2018 (8) TMI 2171 - AT - Income Tax

Interest from bank investments not deductible under section 80P(2)(a)(i); AO to exclude net interest, allow related expenses

Balasinor Vikas Co-Op Credit Society Ltd. Versus ITO, Lunawada.

ITAT dismissed the appeal, holding that interest earned on investments in banks is not deductible under section 80P(2)(a)(i), following precedent from the ... Disallowance u/s. 80P(2)(a)(i) - interest income of the society - HELD THAT:- Assessee fairly conceded that issue in dispute is squarely covered against the assessee by the decision in the case of State Bank of India [2016 (7) TMI 516 - GUJARAT HIGH COURT] wherein as held that interest earned from the investment made in any bank is not deductible u/S 80P(2)(a)(i) of the Act. We dismiss the appeal of the assessee. However, we direct the AO to exclude the amount of net interest income from the deduction claimed u/s 80P(2)(a)(i) of the Act. Thus the AO will allow the expenses incurred by the assessee in the earning of such interest income not eligible for deduction under section 80P(2)(a)(i) of the Act. AO has to determine the net interest income earned by the assessee on such investment with the bank, and only after that net interest income has to be excluded from the admissibility of deduction u/s 80P(2). Hence, grounds of appeal filed by the assessee are allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned on fixed deposits with a nationalized bank is eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act. 2. Whether, if interest on bank investments is held not deductible under section 80P(2)(a)(i), the Assessing Officer must determine and exclude only the net interest income (after allowance of pro rata expenditure under section 57) from the deduction claimed, permitting related expenses against such interest. 3. Ancillary contention (raised as additional grounds): whether specific items of interest income should be taxed under section 56 or be allowed deduction under section 80P(2)(d) or subject to pro rata expense allowance under section 57 - considered only insofar as they relate to the principal issue above. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of bank interest under section 80P(2)(a)(i) Legal framework: Section 80P(2)(a)(i) provides deduction for certain income of cooperative societies arising from specified activities; the question is whether interest earned from investments with a bank falls within those permitted categories. Precedent treatment: The Tribunal expressly followed the binding decision of the jurisdictional High Court holding that interest earned from investments made in any bank is not deductible under section 80P(2)(a)(i). Interpretation and reasoning: The Court accepted the assessee's counsel's concession that the High Court decision squarely covers the issue against the assessee. On that basis, and applying the precedent, interest income on fixed deposits with a bank does not qualify for deduction under section 80P(2)(a)(i). Ratio vs. Obiter: The holding that bank interest is not deductible under section 80P(2)(a)(i) is treated as the ratio adopted by the Tribunal by following the binding High Court precedent. Conclusion: The Tribunal dismissed the challenge to the disallowance of interest under section 80P(2)(a)(i) insofar as substantive entitlement is concerned, following the High Court ruling. Issue 2 - Treatment of related expenses and net interest exclusion Legal framework: Section 80P excludes certain income from deduction; section 57 permits allowance of expenditure in relation to income; Assessing Officer must compute taxable income by matching income and related allowable expenditure. Precedent treatment: No contrary precedent was invoked; the Tribunal formulated an operational direction consistent with principles of matching and allowable deduction of expenses under section 57. Interpretation and reasoning: Although the Tribunal held that interest from bank investments is not deductible under section 80P(2)(a)(i), it directed that the Assessing Officer determine the net interest income earned on such investments (i.e., interest income after allowing pro rata expenditures incurred in earning that interest under section 57) and exclude only that net interest income from the deduction under section 80P(2). The Tribunal thereby required the AO to allow expenditures attributable to earning the interest even though the gross interest cannot be claimed under section 80P. Ratio vs. Obiter: The direction to compute and exclude only net interest income (after allowing related expenses) is a practical remedial ratio adopted by the Tribunal to give effect to the statutory provisions on allowable expenditure and to avoid taxing income without deduction of related costs; it is not obiter. Conclusion: The AO was ordered to compute net interest income from bank investments by allowing pro rata expenses, exclude that net amount from the section 80P deduction, and permit the associated expenses under section 57; the appeal was accordingly allowed for statistical purposes to that limited extent. Issue 3 - Additional grounds on taxation under section 56 and deduction under section 80P(2)(d) Legal framework: Section 56 deals with income other than profits and gains of business or profession; section 80P(2)(d) concerns deduction rules for cooperatives receiving interest from cooperative banks/societies. Precedent treatment: The Tribunal did not separately adjudicate these contentions on their merits; they were subsumed under the primary issue concerning deductibility of bank interest under section 80P(2)(a)(i) and the consequential treatment directed in Issue 2. Interpretation and reasoning: Given the Tribunal's adherence to the High Court precedent that bank interest is not deductible under section 80P(2)(a)(i), the Tribunal confined relief to the computation of net interest and allowance of related expenses. Specific assertions that particular interest items should be taxed under section 56 or allowed under section 80P(2)(d) were not separately decided beyond their relationship to the principal holding and the directed treatment. Ratio vs. Obiter: Any remarks touching these additional grounds are incidental; no separate ratio on taxation under section 56 or applicability of section 80P(2)(d) was laid down. Conclusion: Additional grounds were not sustained independently; relief was limited to the netting and expense-allowance mechanism described above and to statistical allowance of the related grounds. Overall Disposition The Tribunal, following the controlling High Court precedent, held that interest earned from investments with a bank is not deductible under section 80P(2)(a)(i). Simultaneously, the Tribunal directed that the Assessing Officer compute the net interest income (after allowing pro rata expenditures under section 57) and exclude only that net interest from the section 80P deduction, thereby allowing associated expenses; the appeal was dismissed on the principal question but partly allowed for statistical purposes to implement the directed computation.