2021 (10) TMI 742 - AT - Income Tax

Tribunal directs AO to allow legitimate expenses for interest income under Section 57

M/s. Manjunatheshwara Credit Co-operative Society Limited Versus The Income Tax Officer Ward 6 (2) (2) Bengaluru.

The Tribunal allowed the appeal for statistical purposes, directing the AO to examine and allow legitimate expenses incurred for earning interest income ... Deduction u/s 80P(2)(a)(i) - interest income / dividend received on investments with co-operative banks - HELD THAT:-The Bangalore Bench of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd. [2021 (8) TMI 706 - ITAT BANGALORE] had held that the assessee is not entitled to deduction u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the I. T. Act with regard to the interest income earned from investments made with cooperative banks - Thus we hold that the assessee is not entitled to deduction u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income earned from investments with Cooperative Banks. AR had claimed that if interest income is to be assessed as income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction u/s 57 - We find an identical issue was considered by the Hon’ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. [2015 (4) TMI 829 - KARNATAKA HIGH COURT] The assessee has not raised the plea before the Income Tax Authorities that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised before the lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only net income has to be taxed and not the gross income, this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of the Hon’ble jurisdictional High Court in the case of Totagars Sale Cooperative Society (Supra). Accordingly, the case is restored to the files of the A.O. A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources’. If so, the same shall be allowed as deduction u/s 57 - Appeal filed by the assessee is allowed for statistical purposes. Issues Involved:1. Condonation of delay in filing the appeal.2. Entitlement to deduction under Section 80P(2)(a)(i) of the Income Tax Act.3. Entitlement to deduction under Section 80P(2)(d) of the Income Tax Act.4. Allowance of deduction under Section 57 for expenses incurred to earn interest income assessed as income from other sources.Detailed Analysis:1. Condonation of Delay in Filing the Appeal:The appeal was filed with a delay of 4 days. The assessee submitted a petition for condonation of delay along with an affidavit from the Secretary of the assessee-society. Upon review, the Tribunal found that there was sufficient cause for the delay and no latches could be attributed to the assessee. Consequently, the delay was condoned, and the appeal was admitted for hearing on merits.2. Entitlement to Deduction under Section 80P(2)(a)(i):The assessee, a co-operative society, claimed a deduction under Section 80P(2)(a)(i) amounting to Rs. 50,18,018. The Assessing Officer (AO) denied this claim, asserting that the assessee was engaged in the business of banking, which disqualifies it from the deduction per the amended provisions of Section 80P. The AO referenced a pending Supreme Court decision in the case of Bilur Gurubasava Pattina Sahakari Sangha Niyamit to support this stance. The CIT(A) partially allowed the appeal, granting the deduction for interest income earned by providing credit facilities to members but denying it for interest/dividend income from investments with co-operative banks, citing the Karnataka High Court's ruling in Pr.CIT v. Totagars Co-operative Sale Society.3. Entitlement to Deduction under Section 80P(2)(d):The CIT(A) ruled that interest income/dividend from investments with co-operative banks should be assessed as income from other sources and not eligible for deduction under Section 80P(2)(d). This decision was based on the Karnataka High Court's judgment in Pr.CIT v. Totagars Co-operative Sale Society, which held that such income does not qualify for the deduction. The Tribunal upheld this view, referencing its own decision in M/s. Vasavamba Co-operative Society Ltd., which followed the jurisdictional High Court's ruling.4. Allowance of Deduction under Section 57:The assessee argued that if interest income is assessed as income from other sources, the expenses incurred to earn such income should be deductible under Section 57. The Tribunal acknowledged this argument, citing the Karnataka High Court's decision in Totagars Co-operative Sale Society v. ITO, which supports the deduction of proportionate costs incurred in earning interest income. Although this plea was not raised before the lower authorities, the Tribunal deemed it necessary to entertain it to ensure only net income is taxed. The case was remanded to the AO to verify if the assessee incurred any expenses for earning the interest income and to allow deductions under Section 57 if applicable.Conclusion:The appeal was allowed for statistical purposes, with the Tribunal directing the AO to examine and allow any legitimate expenses incurred for earning interest income under Section 57. The assessee is required to provide necessary evidence to facilitate this examination. The Tribunal's decision ensures that the principles of net income taxation are upheld.