2017 (4) TMI 1545 - AT - Income Tax

ITAT Upholds Deduction Under Section 80P(2)(d) for Co-op Banks

The ITAT upheld the CIT(A)'s decision, allowing the assessee a deduction under Section 80P(2)(d) on a net income of Rs. 1,36,41,639. It was determined ... Deduction u/s. 80P - interest bearing funds for normal business activity of advancing credit to members - CIT(A) concluding that there is no nexus between the interest/dividend income earned from the co-op, societies and the interest expenditure incurred by the assesses on borrowed funds on the ground that there is no proof of the investment of such interest bearing funds to earn the said income without appreciating the fact that the assessee has failed to substantiate the above in full measure with proper evidences - HELD THAT:- We have noticed that the assessee has been statutorily investing its surplus fund from the year 1992 with other Cooperative Societies which include Co-operative Banks and on such investments, the appellant has been receiving interest and dividend which has been claimed as deduction u/s. 80P(2)(d) of the Act. Provision of section 80P(4) are not applicable to the assessee, because section 80P(4) says that provision of this section shall not apply in relation to Co-op Bank other than Primary Agricultural Credit societies or a Primary Co-op agricultural and Rural Development Bank. Regarding eligibility for receiving interest received from the co-operative bank we have noticed from the judicial pronouncement in the case of Surat Vankar Sahakari Sangh Ltd. v. Assistant Commissioner of Income Tax [2016 (7) TMI 1217 - GUJARAT HIGH COURT]. As noticed from the finding of the Ld.CIT(A) that the assessee has claimed the gross amount u/s. 80P(2)(d) which includes interest income and dividend income received from other Co-operative societies. However, in the computation of income, assessee has restricted the deduction which was net income. CIT(A) is justified in his decision that the net income in the case of assessee allowable as deduction u/s. 80P(2)(d). In view of the above stated facts and detailed findings of the Ld.CIT(A) given in his order, we disinclined to interfere in the decision of Ld. CIT(A) - Decided against revenue. Issues Involved:1. Nexus between interest/dividend income and interest expenditure.2. Expenses incurred for earning income claimed under Section 80P(2)(d).3. Source of income for deduction under Section 80P(2)(d).4. Eligibility of interest received from co-operative banks for deduction under Section 80P(2)(d).5. Propriety of the Assessing Officer's order versus the CIT(A)'s order.Detailed Analysis:1. Nexus between interest/dividend income and interest expenditure:The Revenue argued that the CIT(A) erred in concluding there was no nexus between the interest/dividend income earned from co-operative societies and the interest expenditure incurred by the assessee on borrowed funds. The Assessing Officer (AO) observed that the assessee was not having any funds for investment to earn interest income and that the deposits received from members were used to provide loans to other members. The AO maintained that there was a direct nexus between the entire expenses claimed and the entire income received, thus disallowing the deduction under Section 80P of the Act.2. Expenses incurred for earning income claimed under Section 80P(2)(d):The AO argued that the assessee incurred expenses for earning the income on which the deduction under Section 80P(2)(d) was claimed. The AO disallowed the deduction on the grounds that the interest income received from co-operative banks was not allowable under Section 80P of the Act. The CIT(A), however, found that the interest and dividend earned from investments with other co-operative societies did not have a direct or indirect nexus with the interest expenses incurred by the assessee. The CIT(A) relied on the jurisdictional ITAT's decision, which held that the assessee had not incurred any expenditure on earning the dividend and interest from other co-operative societies as the investments were made long back.3. Source of income for deduction under Section 80P(2)(d):The AO contended that the income on which the assessee claimed deduction under Section 80P(2)(d) was earned from investments made from non-interest bearing funds. The CIT(A) disagreed, stating that the assessee had been investing its surplus funds with other co-operative societies, including co-operative banks, since 1992. The CIT(A) concluded that the interest and dividend income derived from these investments were eligible for deduction under Section 80P(2)(d).4. Eligibility of interest received from co-operative banks for deduction under Section 80P(2)(d):The AO argued that the interest income received from co-operative banks was not eligible for deduction under Section 80P(2)(d) due to the provisions of Section 80P(4), which exclude co-operative banks from being treated as co-operative societies. The CIT(A) and the ITAT, however, found that Section 80P(4) did not apply to the assessee, as it was not a co-operative bank but a co-operative society. The ITAT referenced the Gujarat High Court's decision in Surat Vankar Sahakari Sangh Ltd., which held that Section 80P(2)(d) allows deduction of income derived from investments with any other co-operative society, without distinguishing the source of the investment.5. Propriety of the Assessing Officer's order versus the CIT(A)'s order:The AO computed the income eligible for deduction under Section 80P, reducing the claimed amount based on the proportionate allocation of expenses. The CIT(A) allowed the appeal of the assessee, holding that the deduction should be based on the net income after accounting for expenses. The ITAT upheld the CIT(A)'s decision, agreeing that the net income of Rs. 1,36,41,639 was allowable as a deduction under Section 80P(2)(d).Conclusion:The ITAT dismissed the revenue's appeal, affirming the CIT(A)'s order that the assessee was eligible for a deduction under Section 80P(2)(d) on the net income of Rs. 1,36,41,639. The ITAT found no error in the CIT(A)'s conclusion that there was no nexus between the interest/dividend income and the interest expenditure, and that the interest income from co-operative banks was eligible for deduction. The decision was pronounced in the open court on 18-04-2017.