2022 (3) TMI 968 - AT - Income Tax

Bank Interest as Business Expense: ITAT allows appeal, distinguishing member vs. bank interest.

The ITAT allowed the appeal, concluding that interest paid to the bank should be considered a business expense, not income of the cooperative society. The ... Disallowing interest outgo on bank loans/ overdrafts as business expense - Whether CIT(A) has erred affirming with Ld. AO in not considering the additions as part of total income of the coop credit society and hence allowable as deduction u/s 80P(2)(a)(i) - HELD THAT:- It is undisputed fact that assessee had borrowed money against its own fixed deposit to advance the same to the member of the society. The assessee has categorically submitted before the ld. CIT(A) that interest paid to the bank was expenditure and not the income of the society, however, without disproving contrary the CIT(A) has rejected the claim of the assessee, for payment of interest on loan to the bank which was a part of its expenditure and not income. In this regard we have also perused the decision of coordinate bench of the ITAT, Delhi ACIT Vs. M/s Sangwari Primary Agr. Co-op Society Ltd. [2012 (12) TMI 1224 - ITAT MUMBAI] Thus payment of interest to the bank is an expenditure of the assessee and not income of the society, therefore, the ld. CIT(A) is not justified in confirming the said addition made by the A.O, therefore, ground no. 1 of the assessee is allowed. Since, we have allowed ground no. 1 of the assessee, therefore, ground no. 2 of the assessee for claiming deduction u/s 80P(2)(a)(i) of the Act on the amount of addition sustained by the ld. CIT(A) is not required any adjudication. Appeal of the assessee is partly allowed. Issues:1. Disallowance of interest outgo on bank loans/overdrafts as a business expense.2. Consideration of additions as part of total income of the cooperative credit society for deduction u/s 80P(2)(a)(i).Analysis:1. The appeal involved challenging the order passed by the CIT(A) affirming the disallowance of interest outgo on bank loans/overdrafts as a business expense amounting to Rs. 49,42,618. The assessment was finalized ex-parte u/s 144 of the Income Tax Act, 1961, due to non-compliance by the assessee with various notices. The assessing officer added the interest expenditure of Rs. 1,54,68,608 to the total income of the assessee, leading to the dispute.2. The CIT(A) allowed the payment of interest made to the members but disallowed the interest amount claimed to be paid to the bank. During the appellate proceedings, the counsel argued that the interest on bank loan/overdraft should be considered a business expense. The counsel relied on a decision of ITAT Delhi to support this argument.3. The ITAT observed that the assessee, a cooperative society, declared total income and claimed a deduction u/s 80P(2)(a)(i) of the IT Act, 1961. The AO disallowed the deduction and added the interest paid to members and to the bank as part of the total income. The CIT(A) deleted the addition related to interest paid to members but upheld the disallowance of interest paid to the bank.4. Relying on a decision of the ITAT Delhi, the ITAT concluded that the payment of interest to the bank was an expenditure of the assessee and not income of the society. Therefore, the CIT(A) was not justified in confirming the addition made by the AO. Consequently, the ITAT allowed ground no. 1 of the assessee and partially allowed the appeal.5. The judgment highlighted the distinction between interest paid to members and interest paid to the bank, emphasizing that the latter should be considered a business expense. The decision relied on precedents to support the conclusion that the interest paid to the bank was an expenditure and not income of the society, justifying the allowance of the appeal.6. The ITAT's decision clarified the treatment of interest payments on bank loans/overdrafts as business expenses and not as part of the society's income, leading to the partial allowance of the appeal and emphasizing the importance of distinguishing between different types of interest payments in such cases.