Appeals allowed for credit co-op society's expenditure, net income taxed, deduction permitted for cost incurred.

The Tribunal allowed the appeals for statistical purposes, directing the Assessing Officer to re-examine the expenditure incurred by the credit co-operative society for earning interest income. The Tribunal upheld the disallowance of interest income from deduction u/s 80P but permitted the deduction u/s 57 for the cost incurred in generating this income. The decision emphasized taxing net income rather than gross income.

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Issues Involved:
1. Whether the CIT(A) is justified in confirming the assessment order wherein the claim of deduction u/s 80P of the I.T. Act was partly denied.
2. Whether the interest income earned from investments with Cooperative Banks is entitled to deduction u/s 80P(2)(d) or u/s 80P(2)(a)(i) of the I.T. Act.
3. Whether the cost incurred for earning interest income should be allowed as deduction u/s 57 of the I.T. Act.

Issue-wise Detailed Analysis:

1. Confirmation of Assessment Order and Partial Denial of Deduction u/s 80P:
The primary issue raised was whether the CIT(A) was justified in confirming the assessment order which partly denied the claim of deduction u/s 80P of the I.T. Act. The assessee, a credit co-operative society, declared its entire gross total income as a deduction u/s 80P, resulting in a taxable income of 'Nil'. The Assessing Officer (A.O.) made an addition of Rs. 14,81,899 being interest earned on deposits/securities, distinguishing between interest income earned by providing credit facilities to members and interest income earned by investing funds in deposits/securities. The A.O. allowed deduction u/s 80P(2)(a)(i) for the former but assessed the latter as income from other sources, relying on the Supreme Court's judgment in Totagars Co-operative Sales Society (322 ITR 283).

2. Deduction u/s 80P(2)(d) or u/s 80P(2)(a)(i):
The Tribunal had to decide whether the interest income earned from investments with Cooperative Banks is entitled to deduction either u/s 80P(2)(d) or u/s 80P(2)(a)(i). The Bangalore Bench of the Tribunal, in the case of M/s. Vasavamba Cooperative Society Ltd., held that such interest income is not entitled to deduction under these sections. This decision was based on the jurisdictional High Court's judgment in Totagars Co-operative Sales Society (395 ITR 611), which clarified that interest income earned from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) and is not deductible under section 80P(2)(d) either.

3. Deduction u/s 57 for Cost Incurred in Earning Interest Income:
The assessee argued that if the interest income is to be assessed as income from other sources, the cost incurred for earning such income should be allowed as a deduction u/s 57. The Tribunal found merit in this argument, referencing the Karnataka High Court's judgment in Totgars Co-operative Sales Society Ltd. v. ITO [2015] 58 Taxmann.com 35, which held that when interest income is treated as income from other sources, the proportionate cost incurred in earning such income should be deductible. Consequently, the Tribunal restored the case to the files of the A.O. to examine whether the assessee incurred any expenditure for earning the interest income, with directions to allow such expenditure as a deduction u/s 57 if proven.

Conclusion:
The appeals were allowed for statistical purposes, and the Tribunal directed the A.O. to re-examine the expenditure incurred by the assessee for earning the interest income. The Tribunal upheld the CIT(A)'s disallowance of Rs. 14,81,899 interest income from deduction u/s 80P but allowed the assessee to claim deduction u/s 57 for the cost incurred in earning this interest income. The order emphasized the principle that only net income should be taxed, not gross income.

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