2024 (5) TMI 1600 - AT - Income Tax

Interest Income from Banks Not Deductible u/s 80P(2)(d), But Related Expenses Are Deductible

GSSS Credit Co-operative Society Limited. Versus The Income Tax Officer, Ward-2 (2) (3), Bangalore.

ITAT Bangalore held that interest income from investments in a nationalized bank is not eligible for deduction u/s 80P(2)(d), but corresponding interest ... Disallowance u/s 80P(2)(d) - interest earned on the investment made in the nationalized/cooperative bank - HELD THAT:- As far as the interest income earned by the assessee on the investment made with the nationalized bank is concerned, there is no dispute that the same is not eligible for deduction u/s 80P(2)(d) as held in the case of Totagars Co-operative Sale Society [2017 (7) TMI 1049 - KARNATAKA HIGH COURT] but in our considered view, the corresponding interest cost incurred by the assessee against such interest income should be allowed as deduction. Accordingly, we direct so. Interest income earned from the Co-operative Bank - We hold that if the Co-operative Bank is not functioning the business of banking as defined u/s 5(b) of Banking Regulation Act, then such Co-operative Bank shall be considered as Cooperative Society for the purpose of the deduction claimed u/s 80P(2)(d) of the Act. Therefore, in our considered view, such interest income will be eligible for deduction u/s 80P(2)(d) of the Act. However, if the Co-operative Bank is carrying out banking activities as defined u/s 5(b) of the Bank Regulation Act, then the assessee shall not be entitled for the deduction with respect to the interest earned on the investments made with such bank under the provisions of sec. 80P(2)(d) of the Act. However, corresponding interest cost incurred by the assessee shall be eligible to be adjusted against such interest income at par with nationalized bank. We also note that this Tribunal in the case of Bee Co-op Credit Society Ltd. [2023 (8) TMI 1265 - ITAT BANGALORE] involving identical facts and circumstances has set aside the issue to the file of the AO for fresh adjudication as per the provision of law. Thus, we are inclined to set aside the issue to the file of AO for fresh adjudication. Ground of appeal of the assessee is allowed for statistical purposes. ISSUES: Whether deduction claimed under section 80P(2)(d) of the Income Tax Act is allowable in respect of interest income earned by a cooperative society from investments made in nationalized banks and cooperative banks.Whether the provisions of section 80P(4) of the Act apply to deny deduction under sections 80P(2)(a)(i) and 80P(2)(d) when the cooperative bank is carrying on banking business as defined under the Banking Regulation Act, 1949.Whether interest expenditure incurred against interest income earned from investments in banks is deductible under section 57 of the Act.Whether interest income earned by a cooperative society on investments in cooperative banks not carrying on banking business as defined under section 5(b) of the Banking Regulation Act qualifies for deduction under section 80P(2)(d).Whether the issue of deductibility of interest income under section 80P(2)(d) should be remanded to the Assessing Officer for fresh adjudication in light of relevant Supreme Court and High Court decisions. RULINGS / HOLDINGS: Deduction under section 80P(2)(d) is not allowable for interest income earned on investments made in nationalized banks, as held by the Hon'ble Karnataka High Court in Totagars Co-operative Sale Society, but corresponding interest cost incurred by the assessee against such income is allowed as a deduction.Where a cooperative bank is carrying on the business of banking as defined under section 5(b) of the Banking Regulation Act, 1949, the deduction under section 80P(2)(d) is not allowable on interest earned from investments with such bank, pursuant to section 80P(4) of the Act.Where the cooperative bank is not carrying on banking business as defined under section 5(b) of the Banking Regulation Act, it shall be treated as a cooperative society for the purposes of section 80P(2)(d), and the interest income earned from investments therein is eligible for deduction under that section.Interest expenditure incurred in earning interest income from commercial banks is deductible under section 57 of the Act when computing income under the head 'Income from Other Sources'.The issue regarding deduction under section 80P(2)(d) is to be remanded to the Assessing Officer for fresh adjudication in light of the Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. v. CIT and relevant High Court decisions, granting the assessee a proper opportunity of being heard. RATIONALE: The Court applied the statutory provisions of section 80P of the Income Tax Act, 1961, particularly subsections (2)(a)(i), (2)(d), and (4), and section 57 concerning deductions from income chargeable under the head 'Income from Other Sources'.Precedents considered include the Hon'ble Karnataka High Court decisions in Totagars Co-operative Sale Society and Tumukur Merchants Souharda Credit Co-operative Ltd., and the Hon'ble Supreme Court decision in Kerala State Co-operative Agricultural and Rural Bank Ltd. v. ACIT, which clarified the definition of 'banking business' under section 5(b) of the Banking Regulation Act, 1949.The Court recognized that a cooperative society not transacting banking business with the public as defined in the Banking Regulation Act is entitled to deduction under section 80P(2)(d), while cooperative banks carrying on banking business are excluded under section 80P(4).It was noted that interest income from investments in nationalized banks is not eligible for deduction under section 80P(2)(d), but the corresponding interest expenditure is deductible under section 57, following the principle that income from such investments is assessable under 'Income from Other Sources'.The Court followed the coordinate bench's approach in remanding the matter to the Assessing Officer for de novo consideration, to reconcile the conflicting judicial precedents and factual determinations, ensuring compliance with procedural fairness.