2025 (1) TMI 1603 - AT - Income Tax

Interest from bank deposits not allowable under section 80P(2)(a)(i); proportionate interest expense under section 57 remitted

Balwa Group Coop Society Versus The ITO, Ward-1 Mehsana

Balwa Group Coop Society Versus The ITO, Ward-1 Mehsana - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned from deposits with nationalized banks, representing interest on surplus funds of a credit co-operative society, is deductible under section 80P(2)(a)(i) of the Income-tax Act. 2. Whether, if such bank interest is taxable under the head 'Income from Other Sources', proportionate expenses (including interest paid to members and other overheads) may be allowed against that income under section 57(iii) as expenses 'wholly and exclusively' incurred for earning that income; and if so, the correct approach to determine and verify such pro-rata deduction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of bank deposit interest under section 80P(2)(a)(i) Legal framework: Section 80P(2)(a)(i) provides deduction in respect of income of a co-operative society engaged in specified activities (e.g., business of banking or providing credit facilities), subject to conditions and the scope of income connected to the relevant cooperative activity. Precedent treatment: The assessee relied on several tribunal decisions to support allowance of deduction (decisions from Ahmedabad and Bangalore benches were cited). The judgment records those citations as relied upon by the assessee but the Court did not adopt them as dispositive in this matter. Interpretation and reasoning: The Tribunal examined the nature of the impugned receipts - interest earned by parking surplus/idle funds with nationalized banks. The Court analysed whether such interest can be treated as income 'from the business' qualifying for section 80P relief. The Court held that interest received from nationalized banks on deposits of surplus funds is not allowable under section 80P; it constitutes income outside the specific scope of deduction under that provision. Ratio vs. Obiter: The determination that bank deposit interest from parked surplus funds is not deductible under section 80P(2)(a)(i) is ratio decidendi for this appeal point. Conclusion: Ground contesting disallowance under section 80P(2)(a)(i) is dismissed. The Court concluded such interest is not eligible for deduction under section 80P. Issue 2 - Allowability of pro-rata expenses under section 57(iii) against interest from banks Legal framework: Section 56 captures income from other sources; section 57(iii) permits deduction of amounts expended wholly and exclusively for the purpose of earning such income. The legal test is whether particular expenditure is wholly and exclusively incurred to earn the specific income taxed under the head 'other sources'. Precedent treatment: The assessee relied on tribunal precedents supporting allocation of expenses to similar interest from bank deposits; the Revenue emphasised that many expenses (notably interest paid to members) are directly attributable to the primary lending activity and cannot be allocated against bank interest without risking double deduction. The Tribunal did not make a definitive pronouncement on reconciling the cited precedents but acknowledged their invocation. Interpretation and reasoning: The Court examined the parties' contentions and the revised pro-rata working submitted by the assessee and commented on the Revenue's objection that major expenditures (notably interest paid to members amounting to a large portion of P&L charges) are directly related to the society's primary lending business and therefore not properly deductible against interest earned from parked surplus funds. The Court recognised the Revenue's concern that allowing the entire or inappropriate portion of P&L expenditures would amount to double deduction since those expenses are already attributable to interest-income from members. At the same time the Court accepted that some expenditure might legitimately be apportioned to bank interest and that the assessee had produced a quantification (including a revised computation showing pro-rata allowance leading to a small net taxable amount). Because the figures and the nature of the expenditures required factual enquiry and verification of attribution, the Tribunal refrained from deciding the quantitative question on the record presented. Ratio vs. Obiter: The finding that the question of pro-rata deduction requires factual verification and cannot be conclusively determined on the present record is ratio for the remedial direction given. Observations as to the inadmissibility of allowing interest paid to members against bank interest (on principle of direct relation and double deduction) are instructive ratio-level reasoning supporting remit to fact-finding. Conclusion: The Tribunal partly allowed the appeal for statistical purposes by remitting the issue to the file of the Assessing Officer for detailed verification and adjudication of the pro-rata computation. The assessee is to be afforded an opportunity of hearing in accordance with the principles of natural justice; the AO must examine and verify the nature of each expense item and its nexus to the bank interest income before determining the allowable deduction under section 57(iii). Ancillary procedural outcome The Tribunal pronounced that ground no. 1 (section 80P claim) is dismissed, and ground no. 2 (claim for pro-rata deduction under section 57) is partly allowed only to the extent of remanding the computation for verification by the Assessing Officer; no final numeric adjustment was made by the Tribunal itself. Cross-references and interaction of issues There is a direct interaction between the two issues: denial of section 80P relief (Issue 1) made it necessary to consider taxation under 'Income from Other Sources', which in turn raises the question whether section 57(iii) permits allocation of expenses to reduce that income (Issue 2). The Tribunal resolved the legal status (no 80P deduction) and left factual allocation (section 57) to the AO.