assessee is a cooperative society registered under the Gujarat Co-operative Societies Act, 1961, and earned interest income from cooperative banks.

Key evidence and findings: The assessee filed return declaring income as NIL and claimed deduction under section 80P(2)(d). The AO's disallowance was based on the view that the interest income did not qualify for exemption. However, the assessee produced evidence of interest earned from cooperative banks such as Gujarat State Cooperative Bank and Panchmahal District Cooperative Bank Ltd.

Application of law to facts: The Tribunal disposed of ground no.1 as general in nature without detailed adjudication, indicating no substantial dispute on the broad applicability of section 80P(2)(d) for the entire amount of Rs. 45,31,057/-. However, the Tribunal's later analysis on ground no.3 (which relates to a part of this amount) clarifies the position.

Treatment of competing arguments: The Revenue relied on AO and CIT(A) orders disallowing the deduction, while the assessee argued for full exemption under section 80P(2)(d). The Tribunal's partial allowance on ground no.3 suggests selective acceptance of the assessee's contentions.

Conclusions: The Tribunal did not allow the entire deduction claimed under section 80P(2)(d) for Rs. 45,31,057/-, but allowed a portion of it (Rs. 10,58,455/-) as per ground no.3 discussed below.

Issue (b): Allowability of expenditure of Rs. 34,72,602/- incurred for earning interest income

Relevant legal framework and precedents: Sections 57 and 37 of the Income Tax Act allow deduction of expenses incurred wholly and exclusively for earning income from other sources or business income, respectively. The principle of avoiding double taxation on the same expense is well established.

Court's interpretation and reasoning: The assessee claimed expenses directly related to earning interest income from cooperative bank deposits. The AO disallowed these expenses on the ground that the assessee had already claimed deduction under section 80P(2)(d), and thus allowing expenses would amount to double deduction.

Key evidence and findings: The assessee contended that the expenses were not claimed under business income and that the AO's assertion of double taxation was factually incorrect. The Tribunal found that the assessee had itself disallowed the business expenses and claimed them against interest income.

Application of law to facts: Since the assessee had claimed deduction under section 80P(2)(d) for interest income, the expenses incurred to earn that income cannot be separately allowed under sections 57 or 37. Allowing both would result in double benefit.

Treatment of competing arguments: The assessee argued for allowance of expenses to offset interest income, while the Revenue contended that the expenses were already accounted for in the business income and disallowance was justified.

Conclusions: The Tribunal dismissed ground no.2, holding that expenses incurred for earning interest income cannot be allowed when deduction under section 80P(2)(d) is already claimed.

Issue (c): Allowability of deduction under section 80P(2)(d) amounting to Rs. 10,58,455/- on interest income from fixed deposits in cooperative banks

Relevant legal framework and precedents: Section 80P(2)(d) allows deduction for income earned by cooperative societies from interest on deposits with cooperative banks. The jurisdictional High Court decision in Katlary Kariyna Merchant Sahkari Sarafi Mandali Ltd. Vs. ACIT is pivotal, which held that such interest income qualifies for deduction under section 80P(2)(d).

Court's interpretation and reasoning: The Tribunal relied on the High Court decision to hold that interest income earned on fixed deposits in cooperative banks is eligible for deduction under section 80P(2)(d). The assessee's claim of Rs. 10,58,455/- was thus allowed.

Key evidence and findings: The assessee produced documentary evidence of interest income earned from Gujarat State Cooperative Bank and Panchmahal District Cooperative Bank Ltd. The AO and CIT(A) had disallowed this deduction, but the Tribunal found the High Court ruling binding and favorable to the assessee.

Application of law to facts: The Tribunal applied the binding precedent to facts, concluding that the interest income from cooperative banks