Co-operative society's interest income from Central Co-operative Bank may qualify for section 80P deduction if investment was compulsory under state law

ITAT Bangalore allowed the assessee's appeal for statistical purposes, directing the AO to re-examine whether interest income from Central Co-operative Bank investments was compulsory under Karnataka Co-operative Societies Act, 1959. If compulsory, such income qualifies as business income eligible for deduction under section 80P(2)(a)(i). The Tribunal followed precedent from Totgars Co-operative Sale Society Ltd case, restoring the matter to AO for fresh consideration with proper hearing opportunity for the assessee.

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Issues:
The judgment involves the delay in filing the appeal and the disallowance made by the AO under section 80P of the Income Tax Act, 1961.

Delay in Filing Appeal:
The appeal was filed with a delay of four days, for which the assessee submitted a petition for condonation of delay. The Tribunal, after perusing the reasons for the delay, found reasonable cause and condoned the delay, proceeding to dispose of the appeal on merits.

Disallowance under Section 80P:
The AO disallowed the deduction claimed under section 80P of the Act, stating that the assessee violated the principle of mutuality by dealing with non-members and not deducting tax at source on interest payments to nominal members. The CIT(A) partly allowed the appeal, confirming the disallowance on interest received from cooperative banks but not on interest paid to nominal members.

Case Facts:
The assessee, a cooperative society, provided credit facilities to members and filed its return for the Assessment Year 2017-18 claiming a deduction under section 80P. The AO disallowed the deduction, citing violations and non-deduction of tax at source. The CIT(A) upheld part of the disallowance, leading to the appeal before the Tribunal.

Legal Arguments:
The assessee argued that investments with Central Co-operative Banks were made under compulsion of the Karnataka Co-operative Societies Act, 1959, entitling the interest income to deduction under section 80P(2)(a)(i). They relied on precedents from the Bangalore Bench of the Tribunal to support their claim.

Judicial Findings:
The Tribunal referred to previous orders and directed the AO to examine if the interest income from investments with Central Co-operative Bank was due to compulsion under the Act and Rules. Compliance with relevant provisions would entitle the income to be considered as business income under section 80P(2)(a)(i).

Cost of Funds Claim:
The assessee also claimed the cost of funds for interest income assessed under other sources. Citing a judgment of the Hon'ble jurisdictional High Court, the Tribunal directed the AO to calculate the cost of funds for such income and allow it as a deduction under section 57 of the Act.

Decision:
The Tribunal allowed the appeal for statistical purposes, remanding the matter to the AO to decide in accordance with the law and provide a reasonable opportunity of hearing to the assessee.

Conclusion:
The judgment addressed the delay in filing the appeal and the disallowance under section 80P, providing detailed legal analysis and directions for further assessment by the AO based on compliance with relevant laws and previous judicial findings.

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