2023 (5) TMI 1244 - AT - Income Tax

Interest from Cooperative Banks Eligible for Deduction under Income Tax Act

M/s. University of Agricultural Employees House Building Co-op Society Ltd. Versus The Assistant Commissioner of Income Tax, Circle – 6 (3) (1), Bangalore.

The Tribunal allowed the assessee's appeal, holding that interest earned from cooperative banks is eligible for deduction under section 80P(2)(d) of the ... Exemption u/s 80P(2)(d) - income by way of interest from investment made with cooperative banks shall not be entitled to deduction - HELD THAT:- We hold that the assessee is eligible for 80P(2)(d) deduction in respect of interest earned from co-operative banks based on the view taken in M/s. Bhavasar Kshtriya Co-operative Credit Society Ltd. [2022 (10) TMI 850 - ITAT BANGALORE] It is directed that interest earned by the assessee under the head Income from other sources by granting benefit available to the assessee u/s. 57 - We direct the AO to follow the directions therein and to compute the deduction in the hands of the assessee in accordance with law. Appeal filed by assessee stands allowed. Issues Involved:1. Eligibility for deduction u/s 80P(2)(d) of the Income Tax Act.2. Assessment of interest income under the head 'Income from Other Sources.'3. Allowance of expenditure incurred in earning interest income u/s 57 of the Act.Summary:1. Eligibility for Deduction u/s 80P(2)(d):The assessee, a housing co-operative society, claimed exemption of Rs.21,99,628/- u/s 80P(2)(d) for the A.Y. 2016-17. The Ld.AO denied this exemption by relying on the Supreme Court decision in Totgar's Co-operative Sale Society Ltd. vs. ITO, which held that interest earned on investments of surplus funds is not eligible for deduction as it is not considered business income. The Ld.CIT(A) upheld this decision, citing the Karnataka High Court's ruling in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO. However, the Tribunal noted that similar cases had been decided in favor of the assessee by restoring the matter for de novo consideration, emphasizing that co-operative banks should be regarded as co-operative societies for the purposes of section 80P(2)(d).2. Assessment of Interest Income:The Tribunal considered whether interest income earned by the assessee from deposits in co-operative banks should be assessed under the head 'Income from Other Sources.' It was noted that the Supreme Court in Totgar's case had deliberated on section 80P(2)(a)(i) but not on section 80P(2)(d). The Tribunal observed that section 80P(2)(d) allows deduction of income by way of interest from investments with any other co-operative society, without stipulating the nature of funds. Therefore, the interest earned from co-operative banks should be eligible for deduction u/s 80P(2)(d).3. Allowance of Expenditure u/s 57:The assessee argued for the allowance of expenditure incurred in earning interest from commercial banks. The Tribunal directed the Ld.AO to allow such expenditure while computing income under the head 'Income from Other Sources,' in accordance with section 57, which permits deductions for expenses incurred wholly and exclusively for earning such income.Conclusion:The Tribunal held that the assessee is eligible for deduction u/s 80P(2)(d) for interest earned from co-operative banks. The issue was restored to the Ld.AO for de novo consideration, with directions to follow the precedent cases and allow the claim after granting proper opportunity of being heard to the assessee. The appeal was allowed for statistical purposes.Order Pronounced:The appeal filed by the assessee was allowed, and the order was pronounced in open court on 18th May, 2023.