2023 (7) TMI 860 - AT - Income Tax

Appeal outcome: deduction under Section 80P partly allowed, pro-rata expenses for interest income considered

The appeal involved the disallowance of deduction under section 80P and confirmation of an addition, as well as the allowance of pro-rata expenses for ... Deduction u/s. 80P - Assessee is in the business of providing credit facilities to its members - HELD THAT:- It is pertinent to note that the assessee has earned interest income from deposits held with Nationalized Banks and thus, the contention of the assessee that the assessee is eligible for deduction u/s 80P(2)(a)(i) appears to be incorrect in light of the decision of State Bank of India [2016 (7) TMI 516 - GUJARAT HIGH COURT] - As relates to the pro-rata expenses for earning interest income the contention of the Ld. A.R. appears to be genuine and in light of the decision of Dhanlaxmi Credit Co-op. Society Ltd. [2017 (1) TMI 1601 - ITAT AHMEDABAD] it will be appropriate to remand back this issue thereby directing the Assessing Officer to verify the assessee’s claim of pro-rata expenses by examining the record which has to be shown for verification by the assessee - Appeal of the assessee is partly allowed for statistical purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether interest on deposits placed with banks by a primary cooperative society engaged in providing credit facilities to its members is deductible under Section 80P(2)(a)(i) as profit and gains of business attributable to such activity. 2. Whether pro rata expenses attributable to earning interest income on investments should be allowed, and if so, whether the matter requires remand for verification and application of the principle of natural justice. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of interest on bank deposits under Section 80P(2)(a)(i) Legal framework: Section 80P(1) allows deduction of the whole of the amount of profit and gains of business attributable to activities specified in Section 80P(2). Section 80P(2)(a)(i) covers activities of primary cooperative societies engaged in providing credit facilities to members. Precedent treatment: The Tribunal notes reliance placed by the assessee on higher court decisions favorable to granting deduction for interest on surplus funds invested by cooperative societies engaged in lending to members. However, the Tribunal specifically refers to a contrary decision of the High Court which holds that interest from bank deposits is not eligible for deduction under Section 80P in such circumstances. Interpretation and reasoning: The Court examined whether the interest income from bank deposits constituted profit and gains of the business 'attributable' to the specified cooperative activity. Having regard to the contrary High Court decision, the Tribunal concluded that the assessee's contention that such interest is deductible under Section 80P(2)(a)(i) is not tenable. The Tribunal treated the High Court ruling as dispositive on the legal question raised. Ratio vs. Obiter: The Tribunal's determination that the interest income is not deductible under Section 80P(2)(a)(i) is ratio decidendi to the extent it applies the controlling High Court authority to deny the claimed deduction. References to other favorable authorities relied upon by the assessee are treated as distinguishable or not prevailing in light of the controlling High Court decision. Conclusion: Deduction under Section 80P(2)(a)(i) for interest earned on deposits with banks by the primary cooperative society is rejected in view of the relevant High Court precedent; the assessee's claim for deduction on that interest is not sustained. Issue 2 - Allowance of pro rata expenses attributable to interest income and remand for verification Legal framework: Ordinary tax principles permit attribution of business expenses to specific heads of income where a portion of overall expenditure can be objectively allocated to the generation of particular receipts (e.g., investment interest). Procedural fairness requires that factual claims be verified by the Assessing Officer with opportunity for the assessee to be heard. Precedent treatment: The assessee relied upon a Tribunal decision that allowed pro rata expenses to be apportioned in comparable circumstances. The Tribunal found that this authority supports the proposition that pro rata expenses for earning interest income can be allowed subject to verification. Interpretation and reasoning: The Tribunal accepted the assessee's factual assertion regarding total expenditure, total income and interest income, and recognized the reasonableness of granting a proportionate share of expenses against the interest income. However, because factual verification is necessary (including examination of accounting records and supporting material), the Tribunal concluded that the appropriate remedy is to remit the matter to the Assessing Officer for scrutiny and verification. The Tribunal emphasized that the assessee must be afforded an opportunity of hearing consistent with the principles of natural justice. Ratio vs. Obiter: The direction to remand for verification and to allow pro rata expenses if substantiated is part of the operative ratio: factual allocation of expenses is permissible but contingent on verification. Observations about relevant precedents supporting pro rata allocation are persuasive but subordinate to the requirement of fact-based inquiry. Conclusion: The plea for pro rata allocation of expenses attributable to interest income is accepted in principle; the matter is remitted to the Assessing Officer for verification of the claim and for grant of relief if substantiated, with an express direction to observe natural justice (opportunity of hearing). Disposition (statutory effect of conclusions): The appeal is partly allowed - the claim for deduction under Section 80P(2)(a)(i) for interest on bank deposits is not upheld in view of controlling High Court authority, while the claim for pro rata expenses related to interest income is remanded for verification and decision by the Assessing Officer after affording the assessee a hearing.