2019 (3) TMI 381 - AT - Income Tax

Deduction u/s. 80P - CIT(A) denied deduction in exercise of its power of enhancement - maintainability of deduction u/s 80P(2)(d) in the hands of the credit co-operative society towards interest earned from deposit placed with co-operative banks, more so, in the light of insertion of s. 80P(4) of the Act by Finance Act, 2006 - HELD THAT - For the purposes of Section 80P the principle of mutuality has been obliterated in view of insertion of Section 2(24) (viia) of the Act by Finance Act, 2006 and such principles thus no longer serve as strict guiding principle to test the relief eligible under S. 80P(2)(d). Therefore, the plea raised on behalf of the Revenue towards absence of principle of mutuality in such deposits with co-operative banks is a damp squib. Thus, the assessee being a co-operative society as contemplated under s. 80P(1) of the Act, cannot be deprived of benefit of S.80P(2)(d) despite purported absence of mutuality in investment with a co-op bank. We, thus, concur with plea of assessee for allowability of deduction on interest income derived from co operative society in the form of Co-operative bank on first principles. - Decided in favour of assessee. assessee to demonstrate on facts that the investee co-operative bank in question is recognised as a co-operative society indeed within the meaning of Section 2(19) of the Act. A self declaration from the respective co-op. bank in this regard or any other suitable document may discharge the onus of the assessee towards the status of the co-op. bank. Similarly, the assessee is entitled to avail deduction of resultant income derived and not gross receipt of interest under S. 80P(2)(d) of the Act in accord with basic rationale of taxation. Hence, all expenses/losses attributable to such interest income are required to be necessarily deducted and only resultant interest income is eligible for deduction under S. 80P(2)(d) of the Act. The AO would thus be at liberty to ascertain these factual aspects for which the assessee shall provide suitable assistance. Allowance of pro-rata expenditure against the interest income from investment in co operative banks - HELD THAT - Assessee is entitled for deduction under s.80P(2)(d) for resultant income derived from investments placed with co-operative banks, we do not seek to delineate further. Therefore, AO may allow claim of deduction under s. 80P(2)(d) of the Act on net income from interest after reduction of all incidental expenses incurred to earn such income. The issue is thus remitted back to AO for quantification of deduction of interest income in accordance with law on being satisfied that the receiver co-operative bank satisfies to be a co-operative society equally. Interest income derived by the assessee society from investment with private bank - HELD THAT - It neither qualified under s. 80P(2)(a)(i) of the Act in the light of the ratio of The Citizen Co-Operative Society Ltd. (2018 (1) TMI 290 - SUPREME COURT OF INDIA) nor under s.80P(2)(d) of the Act. Thus, the assessee is not entitled for deduction or interest derived from the private bank. - Decided against assessee

Issues Involved:

1. Fresh addition of interest income.
2. Deduction of interest income under Section 80P(2)(d).
3. Taxability of interest income under Section 56.
4. Allowance of pro-rata expenditures under Section 57.
5. Opportunity of being heard.

Issue-wise Detailed Analysis:

1. Fresh Addition of Interest Income:
The Commissioner of Income Tax (Appeals) [CIT(A)] made a fresh addition of ?3,30,062 on account of interest income received from a Co-operative bank. The assessee, a co-operative credit society, filed its return of income which included interest income from Ahmedabad District Co-operative Bank (ADC) and Axis Bank. The Assessing Officer (AO) made certain additions, which were contested by the assessee before the CIT(A). The CIT(A), in exercise of its power of enhancement, denied the deduction of the interest income aggregating to ?3,30,662 claimed under Section 80P of the Income Tax Act, 1961 (the Act).

2. Deduction of Interest Income under Section 80P(2)(d):
The primary issue was whether the interest earned from surplus invested in private banks and co-operative banks is eligible for deduction under Section 80P(2)(d) of the Act. The Tribunal noted that Section 80P(2)(d) provides for the deduction of income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society. The Tribunal emphasized that co-operative banks are essentially co-operative societies and thus, investments in co-operative banks should be treated at par with investments in co-operative societies for the purposes of eligibility of deduction under Section 80P(2)(d). The Tribunal referred to various judicial precedents, including the Hon'ble Gujarat High Court's decisions, which supported the view that interest earned on fixed deposits with co-operative banks qualifies for deduction under Section 80P. The Tribunal concluded that the assessee society is entitled to the benefit of Section 80P(2)(d) on interest income from investments in co-operative banks.

3. Taxability of Interest Income under Section 56:
The Tribunal addressed the issue of whether the interest income received on investment with banks is fully taxable under Section 56 of the Act without allowing pro-rata expenditures incurred under Section 57. The Tribunal held that only the net interest income received after allowing the pro-rata expenditure incurred should be taxed. The AO was directed to ascertain the factual aspects and quantify the deduction of interest income in accordance with the law, ensuring that the receiver co-operative bank is recognized as a co-operative society.

4. Allowance of Pro-rata Expenditures under Section 57:
The alternative claim of the assessee for the allowance of pro-rata expenditure against the interest income from investment in co-operative banks was rendered infructuous in view of the endorsement of the main plea. The Tribunal directed the AO to allow the claim of deduction under Section 80P(2)(d) on net income from interest after the reduction of all incidental expenses incurred to earn such income.

5. Opportunity of Being Heard:
In ITA No. 1671/Ahd/2018 for AY 2015-16, the assessee contended that the CIT(A) passed the order without granting an opportunity of being heard. The Tribunal noted that the interest income derived from ADC Bank amounting to ?6,06,192 is eligible for deduction under Section 80P on first principles, subject to verification by the AO. However, the interest income derived from Axis Bank amounting to ?1,185 would not be eligible for deduction under Section 80P(2).

Conclusion:
The Tribunal partly allowed the appeals of the assessee for both AY 2014-15 and AY 2015-16. The Tribunal held that the assessee is entitled to the benefit of Section 80P(2)(d) for interest income from investments in co-operative banks, subject to verification by the AO. The interest income from private banks, however, is not eligible for deduction under Section 80P. The Tribunal directed the AO to quantify the deduction of interest income in accordance with the law and to allow the claim of deduction on net income from interest after the reduction of all incidental expenses.

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