ITAT allows full deduction under Section 80P(2)(d) for interest income from FDRs

The ITAT ruled in favor of the assessee, allowing the full deduction under Section 80P(2)(d) for interest income from FDRs with Jaipur Central Cooperative Bank. The payment to 'Sparsh Trust' was justified as business expenditure, and the ITAT directed the CIT(A) to allow the deduction on gross interest income without attributing any interest expenditure. The decision was pronounced on 04/03/2020.

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Issues Involved:
1. Disallowance of deduction under Section 80P for interest income from FDRs.
2. Justification of payment to 'Sparsh Trust' as business expenditure.
3. Deduction under Section 80P(2)(d) for interest income from investments with cooperative banks.

Detailed Analysis:

1. Disallowance of Deduction under Section 80P for Interest Income from FDRs:
The assessee received interest income of Rs. 6,21,99,978 on FDRs with Jaipur Central Cooperative Bank (JCCB) and claimed deduction under Section 80P. The Assessing Officer (AO) disallowed this deduction, referencing the Supreme Court decision in Totgar’s Cooperative Sales Society Ltd. Vs. ITO, which stated that interest income from funds not required immediately for business purposes is taxable under 'Income from other sources' and not eligible for deduction under Section 80P. The AO concluded that the interest income from cooperative banks does not qualify for deduction under Section 80P(2)(d).

2. Justification of Payment to 'Sparsh Trust' as Business Expenditure:
The Revenue challenged the deletion of disallowance made by the AO on payments to 'Sparsh Trust', arguing that it should be treated as a donation allowable under Section 80G, not as business expenditure. The CIT(A) had allowed this as business expenditure, which the Revenue contested.

3. Deduction under Section 80P(2)(d) for Interest Income from Investments with Cooperative Banks:
The CIT(A) allowed partial deduction under Section 80P(2)(d), attributing a proportionate interest expenditure to the interest income from JCCB, reducing the net interest income eligible for deduction. The assessee argued that the investment in FDRs was made from interest-free funds, thus no interest expenditure should be attributed to earning the interest income.

Judgment on Issues:

1. Disallowance of Deduction under Section 80P for Interest Income from FDRs:
The ITAT held that Jaipur Central Cooperative Bank is a cooperative society, thus interest income from it is eligible for deduction under Section 80P(2)(d). The ITAT referenced previous decisions, including the Hon’ble Gujarat High Court in Surat Vankar Sahakari Sangh Ltd. and the Hon’ble Karnataka High Court in Totagars Cooperative Sale Society, which supported the view that cooperative banks are considered cooperative societies for Section 80P(2)(d). The ITAT concluded that the deduction should be allowed on the gross interest income, not net, following the Hon’ble Gujarat High Court's decision.

2. Justification of Payment to 'Sparsh Trust' as Business Expenditure:
The ITAT followed the Hon’ble Rajasthan High Court’s decision in the assessee’s own case, which held that payments to 'Sparsh Trust' were for business purposes, aimed at improving milk quality and animal health, and thus allowable as business expenditure under Section 37(1). The ITAT dismissed the Revenue's ground, affirming the CIT(A)'s decision.

3. Deduction under Section 80P(2)(d) for Interest Income from Investments with Cooperative Banks:
The ITAT noted that the CIT(A) incorrectly attributed interest expenditure to the interest income from JCCB. The assessee demonstrated that it had sufficient interest-free funds to cover the FDR investments, invoking the presumption that investments were made from interest-free funds. The ITAT directed the CIT(A) to allow the deduction under Section 80P(2)(d) on the gross interest income without attributing any interest expenditure, aligning with the Hon’ble Gujarat High Court's decision.

Conclusion:
The ITAT ruled in favor of the assessee on all grounds, allowing the full deduction under Section 80P(2)(d) for interest income from FDRs with JCCB, justifying the payment to 'Sparsh Trust' as business expenditure, and directing the CIT(A) to allow the deduction on gross interest income without attributing interest expenditure. The decision was pronounced on 04/03/2020.

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