Co-operative society denied Section 80P deduction on interest income from banks but allowed cost deduction under Section 57

The ITAT Bangalore denied deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income from co-operative banks, following Karnataka HC precedent in Totgars Co-operative Sales Society case. The tribunal held that interest income from investments in co-operative banks remains "income from other sources" regardless of investment type, and only operational income qualifies for Section 80P deduction. However, the tribunal accepted the alternative argument that cost of funds should be allowed as deduction under Section 57. The case was remanded to the Assessing Officer to examine expenditure incurred for earning interest income and allow such costs as deductions.

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Issues Involved:
1. Deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income from co-operative banks.
2. Alternative claim for deduction of the cost of funds if deduction under Section 80P(2) is not allowed.
3. Disallowance of provisions made towards Income Tax reserve and General reserve.

Summary:

Issue 1: Deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income from co-operative banks

The assessee challenged the denial of deduction under Section 80P(2)(a)(i)/80P(2)(d) on interest income received from co-operative banks. The revenue authorities relied on the judgment of the jurisdictional High Court in the case of Totgars Cooperative Sale Society (2017) 83 taxmann.com 140, which held that interest income from investments in co-operative banks is not eligible for deduction under Section 80P(2)(d) as it is considered "income from other sources" and not operational income. The Tribunal concurred with the revenue's position, stating that the character of the income does not change irrespective of whether it is earned from a scheduled bank or a co-operative bank, and thus, it is not eligible for deduction under Section 80P(2)(d).

Issue 2: Alternative claim for deduction of the cost of funds

The assessee argued that if the deduction under Section 80P(2) is not allowed, the cost of funds for earning the interest income should be deductible. The Tribunal agreed with this argument, noting that only net income should be taxed, not the gross income. The case was remitted to the Assessing Officer (AO) to examine whether the assessee incurred any expenditure for earning the interest income, which should be allowed as a deduction under Section 57 of the IT Act. The AO was directed to decide the issue as per law, with the assessee instructed to cooperate and provide necessary evidence.

Issue 3: Disallowance of provisions made towards Income Tax reserve and General reserve

For the Assessment Year 2013-14, the AO disallowed provisions made towards Income Tax reserve and General reserve. The Tribunal remitted this issue back to the AO to determine whether these provisions were made out of business profits. If so, the AO should give the benefit of Circular No. 37/2016 dated 2nd November 2016. The AO was instructed to provide a reasonable opportunity of being heard to the assessee and decide the issue as per law, with the assessee directed to substantiate their claims with necessary documents and avoid unnecessary adjournments.

Conclusion:

All the appeals were partly allowed for statistical purposes, with the common order to be kept in the respective case files. The order was pronounced in the open court on 29th September 2023.

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