2022 (5) TMI 1063 - AT - Income Tax

Tribunal allows deduction for cooperative bank interest; disallows nationalized bank interest. Penalty proceedings initiated.

The ACIT, Patan Circle, Patan Versus The Sardar Patel Coop. Credit Society Ltd.

The Tribunal upheld the appellant's claim for deduction under section 80P(2)(d) for interest earned from cooperative banks, allowing the deduction for ... Addition on account of interest earned u/s 80P(2)(d) - AO denied the claim of deduction u/s 80P in totality and taxed the interest income as “income from other sources” u/s 56 - AO also denied deduction of proportionate expenses incurred for earning the aforesaid interest income - HELD THAT:- The issue for consideration before us is whether the assessee is eligible to claim deduction on interest earned from Co-Operative Banks u/s 80P(2)(d) of the Act. The Hon’ble Gujarat High Court in the case of State Bank of India[2016 (7) TMI 516 - GUJARAT HIGH COURT] held that that the interest income earned by a co-operative society on its investments held with a co-operative bank would be eligible for claim of deduction under Sec.80P(2)(d) In the case of Surat Vankar Sahakari Sangh Ltd. v Assistant Commissioner of Income-tax [2016 (7) TMI 1217 - GUJARAT HIGH COURT] the Gujarat High Court held assessee-co-operative society was eligible for deduction under section 80P(2)(d) in respect of gross interest received from co-operative bank without adjusting interest paid to said bank. In the case of Surendranagar District Co-op. Milk Producers Union Ltd. [2019 (9) TMI 978 - ITAT RAJKOT] the ITAT held that assessee-co-operative society could not claim benefit of section 80P(2)(d) in respect of interest earned by it from deposits made with nationalised/private banks, however, said benefit was available in respect of interest earned on deposits made with co-operative bank. In the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society [2017 (1) TMI 1100 - KARNATAKA HIGH COURT] the Karnataka High Court has held that the interest income earned by a co-operative society on its investments held with a co-operative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. Thus interest earned by the assessee on surplus held with cooperative banks would be eligible for deduction under Sec.80P(2)(d) of the Act.- Decided against revenue. Issues Involved:1. Allowability of deduction under section 80P(2)(d) of the Act for interest earned from cooperative banks.2. Disallowance of deduction for interest income from nationalized banks.3. Treatment of interest income as 'income from other sources' under section 56 of the Act.4. Denial of proportionate expenses for earning interest income.5. Initiation of penalty proceedings under section 271(1)(c) for inaccurate particulars of income.Analysis:Issue 1: Allowability of deduction under section 80P(2)(d) for interest earned from cooperative banks:The appellant, a Cooperative Society, claimed deduction under section 80P of the Act for interest earned from cooperative banks. The assessing officer disallowed the deduction and taxed the interest income as 'income from other sources' under section 56 of the Act. However, the Ld. CIT(A) allowed the deduction under section 80P(2)(d) for interest received on surplus funds deposited with other cooperative banks. The Tribunal upheld this decision citing relevant case law and held that interest earned by the appellant on surplus funds held with cooperative banks is eligible for deduction under Sec.80P(2)(d) of the Act.Issue 2: Disallowance of deduction for interest income from nationalized banks:The assessing officer denied the deduction under section 80P of the Act for interest income earned from nationalized banks and added it to the total income of the assessee as 'income from other sources.' The assessing officer also rejected the claim for proportionate expenses incurred for earning the interest income. However, the Ld. CIT(A) allowed deduction under section 80P(2)(d) for interest earned on surplus funds deposited with cooperative banks, not nationalized banks. The Tribunal affirmed this decision based on the specific provisions and case law related to cooperative societies and their eligibility for deductions.Issue 3: Treatment of interest income as 'income from other sources':The assessing officer categorized the interest income earned by the appellant from nationalized banks as 'income from other sources' under section 56 of the Act due to the disallowance of deduction under section 80P. This decision was challenged in appeal, and the Ld. CIT(A) allowed the deduction for interest earned from cooperative banks under section 80P(2)(d). The Tribunal upheld this decision, emphasizing the eligibility of cooperative societies for deductions as per the relevant provisions and judicial precedents.Issue 4: Denial of proportionate expenses for earning interest income:The assessing officer denied the claim for proportionate expenses incurred for earning the interest income from nationalized banks. It was argued that there was no nexus between the surplus funds invested and the expenses claimed by the assessee. The Tribunal concurred with this assessment and upheld the denial of separate expenses on interest income received from nationalized banks based on the provisions of Section 57(iii) of the IT Act.Issue 5: Initiation of penalty proceedings under section 271(1)(c):The assessing officer initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. This action was taken in the context of disallowing the deduction under section 80P and adding the interest income to the total income of the assessee. However, the Tribunal's decision to allow the deduction for interest earned from cooperative banks under section 80P(2)(d) indicates that the penalty proceedings may need to be revisited in light of the final judgment.This detailed analysis of the judgment provides a comprehensive overview of the issues involved and the Tribunal's decision on each aspect of the case.