2024 (8) TMI 1564 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - Expenses incurred against interest income earned by the appellant co-operative society on FDR(s) with the Schedule Banks - HELD THAT - The assessee was required to justify the claim of expenses against the interest income out of the borrowed funds but has expressed its inability to corelate the same. However since AO has also not given any specific finding for corelation but allowed the expenditure as per the calculation done therefore in our considered view this issue is once again restored to the file AO who would go through the chart filed before us which is reproduced in the preceding paragraph and allow the claim of assessee as per law and as per the direction of the Tribunal. It is not the case of the assessee that only the borrowed funds were invested in short-term deposit as no such correspondence or corelation has been exhibited before us. The assessee shall be at liberty to explain the same before the ld. Assessing Officer who will allow the claim of deduction of interest on borrowed funds utilized in making the deposits in the Scheduled Banks and others the earning of interest from which has been assessed under the head income from other sources by considering the totality of the facts and circumstances. Hence this ground of appeal of the assessee is allowed for statistical purposes. Receipt of interest on house building loan to employees as not attributable to the business of the assessee - While granting Training and earning income from Training the assessee had also incurred expenses and out of the common expenses of rent and taxes insurance depreciation salary allowance etc. it has bifurcated the expenses and claimed the same as relating to the Training portion. Apparently this was not furnished before the ld. AO. The view of the ld. AO that no corresponding expenses were incurred for earning of the above receipts is not correct as the expenses relating to training and income from training are to be allowed in accordance with the direction of the Tribunal. Hence this ground of appeal is also restored to the file of ld. AO to examine the claim of the assessee. As income from Training Institute is not attributable to the business of the assessee therefore it is not eligible for deduction under section 80P of the Income Tax Act. Interest received on FD with Scheduled Banks and interest on HBL to staff u/s. 80P(2)(a)(i) - The issue does not emanate from the order of the Tribunal it may also be mentioned that in the case of Bihar Rajya Sahakari Bhoomi Vikas Cooperative Bank Limited 2008 (9) TMI 310 - PATNA HIGH COURT it has been held that income earned by a Cooperative Bank by way of interest on P.F. amounts of employees and rent from house property could not be treated as income attributable to the banking business and hence would not qualify for deduction. Since it was not the business of the assessee to lend money to employees and being a Cooperative Bank its business is to lend money to its members and since the employees do not fall under the category of members therefore the claim of allowing deduction under section 80P(2)(a)(i) for interest on HBL to staff is rejected primarily for the reason that the issue does not emanate from the direction of the Tribunal and secondly because the same is otherwise also not allowable. Hence Ground No. 2 is rejected.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the expenses claimed by the appellant corresponding to interest income earned on fixed deposits with scheduled banks can be allowed in full or only to the limited extent allowed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A))?

- Whether the expenses corresponding to receipts from Training Institute Grant and receipts from Training Institute are allowable deductions against such income?

- Whether the interest income earned on fixed deposits with scheduled banks and interest on housing building loans (HBL) to employees qualify as income derived from business activities and are eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961?

- Whether the appeal is barred by limitation and if the delay in filing the appeal can be condoned?

- Ancillary issues relating to the classification of income from building maintenance charges and other miscellaneous receipts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of Expenses Corresponding to Interest Income on Fixed Deposits

Legal Framework and Precedents: Section 57 of the Income Tax Act governs the deduction of expenses against income chargeable under the head "Income from Other Sources." The law permits deduction of expenditure wholly and exclusively laid out for earning such income. The Tribunal had earlier ruled that while the deduction under section 80P was not allowable for such income, the corresponding expenses incurred to earn the income under "Income from Other Sources" must be allowed to arrive at net taxable income.

Court's Interpretation and Reasoning: The appellant claimed expenses of Rs. 54,50,166 corresponding to interest income of Rs. 55,08,000, whereas the AO allowed only Rs. 8,26,200, a figure upheld by the CIT(A). The appellant contended that the entire investment in scheduled banks was statutory and integral to its banking business, made to comply with directives from regulatory authorities (Registrar of Co-operative Societies and NABARD) to maintain liquid resources. The appellant argued that the interest income from such investments is business income, and the corresponding borrowing cost should be allowed as expense.

The AO and CIT(A) rejected the appellant's claim primarily because the appellant failed to maintain separate books of accounts for these incomes and could not directly correlate the expenses to the income on a one-to-one basis, as required under section 57. The appellant's submission that the investments were part of its business activity was not accepted as the Tribunal had earlier decided that such interest income was income from other sources, not business income, and thus not eligible for deduction under section 80P.

Key Evidence and Findings: The appellant submitted detailed cash flow statements and accounting records showing deposits from members, statutory investment requirements, interest paid on deposits, and interest earned on investments. It demonstrated that the effective interest rate on deposits was higher than the rate earned on investments, reflecting the cost of funds. However, the appellant admitted it could not directly link specific expenses to specific income streams.

Application of Law to Facts: Given the Tribunal's prior ruling disallowing section 80P deduction and classifying the interest income as income from other sources, the expenditure deduction is governed by section 57. Since direct correlation of expenses to income was not established, the AO's approach to allow a reasonable portion of expenses was upheld. However, the Tribunal restored the matter to the AO to reconsider the claim in light of the appellant's submissions and evidence, directing the AO to allow expenses corresponding to the interest income after due verification.

Treatment of Competing Arguments: The appellant emphasized the integral nature of the investments to its banking business and regulatory compliance, while the revenue relied on the absence of direct correlation and the prior Tribunal ruling. The Tribunal balanced these by allowing reconsideration but rejecting the claim under section 80P.

Conclusion: The claim for expenses corresponding to interest income is allowed for reconsideration by the AO for appropriate allowance under section 57, but the deduction under section 80P is rejected.

Issue 2: Allowability of Expenses Corresponding to Training Institute Grant and Receipts from Training Institute

Legal Framework and Precedents: Expenses wholly and exclusively incurred for earning income from other sources are allowable under section 57. The appellant claimed expenses corresponding to receipts from training activities, including grants from NABARD and fees from trainees.

Court's Interpretation and Reasoning: The appellant submitted detailed allocation of expenses based on floor space usage in its training institute building (ICMARD), segregating income and expenses for rent, training, and administrative purposes. The appellant argued that expenses such as rent, electricity, depreciation, salaries, and other costs were incurred corresponding to the training income and should be allowed as deductions.

The AO rejected the claim on the ground that no corresponding expenses were incurred, as the appellant failed to furnish evidence before the AO. The CIT(A) upheld the AO's view. The Tribunal noted that the appellant had now furnished detailed audited accounts and allocations, and the AO's rejection was not justified.

Key Evidence and Findings: The appellant provided audited statements, detailed expense bifurcations, and explanations showing that a significant portion of expenses related to training activities matched the income earned from such activities.

Application of Law to Facts: The Tribunal directed the AO to examine the appellant's claim afresh, verify the submitted evidence, and allow the corresponding expenses against the training income to assess only the net income. It was clarified that since training income is not attributable to the appellant's core business, it is not eligible for deduction under section 80P.

Treatment of Competing Arguments: The appellant's detailed submissions overcame the AO's initial rejection based on lack of evidence. The revenue did not dispute the factual allocations but relied on procedural grounds. The Tribunal prioritized the principle of taxing net income.

Conclusion: The claim for expenses corresponding to training income is restored to the AO for fresh adjudication and allowance in accordance with law.

Issue 3: Deduction under Section 80P(2)(a)(i) for Interest Income on Fixed Deposits and Interest on Housing Building Loans to Employees

Legal Framework and Precedents: Section 80P(2)(a)(i) provides deduction for income derived from the business of banking or lending by cooperative societies. The Supreme Court in the Totgars' Cooperative Sale Society Ltd. case held that interest income on surplus funds not required for business purposes is "other income" and not eligible for deduction under section 80P.

Court's Interpretation and Reasoning: The appellant contended that unlike the Totgars case, it is engaged in the business of banking and lending to members, and investments in scheduled banks are integral to its business, made to comply with statutory and regulatory directions. Therefore, the interest income earned should be treated as business income eligible for deduction under section 80P.

The Tribunal observed that the issue was already decided against the appellant in the earlier order dated 16.09.2015 relying on the Totgars case. The interest income was held to be income from other sources, not business income, and thus not eligible for deduction under section 80P. The appellant's additional ground was not entertained as it amounted to review of the Tribunal's earlier decision, which is beyond the powers of the ITAT.

Regarding interest on housing building loans to employees, the Tribunal relied on a precedent holding that such income is not attributable to the business of the cooperative bank and is therefore not eligible for deduction under section 80P.

Key Evidence and Findings: The appellant's submissions on the nature of business and regulatory compliance were noted but found insufficient to overturn the binding precedent.

Application of Law to Facts: The Tribunal rejected the claim for deduction under section 80P for both the interest income on fixed deposits and interest on housing loans to employees.

Treatment of Competing Arguments: The appellant's argument distinguishing its business from the Totgars case was not accepted due to the binding nature of the Supreme Court's ruling and prior Tribunal decision. The revenue's stance was upheld.

Conclusion: Deduction under section 80P(2)(a)(i) for the interest income on fixed deposits and interest on housing loans to employees is rejected.

Issue 4: Condonation of Delay in Filing Appeal

The appeal was reportedly delayed by 295 days due to an erroneous date mentioned in the appeal form. The appellant filed a condonation petition explaining the mistake. The revenue did not object, and the Tribunal admitted the appeal as filed within time.

Ancillary Issues: Classification of Income from Building Maintenance Charges and Miscellaneous Receipts

The CIT(A) had directed that income from building maintenance charges recovered from tenants be assessed under the head "Income from House Property" and excluded from income from other sources. The Tribunal upheld this direction as correct and allowed the revenue's appeal for statistical purposes.

3. SIGNIFICANT HOLDINGS

"An important point needs to be mentioned. The words 'the whole of the amount of profits and gains of business' emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. In this particular case, the evidence shows that the assessee-Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of 'other Income' which has been rightly taxed by the Department under section 56 of the Act."

This principle from the Supreme Court in the Totgars case was applied to reject the claim for deduction under section 80P for interest income earned on deposits with scheduled banks.

The Tribunal further held that net income under income from other sources must be computed after allowing deduction of expenses wholly and exclusively incurred for earning such income, as per section 57. It emphasized the necessity of direct correlation between expenses and income for allowance of such deductions.

The Tribunal clarified that the issue of deduction under section 80P having been conclusively decided against the appellant, it could not be reopened before the ITAT, and the matter was restored to the AO only for determination of net income after allowing corresponding expenses.

The Tribunal also established the principle that income not attributable to the business of the cooperative society (such as interest on loans to employees or training institute income) is not eligible for deduction under section 80P but expenses corresponding to such income can be allowed under section 57 to arrive at net taxable income.

Final determinations:

• The appeal on the claim for deduction under section 80P(2)(a)(i) for interest income on fixed deposits and interest on housing loans to employees is rejected.
• The claim for expenses corresponding to interest income on fixed deposits is restored to the AO for fresh adjudication to allow appropriate expenditure under section 57.
• The claim for expenses corresponding to training institute grant and receipts is restored to the AO for fresh adjudication and allowance.
• The appeal is admitted as timely filed after condonation of delay.
• Income from building maintenance charges is correctly classified under income from house property.