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

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 expenses are deductible. Interest income from a co-operative bank is deductible under the same section only if the bank does not carry on banking business as defined u/s 5(b) of the Banking Regulation Act; otherwise, the deduction is disallowed, though related interest costs remain deductible. The Tribunal set aside the matter to the AO for fresh adjudication consistent with these principles, allowing the assessee's appeal for statistical purposes.

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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.

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