2022 (2) TMI 489 - AT - Income Tax

Tribunal corrects tax assessment, directs proper income interest taxation & expenses allowance.

M/s. Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd. Versus Pr. Commissioner of Income Tax, Mysore.

The Tribunal upheld the Principal Commissioner of Income Tax's invocation of section 263, finding the assessment order erroneous. It directed the ... Revision u/s 263 by CIT - Admissibility of deduction u/s 80P - CIT held that the AO’s order allowing deduction u/s.80P(2)(d) which was interest received on investments with MDCC Bank, was erroneous and prejudicial to the interest of the revenue - According to the CIT, in view of the provisions of section 80P(4) excluding co-operative banks from the purview of section 80P and in view of the fact that provisions of 80P(2)(d) is applicable only in respect of interest on deposits received from co-operative societies, the deduction ought not to have been allowed by the AO - HELD THAT:- The ratio laid down by THE TOTAGARS CO-OPERATIVE SALE SOCIETY [2017 (7) TMI 1049 - KARNATAKA HIGH COURT] is that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society [2010 (2) TMI 3 - SUPREME COURT] in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) - section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. CIT was therefore justified in exercising his powers of revision u/s.263 of the Act and directing the AO to tax interest income in question as it is neither of the nature specified in Sec.80P(2)(a)(i) or 80P(2)(d) of the Act. Deduction u/s.80P(2)(d) - what is the quantum of interest income that should be brought to tax by the AO, in case the deduction is denied to the assessee u/s.80P(2)(d) - On this aspect, the Hon’ble ITAT, Bengaluru Bench in the case of Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., Vs. ITO [2021 (6) TMI 460 - ITAT BANGALORE] the tribunal held that the assessee should be allowed expenses and the entire gross interest cannot be taxed. The order of the CIT is modified to the extent that the deduction while taxing interest income in dispute the AO will allow deduction on account of expenses on the lines indicated above. Appeal of the assessee is treated as partly allowed for statistical purpose. Issues Involved:1. Whether the Principal Commissioner of Income Tax (Pr.CIT) was justified in invoking jurisdiction under section 263 of the Income Tax Act, 1961.2. Eligibility of the assessee for deduction under section 80P(2)(d) of the Income Tax Act, 1961 on interest income received from investments with MDCC Bank.3. Quantum of interest income to be taxed and the allowance of proportionate expenses.Issue-wise Detailed Analysis:1. Jurisdiction under Section 263:The Pr.CIT invoked jurisdiction under section 263, asserting that the assessment order dated 13-10-2017 was erroneous and prejudicial to the interest of the revenue. The Pr.CIT relied on the judgments of the Hon'ble Karnataka High Court and the Supreme Court in the case of Totagar's Cooperative Society, which held that interest income from investments with co-operative banks is not eligible for deduction under section 80P(2)(d). The Pr.CIT directed the Assessing Officer (AO) to revise the assessment order accordingly.2. Deduction under Section 80P(2)(d):The assessee claimed a deduction under section 80P(2)(d) for interest received from MDCC Bank, which the AO initially allowed. The Pr.CIT, however, held that this was erroneous. The CIT referenced the Hon'ble Karnataka High Court's decision in Totagars Co-operative Sale Society 395 ITR 611 (Karn), which clarified that interest received from co-operative banks is not eligible for deduction under section 80P(2)(d) as it is considered income from other sources, not business income. The insertion of section 80P(4) was to exclude co-operative banks from the purview of section 80P, thus, the deduction should not have been allowed.3. Quantum of Interest Income and Allowance of Proportionate Expenses:The Hon'ble ITAT, Bengaluru Bench, in the case of Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., directed that if interest income is to be taxed under the head 'income from other sources,' the AO must allow proportionate expenses related to earning that income. The Tribunal cited the Karnataka High Court's decision in Totgars Co-operative Sale Society Ltd. vs. ITO, which mandated the deduction of proportionate costs, administrative, and other expenses incurred in earning the interest income.Conclusion:The Tribunal upheld the Pr.CIT's invocation of section 263, agreeing that the AO's order was erroneous and prejudicial to the revenue's interest. The Tribunal directed the AO to tax the interest income appropriately, allowing the deduction of proportionate expenses. The appeal was partly allowed for statistical purposes, with instructions for the AO to afford the assessee an opportunity to present evidence and substantiate its case in the set-aside proceedings.Pronouncement:The judgment was pronounced in the open court, with the appeal treated as partly allowed for statistical purposes.