2017 (3) TMI 146 - HC - Income Tax

High Court affirms Tribunal's decision on Cooperative Society's deduction claims under Income Tax Act

The High Court upheld the Income Tax Appellate Tribunal's decision to grant relief to a Cooperative Thrift and Credit Society for deduction claims under ... Deduction of expenditure incurred in earning income under Section 56 - assessee is a Thrift and Credit Society - ITAT allowed clam - Held that:- This Court is of the opinion that the ITAT’s reasoning cannot be faulted. Concededly the nature of the activities i.e. that which resulted in income under Section 80P and that which resulted in income from other sources are identical. This involves the collection, deposits and management of funds from the assessee’s subscribers/members. In other words, the source is inextricable to the nature of the expenditure. In the circumstances, all that the AO could have possibly done was to scrutinize the returns to find whether, having regard to the income derived under Section 56, the expenses claimed were extraordinary or seemingly disproportionate. In the present case, the very nature of the expenditure i.e. inextricability would, in the absence of any factual inquiry, lend credence to the assessee’s claim. Thus ITAT’s reasoning is sound and does not call any interference - Decided against revenue Issues:1. Whether the Income Tax Appellate Tribunal (ITAT) erred in granting relief to a Cooperative Thrift and Credit Society regarding deduction claims under Section 56 of the Income Tax Act, 1961.2. Whether the nature of expenditure incurred by the assessee can be accurately attributed to income derived from other sources.3. Whether the assessee is entitled to claim deduction for expenses incurred in mobilizing deposits placed with banks/cooperative societies.Analysis:Issue 1:The Revenue challenged the ITAT's order granting relief to the Cooperative Thrift and Credit Society, contending that despite the assessee's inability to earmark specific expenditure under Section 56 of the Income Tax Act, the deduction was claimed. The ITAT held that the assessee, engaged in dual business activities of accepting deposits and investing in securities, could claim deduction for income derived from other sources, including expenses incurred for earning such income. The ITAT directed the Assessing Officer (AO) to allow allocation of expenses based on the assessee's calculation method.Issue 2:The Revenue argued that without specific attribution of expenditure to income from other sources, no deduction could be allowed. However, the High Court upheld the ITAT's reasoning, emphasizing that the nature of activities resulting in income under Section 80P and income from other sources were identical. The Court noted that the source of income was linked to the nature of expenditure, making it difficult to separate the two. The Court highlighted that the AO should have examined whether the claimed expenses were extraordinary or disproportionate, and in this case, the nature of expenditure supported the assessee's claim.Issue 3:The High Court concluded that the ITAT's reasoning was sound and did not warrant interference. The Court found that the nature of expenditure and income sources were intertwined, making it reasonable for the assessee to claim deductions for expenses incurred in mobilizing deposits. As a result, the appeals were dismissed, and the AO was directed to determine the appropriate tax effect based on the judgment.