Cooperative society wins partial appeal on section 80P(2)(a)(i) deduction for interest income and subsidy

Income Tax Officer, Ward-32 (2), Pr. Commissioner of Income Tax, Kolkata Versus M/s National Coal Development Corporation taff Co-operative Credit Society Ltd.

Income Tax Officer, Ward-32 (2), Pr. Commissioner of Income Tax, Kolkata Versus M/s National Coal Development Corporation taff Co-operative Credit Society ... Issues Involved:
1. Eligibility for deduction under section 80P(2)(a)(i) of the Income Tax Act for interest income earned by a cooperative society.
2. Applicability of the judgment in Totgars Co-operative Sale Society Ltd. v. ITO.
3. Proportionate deduction in respect of interest paid/payable to members.
4. Non-adjudication of specific grounds raised in the memorandum of appeal.
5. Provision for ex-gratia.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The core issue revolves around whether the interest income earned by the cooperative society qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act. The assessee, a cooperative society, claimed deductions for various interest incomes, including those from fixed deposits, reserve funds, bad debts, and MSSS accounts. The Assessing Officer (AO) disallowed the deduction for interest income on the grounds that it was not directly related to the business of providing credit facilities to its members. The AO's decision was based on the interpretation that only interest income directly arising from credit facilities provided to members is eligible for deduction under section 80P(2)(a)(i). The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the AO's decision but allowed deductions for interest from reserve funds, bad debts, and MSSS accounts, while disallowing interest from fixed deposits.

2. Applicability of the Judgment in Totgars Co-operative Sale Society Ltd. v. ITO:
The AO applied the Supreme Court judgment in Totgars Co-operative Sale Society Ltd. v. ITO, which held that interest income from surplus funds invested in short-term deposits/securities is taxable under the head 'Income from Other Sources' and not eligible for deduction under section 80P(2)(a)(i). The CIT(A) and the Income Tax Appellate Tribunal (ITAT) found this judgment distinguishable, noting that the facts in Totgars involved surplus funds from sales proceeds, whereas the present case involved statutory reserves and funds required by the West Bengal Co-operative Societies Act, 1983. The ITAT restored the issue to the AO for fresh adjudication, emphasizing the need to verify whether the investments were made from surplus funds or statutory reserves.

3. Proportionate Deduction in Respect of Interest Paid/Payable to Members:
The assessee argued for a proportionate deduction of interest paid to members out of the interest income earned. The ITAT, following its previous decisions, restored this issue to the AO for fresh consideration, requiring verification of whether the investments were made from surplus funds or liabilities payable to members.

4. Non-adjudication of Specific Grounds Raised in the Memorandum of Appeal:
The CIT(A) was found to have erred in not adjudicating specific grounds raised in the memorandum of appeal, including those related to the proportionate deduction of interest paid to members. The ITAT directed the AO to address these grounds during the fresh adjudication process.

5. Provision for Ex-gratia:
The AO disallowed a provision for ex-gratia amounting to Rs. 1.50 lakhs, stating that provisions are not allowable as deductions under the Income Tax Act. However, the CIT(A) allowed the deduction under section 80P(2)(a)(i), reasoning that the disallowance would result in a higher deduction for the assessee. The ITAT upheld the CIT(A)'s decision, noting that the disallowance of ex-gratia would not affect the tax liability due to the deduction under section 80P(2)(a)(i).

Conclusion:
The ITAT's judgment largely revolves around the interpretation and application of section 80P(2)(a)(i) concerning interest income earned by cooperative societies. The Tribunal restored several issues to the AO for fresh adjudication, emphasizing the need for detailed verification of whether the interest income arose from surplus funds or statutory reserves. The decision underscores the importance of distinguishing between different types of interest income and their eligibility for deductions under the Income Tax Act.