Interest from banks taxed as Income from Other Sources; Section 57 relief granted; Section 80P(2)(d) allowed; deposit interest provision deductible
ITAT BANGALORE - AT held interest earned from commercial banks is taxable under "income from other sources" and relief under u/s 57 is to be granted; the assessee's claim u/s 80P(2)(d) was allowed for statistical purposes following Totagars Co-operative Sale Society. The Tribunal also allowed deduction for provision made for interest payable on deposits, finding it to be an ascertainable liability created under the mercantile system consistently followed by the assessee, not an unascertained liability. Overall, the assessee's grounds were allowed as indicated.
ISSUES PRESENTED AND CONSIDERED
1. Whether interest earned by a registered cooperative society on deposits/investments with a district central cooperative bank (SCDCC bank) is eligible for deduction under section 80P(2)(d) of the Income-tax Act, 1961, or is taxable as income from other sources.
2. Whether interest earned by the cooperative society from commercial banks should be assessed as 'income from other sources' and whether the assessee is entitled to deductions under section 57 in respect thereof.
3. Whether the provision made in the relevant year for interest payable on deposits (additional provision of Rs.36,56,860) constitutes an allowable deduction (i.e., an ascertained liability) or is an inadmissible provision/unascertained liability.
ISSUE-WISE DETAILED ANALYSIS - Issue 1: Deductibility under section 80P(2)(d) for interest from cooperative bank deposits
Legal framework: Section 80P(2)(d) provides deduction in respect of income of a cooperative society from carrying on the business of banking with a cooperative bank, subject to statutory interpretation of whether interest on deposits/investments with cooperative banks falls within the scope of the provision.
Precedent Treatment: The Apex Court decision in the Totgars Cooperative Sale Society case was considered and distinguished on facts; Karnataka High Court has rendered conflicting decisions - one decision disallowing (PCIT v. Totagars in (2017) 395 ITR 611) and an earlier Karnataka High Court decision (PCIT & Anr. v. Totagars in (2017) 392 ITR 74) and Gujarat High Court decision (State Bank of India v. CIT (2016) 389 ITR 578) holding such interest eligible for deduction under section 80P(2)(d). The Tribunal followed the view in the later Karnataka High Court decision and the Gujarat High Court decision, and distinguished the Apex Court decision as fact-specific and confined to its facts.
Interpretation and reasoning: The Tribunal examined the factual matrix of the cited Apex Court decision and observed that in that case retained sale proceeds due to members were shown as liabilities and invested; hence the interest related to liabilities and was not attributable to the cooperative banking activity covered by other clauses of section 80P. In the present case, the amounts invested in the cooperative bank were not amounts due to members, were not shown as liabilities, and represented profits/gains not immediately required for lending to members. Given those facts, the interest income was held attributable to the business of banking and thus eligible for deduction under section 80P(2)(d). The Tribunal also noted, and followed, decisions from the Karnataka and Gujarat High Courts that treated interest earned by a cooperative society on investments with a cooperative bank as eligible for deduction under section 80P(2)(d).
Ratio versus Obiter: The distinction from the Apex Court decision is treated as ratio inasmuch as the Tribunal confines the effect of that decision to its facts and applies competing High Court precedents as binding/precedential for the factual scenario before it. The Tribunal's holding that interest from deposits with a cooperative bank is deductible under section 80P(2)(d) on the facts of this case is the operative ratio of the decision; observations contrasting authorities are explanatory (obiter) to the extent they summarize other courts' reasoning.
Conclusion: Interest earned from deposits/investments with the district central cooperative bank is eligible for deduction under section 80P(2)(d) on the facts that the invested sums were not liabilities to members and the amounts were not immediately required for lending to members. The Tribunal allows the ground in favour of the assessee for statistical purposes and directs that interest from commercial banks be treated separately (see Issue 2).
ISSUE-WISE DETAILED ANALYSIS - Issue 2: Treatment of interest from commercial banks and relief under section 57
Legal framework: Income from interest not qualifying for section 80P deduction falls to be assessed under the head 'Income from Other Sources'. Section 57 permits specified deductions against income from other sources.
Precedent Treatment: The Tribunal, while allowing section 80P(2)(d) deduction for cooperative bank interest, directed that interest from commercial banks be assessed as income from other sources and that relief under section 57 be granted as per law - following a consistent approach in prior Tribunal decisions distinguishing between cooperative-bank interest (eligible under section 80P(2)(d)) and commercial-bank interest (taxable under other heads with permissible deductions).
Interpretation and reasoning: The Tribunal treated the nature of the payee/institution (cooperative bank versus commercial bank) as determinative of eligibility under section 80P(2)(d). For interest earned from commercial banks, the Tribunal held the proper head is 'income from other sources' and that corresponding allowable deductions under section 57 should be considered in computing taxable income.
Ratio versus Obiter: The direction that commercial bank interest is to be considered under income from other sources and that section 57 relief be allowed is applied as the operative ratio for the assessment of such income; statements distinguishing categories of banks and corresponding entitlement to section 80P relief are central to the decision (ratio), not merely obiter.
Conclusion: Interest from commercial banks shall be taxed under the head 'income from other sources' and the assessee is entitled to claim deductions available under section 57 in accordance with law; this treatment stands alongside the allowance of section 80P(2)(d) for cooperative-bank interest on the specific facts of the case.
ISSUE-WISE DETAILED ANALYSIS - Issue 3: Allowability of provision for interest payable (Rs.36,56,860)
Legal framework: Deductibility of provisions in profit and loss account depends on whether the liability is ascertained or unascertained and on the accounting system followed (mercantile system permits accruals for interest earned/accrued but not due). Taxation principles distinguish between bona fide, regularly made provisions consistent with accounting practice and prohibited general/unascertained reserves.
Precedent Treatment: The assessing officer and CIT(A) treated the additional provision as an unascertained liability and disallowed it; the Tribunal considered the consistent accounting practice of the assessee and principles governing accrual accounting and past treatment of such provisions.
Interpretation and reasoning: The Tribunal found that the assessee follows the mercantile system of accounting and regularly provides for interest accrued but not due as on the balance-sheet date. The provision of Rs.36,56,860 represented accrued interest determined by a regular, consistent method and was not a mere contingent or unascertained liability nor a reserve lacking objective ascertainment. The absence of mutuality issues and the consistent booking of accruals meant the provision was deductible.
Ratio versus Obiter: The holding that the provision made in accordance with the mercantile system, being an ascertained accrual, is allowable is the ratio as applied to the facts before the Tribunal. Observations about mutuality and accounting consistency are explanatory but central to the reasoning (ratio).
Conclusion: The additional provision for interest payable of Rs.36,56,860 is an allowable deduction because it was computed and recorded pursuant to a consistent mercantile system of accounting and represents an ascertained accrual rather than an unascertained liability; the Tribunal allows the claim of the assessee.
Overall Disposition
The appeal is partly allowed: deduction under section 80P(2)(d) is permitted for interest on deposits with a cooperative bank on the facts of the case; interest from commercial banks is to be assessed under income from other sources with section 57 relief as applicable; the provision for interest payable of Rs.36,56,860 is allowed as an allowable deduction.
TaxTMI 
AI Drafter ✕
TaxTMI 
