2022 (8) TMI 1020 - AT - Income Tax

Tribunal allows deduction for interest income from co-op banks under Section 80P(2)(d)

The Tribunal reversed the PCIT's revision directions, allowing the assessee's appeal. It held that interest income derived from deposits in co-operative ... Revision u/s 263 - Deduction u/s 80P - as per CIT AO had wrongly accepted its section 80P(2)(a) deduction claim regarding interest income derived from deposits made in the co-operative banks - HELD THAT:- We have given our thoughtful consideration to the Revenue’s foregoing arguments supporting the learned PCIT’s revision directions and find no merit therein as this tribunal’s recent co-ordinate bench’s order in Rena Sahakari Sakhar Karkhana Ltd [2022 (1) TMI 419 - ITAT PUNE] CIT-DR could hardly pinpoint any distinction on facts and on law regarding the instant issue of 80P deduction claim raised on interest income derived from deposits made in co-operative banks. We accordingly reverse the learned PCIT’s revision directions in issue - Assessee appeal allowed. Issues Involved:1. Legitimacy of the PCIT's revision directions under Section 263 of the Income Tax Act, 1961.2. Allowability of deduction under Section 80P(2)(a) for interest income derived from deposits in co-operative banks.3. Verification of the principle of mutuality concerning loans and deposits.4. Determination of whether the interest income should be classified as 'income from other sources'.Issue-wise Detailed Analysis:1. Legitimacy of the PCIT's Revision Directions under Section 263 of the Income Tax Act, 1961:The assessee challenged the correctness of the PCIT's revision directions, which held that the regular assessment dated 15.11.2019 was erroneous and prejudicial to the interest of the Revenue. The PCIT argued that the Assessing Officer (AO) had wrongly accepted the assessee's Section 80P(2)(a) deduction claim regarding interest income of Rs. 3,22,84,734/- derived from deposits made in co-operative banks without proper verification. The PCIT emphasized that the AO failed to examine the eligibility of the assessee to claim the deduction under Section 80P and did not verify whether the loans/deposits taken were given back to the members as loans/advances, thus rendering the AO's view legally unsustainable.2. Allowability of Deduction under Section 80P(2)(a) for Interest Income Derived from Deposits in Co-operative Banks:The PCIT's revision directions highlighted that a significant portion of the assessee's income was earned by way of interest on deposits made with other nationalized/co-operative banks. Citing the Supreme Court's decision in Totgar's Cooperative Sale Society Ltd. Vs. ITO and the Karnataka High Court's decision in Pr. Commissioner of Income Tax, Hubali Vs. Totgars Cooperative Sale Society, the PCIT argued that making deposits out of the deposits received from members could not be considered attributable to the business of providing credit facilities to its members. Therefore, interest earned on such deposits could not be allowed as a deduction under Section 80P.3. Verification of the Principle of Mutuality Concerning Loans and Deposits:The PCIT noted that the AO did not properly verify whether the deposits were made out of the deposits received from members or from surplus funds. The PCIT also pointed out that the assessee did not furnish requisite details about the deposits either before the AO or during the present proceedings. The assessment order lacked verification of whether the principle of mutuality was satisfied to allow the deduction under Section 80P.4. Determination of Whether the Interest Income Should be Classified as 'Income from Other Sources':The PCIT argued that since the co-operative banks were not cooperative societies, the interest earned should be classified as 'income from other sources' rather than under the regular head of business income under Section 80P. The PCIT emphasized that the AO failed to verify whether the co-operative banks were registered with the RBI, which would affect the eligibility for deduction under Section 80P(2)(d).Tribunal's Findings:The Tribunal considered the Revenue's arguments but found no merit in them. Referring to its recent co-ordinate bench's order in Rena Sahakari Sakhar Karkhana Ltd. vs. PCIT, the Tribunal noted that the issue hinged on the scope of sub-section (4) of Section 80P. The Tribunal observed that as long as the interest income was derived from investments made by a co-operative society with another co-operative society, the deduction under Section 80P(2)(d) would be available. The Tribunal disagreed with the PCIT's view that the insertion of sub-section (4) to Section 80P would jeopardize the deduction claim under Section 80P(2)(d).The Tribunal cited various judicial pronouncements supporting the view that interest income earned from investments in co-operative banks would be eligible for deduction under Section 80P(2)(d). The Tribunal also referred to conflicting judicial pronouncements and followed the view favoring the assessee, as established in the case of K. Subramanian and Anr. Vs. Siemens India Ltd. and Anr.Conclusion:The Tribunal reversed the PCIT's revision directions, allowing the assessee's appeal. The Tribunal held that the interest income derived from deposits made in co-operative banks was eligible for deduction under Section 80P(2)(d), and the AO's assessment was not erroneous or prejudicial to the interest of the Revenue. The Tribunal ordered the AO to re-frame the assessment in compliance with the directions provided. The assessee's appeal was allowed in the above terms.