Assessee wins appeal on section 80P(2)(a)(i) deduction for interest income from cooperative bank investments

The ITAT Bangalore allowed the assessee's appeal for statistical purposes regarding deduction under section 80P(2)(a)(i) for interest income from District Co-operative Bank investments. Following the precedent in Canara Bank Staff Credit Co-operative Societies Ltd, the Tribunal remanded the matter to the AO to examine whether investments were compulsory under Karnataka Co-operative Societies Act. If compulsory, interest income qualifies as business income eligible for section 80P(2)(a)(i) deduction. Alternatively, the AO must consider deductions under section 80P(2)(d) per Kerala State Co-operative Agricultural Rural Development SC judgment, or section 57 for cost of funds if neither section 80P deduction applies.

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Issues Involved:
1. Partial disallowance of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Eligibility of interest income for deduction under section 80P(2)(d) of the Act.
3. Liability to be charged interest under section 234-B of the Act.

Summary:

Issue 1: Partial Disallowance of Deduction under Section 80P(2)(a)(i)
The assessee, a co-operative society, claimed a deduction of Rs. 1,02,85,865 under section 80P(2)(a)(i) of the Income Tax Act for the Assessment Year 2018-19. The Assessing Officer (AO) disallowed Rs. 6,97,062 of this amount, arguing that interest income from Kanara District Co-operative Bank did not qualify for the deduction under section 80P(2)(a)(i) or section 80P(2)(d). The AO relied on the Supreme Court judgment in Totgar's Co-operative Sales Society Ltd. vs. ITO, which held that such interest income is not eligible for deduction.

Issue 2: Eligibility of Interest Income for Deduction under Section 80P(2)(d)
The CIT(A) upheld the AO's decision, noting that the interest income of Rs. 6,97,062 was not derived from investments with another co-operative society, hence not eligible for deduction under section 80P(2)(d). The CIT(A) referenced multiple judgments, including the Karnataka High Court decision in PCIT Hubbali vs. Totagar Co-operative Sales Society, which denied such deductions when funds were deposited in a co-operative bank.

Issue 3: Liability to be Charged Interest under Section 234-B
The assessee contested the liability to be charged interest under section 234-B, claiming that under the facts and circumstances, the interest should be canceled. However, this issue was not elaborated upon in the judgment.

Tribunal's Decision:
The Tribunal restored the matter to the AO to examine if the investments in the District Co-operative Bank were made out of statutory compulsion under the Karnataka Co-operative Societies Act and relevant rules. If so, the interest income should be treated as 'income from business' and eligible for deduction under section 80P(2)(a)(i). If not, the AO should consider the claim under section 80P(2)(d) and, if necessary, allow a deduction under section 57 for the cost of funds used to earn the interest income. The appeal was allowed for statistical purposes, and the AO was directed to re-examine the facts in light of relevant judicial pronouncements.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the eligibility of the interest income for deductions under sections 80P(2)(a)(i), 80P(2)(d), and potentially section 57, based on statutory requirements and judicial precedents.

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