2023 (12) TMI 1327 - AT - Income Tax

Disallowance u/s 80P - assessee violated the principle of mutuality by dealing with non-members and not deducting tax at source on interest payments to nominal members - HELD THAT - We direct the AO to examine whether the interest income received on investment with Central Co-operative Bank is out of compulsions under the Karnataka Co-operative Societies Act 1959 and the relevant Rules. If it is so the same may be considered as business income and entitled to deduction u/s 80P(2)(a)(i). If assessee society does not comply with the relevant provisions of the Act and the Rules of Karnataka Co-operative Societies Act 1959 it cannot carry on its cooperative activities namely carry on the business of banking or providing credit facilities to its members. Therefore if the investments are out of compulsion under the Act and relevant Rules necessarily it is part of assessee s business activity entailing the benefit of section 80P(2)(a)(i) of the Act. Entitlement to cost of funds with respect to interest income that is assessed as income from other sources - HELD THAT - We find that this contention of the assessee is also covered by the order of case of M/s. Deepa Credit Cooperative Society Ltd 2023 (12) TMI 1326 - ITAT BANGALORE The Bangalore Bench of the Tribunal had followed the dictum laid down by the Hon ble jurisdictional High Court in the case of Totgars Co-operative Sale Society Ltd. 2015 (4) TMI 829 - KARNATAKA HIGH COURT - we restore the matter to the AO. AO is directed to follow the dictum laid down in judicial pronouncements cited supra and take a decision in accordance with law. AO is also directed to afford a reasonable opportunity of hearing to the assessee before a decision is taken in the matter. It is ordered accordingly. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues:
The judgment involves the delay in filing the appeal and the disallowance made by the AO under section 80P of the Income Tax Act, 1961.

Delay in Filing Appeal:
The appeal was filed with a delay of four days, for which the assessee submitted a petition for condonation of delay. The Tribunal, after perusing the reasons for the delay, found reasonable cause and condoned the delay, proceeding to dispose of the appeal on merits.

Disallowance under Section 80P:
The AO disallowed the deduction claimed under section 80P of the Act, stating that the assessee violated the principle of mutuality by dealing with non-members and not deducting tax at source on interest payments to nominal members. The CIT(A) partly allowed the appeal, confirming the disallowance on interest received from cooperative banks but not on interest paid to nominal members.

Case Facts:
The assessee, a cooperative society, provided credit facilities to members and filed its return for the Assessment Year 2017-18 claiming a deduction under section 80P. The AO disallowed the deduction, citing violations and non-deduction of tax at source. The CIT(A) upheld part of the disallowance, leading to the appeal before the Tribunal.

Legal Arguments:
The assessee argued that investments with Central Co-operative Banks were made under compulsion of the Karnataka Co-operative Societies Act, 1959, entitling the interest income to deduction under section 80P(2)(a)(i). They relied on precedents from the Bangalore Bench of the Tribunal to support their claim.

Judicial Findings:
The Tribunal referred to previous orders and directed the AO to examine if the interest income from investments with Central Co-operative Bank was due to compulsion under the Act and Rules. Compliance with relevant provisions would entitle the income to be considered as business income under section 80P(2)(a)(i).

Cost of Funds Claim:
The assessee also claimed the cost of funds for interest income assessed under other sources. Citing a judgment of the Hon'ble jurisdictional High Court, the Tribunal directed the AO to calculate the cost of funds for such income and allow it as a deduction under section 57 of the Act.

Decision:
The Tribunal allowed the appeal for statistical purposes, remanding the matter to the AO to decide in accordance with the law and provide a reasonable opportunity of hearing to the assessee.

Conclusion:
The judgment addressed the delay in filing the appeal and the disallowance under section 80P, providing detailed legal analysis and directions for further assessment by the AO based on compliance with relevant laws and previous judicial findings.