2024 (9) TMI 1806 - AT - Income Tax

Tax authority upholds denial of s.80P(2)(a)(i) deductions for bank FDR interest, personal loans and non-lending income disallowed

The W.B. State Co-op. Agri And Rural Development Bank Ltd. Versus Assistant Commissioner of Income-tax, Circle-32, Kolkata

ITAT, Kolkata (AT) upheld the CIT(A)'s disallowance of deductions under s.80P(2)(a)(i) for interest on FDRs with banks and co-operative banks, and ... Disallowance u/s 80P(2)(a)(i) - interest income earned by the assessee on FDRs with the Scheduled Banks, interest on Personal Loans to members and interest on HBL to staff - HELD THAT:- Since the issue relating to the deduction u/s 80P on the interest from the Banks and Co-operative banks has been decided against the assessee in the appeal for AY 2006-07, hence following the order of AY 2006-07 in the assessee’s own case, the order of the Ld. CIT(A) is upheld and Ground Nos. 1, 1.1 and 3 are dismissed. Interest on personal loans and interest on HBL to staff - As mentioned that in the case of Bihar Rajya Sahakari Bhoomi Vikas Cooperative Bank Limited [2008 (9) TMI 310 - PATNA HIGH COURT] it has been held that income earned by a Cooperative Bank by way of interest on P.F. amounts of employees and rent from house property could not be treated as income attributable to the banking business and hence would not qualify for deduction. Since it was not the business of the assessee to lend money to employees and being a Cooperative Society, its business is to lend money to its members and since the employees do not fall under the category of members, therefore, the claim of allowing deduction under section 80P(2)(a)(i) for interest on HBL to staff and on personal loans is also rejected. Similarly, on the same reasons, as income from commission, miscellaneous income and sundry income also do not relate to the business activities of the assessee, the same do not qualify for deduction under section 80P(2)(d) of the Act or 80P(2)(a)(i) of the Act and Ground No. 1.2 relating to disallowance of deduction is also rejected and the addition is confirmed. Allowability of expenses against the interest received from the banks and on personal loans - AO has held that as regards expenses on other income, such expenses have already been claimed as attributable to earning other income the compression of income, which have been allowed. Hence no more expenses are liable as attributable to earning interest on fixed deposit with other banks and other income as above. Thus, Ground No. 4 is also rejected. Overdue interest being against the prudential norms in respect of non-performing assets and the claim that the interest is not recognised on accrual basis but is booked as income only when actually received - Income Recognition Norms as per the Annexure thereof mention that the prudential norms for income recognition should be based on the record of recovery and therefore, unrealised income should not be taken to profit and loss accounts by SCARDBs/PCARDBs. However, in the case of certain states where the State Cooperative Act/Rules/Order or Manual provide for taking such unrealised interest to the income head in the profit and loss account, it is necessary for those SCARDBs/PCARDBs to make full provision for an equivalent amount by charging to profit and loss account. In other words, the SCARDBs/PCARDBs which are charging interest on all overdue loans and if such interest remains unrealised, the same may be taken to income account provided matching provision is fully made for the same by charging to profit and loss account. Accrued interest taken to income account in the previous year should also be provided in full in case the same becomes overdue within the current year. Apparently, this issue has not been adjudicated upon by the Ld. CIT(A) although it was raised before the Ld. CIT(A). Although, there does not appear any reason to change the method of accounting in this year in this regard, however in the interest of justice, this issue is hereby set aside to the Ld. AO who shall examine the claim of the assessee and exclude the interest on non-performing assets only if there is any statutory guideline of the appropriate authority in this regard/the same meets the accounting standards specified under the Act and the assessee is able to demonstrate and quantify the interest on such nonperforming assets. For statistical purposes, this ground of appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest earned on fixed deposits with scheduled banks qualifies as 'profits and gains of business' of a cooperative society for purposes of deduction under section 80P(2)(d) (and/or 80P(2)(a)(i)) or is chargeable as income from other sources. 2. Whether interest on personal loans to non-member employees (including House Building Loan to staff) and commission/miscellaneous/sundry receipts qualify as income 'attributable to' the business of providing credit to members and thus are deductible under section 80P. 3. Whether corresponding expenses incurred to earn income treated as 'income from other sources' must be allowed against that income (netting of income and expenditure) and, if so, the appropriate forum to adjudicate the quantum of such expenses. 4. Whether overdue/accrued interest in respect of non-performing assets (NPA) should be excluded from income on the basis of Prudential Norms (NABARD guidelines) and accounting recognition principles, i.e., whether such interest must be recognized only when actually received. 5. Whether the appellate forum denied sufficient opportunity of virtual hearing to the assessee. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility under section 80P of interest on deposits with scheduled banks Legal framework: Section 80P provides deduction in respect of 'the whole of the amount of any income' of a cooperative society that is derived from specified transactions; section 80P(2)(d) covers interest and dividends derived from investment with any other cooperative society (eligible income). Section 80P(2)(a)(i) relates to income of a banking business carried on by a cooperative society. Precedent Treatment: The Tribunal and the Commissioner invoked the ratio of the Supreme Court in Totgars' Cooperative Sale Society Ltd. v. ITO (referred to repeatedly in the reasoning) holding that interest earned on surplus funds invested in banks/govt. securities which are not required for operational purposes constitutes 'other income' and is not part of 'profits and gains of business' eligible for deduction under section 80P. Interpretation and reasoning: The Court/Tribunal examined the factual pattern - an apex cooperative bank borrowing wholesale (e.g., NABARD loans) and lending retail through primary societies - and found that interest on deposits with non-cooperative banks arises from funds not immediately required for lending activity. Such interest does not have a direct nexus with the core business of providing credit to members. Section 80P(2)(d) specifically covers interest earned from investments in other cooperative societies; interest from non-cooperative banks falls outside that statutory carve-out and thus cannot be claimed as deductible business income. The policy aim to foster cooperative spirit under section 80P(2)(d) supports this distinction. The Assessing Officer's view that the society could have invested idle funds in cooperative banks (to secure a deductible character) but invested in non-cooperative banks instead was treated as relevant to classification. Ratio vs. Obiter: The conclusion that interest on deposits with non-cooperative banks is not deductible under section 80P (and should be taxed as income from other sources) is treated as ratio decidendi, consistently applied and followed from the Supreme Court precedent. Observations about the society's cash-flow timing and possibility of investing in cooperative banks are explanatory and ancillary but not essential to the statutory ratio. Conclusions: Deduction under section 80P(2)(d) (and 80P(2)(a)(i) insofar as banking business is concerned) for interest of Rs. 2,83,02,934 on FDRs with scheduled banks is disallowed; the amount is to be treated as income from other sources. The Tribunal upheld the view that the statutory language confines eligible interest to investments with other cooperative societies; the assessment disallowance is confirmed on this ground. Issue 2 - Treatment of interest on personal loans to employees (HBL) and to non-member borrowers, and commission/miscellaneous/sundry receipts Legal framework: Section 80P permits deduction only for income that falls within the specified categories and is attributable to the cooperative society's qualifying cooperative activities or banking business; income from transactions with non-members/employees or from unrelated services must be tested for direct nexus. Precedent Treatment: Tribunal followed decisions (including a Patna High Court decision cited by the AO) holding that income from lending to employees (non-members) and rents/PF interest are not attributable to the banking business of a cooperative society and therefore are not eligible for section 80P deduction. Interpretation and reasoning: The Tribunal found that the assessee's principal business is lending to member primary societies/individual members; employees are not members and lending to them does not form part of the qualifying business. Similarly, commission/miscellaneous/sundry receipts were not shown to be directly relatable to the core lending activity. On that basis such receipts are ineligible for section 80P deduction and must be taxed under other heads (income from other sources). The Tribunal emphasized the need for direct attribution to the qualifying business for section 80P relief. Ratio vs. Obiter: The holding that interest on personal loans to employees and various non-core receipts are not deductible under section 80P is ratio and upheld on authority and statutory interpretation. Remarks distinguishing types of recipients (members vs non-members) are integral to the ratio. Conclusions: Interest of Rs. 21,98,448 (personal loans) and Rs. 1,76,490 (HBL to staff), and aggregate other receipts of Rs. 11,57,981, were correctly treated as ineligible for deduction under section 80P; the Assessing Officer's additions in respect of these amounts were sustained. Issue 3 - Allowability of corresponding expenses against income re-characterized as 'income from other sources' Legal framework: General income-tax principle - taxable income should be net of expenses incurred wholly and exclusively for earning that income; computation under the relevant head must allow attributable expenditure. Precedent Treatment: The Tribunal in the assessee's earlier year held that when income is reclassified as income from other sources, the corresponding expenditure must be examined and allowed to arrive at net taxable income; the matter was remitted for quantification. Interpretation and reasoning: The Tribunal observed that the Assessing Officer had allowed certain expenses earlier but rejected further claims; in fairness and in line with settled principle that net income is to be taxed, the Tribunal restored the matter to the Assessing Officer to determine and allow admissible expenses attributable to the interest and other incomes now treated as 'other income'. The Tribunal treated this as a matter of fact/quantification distinct from the legal conclusion on section 80P deductibility. Ratio vs. Obiter: The direction to allow corresponding expenses where properly attributable is ratio in respect of computation procedure; the remand for fresh adjudication on quantification is consequential, not an obiter. Conclusions: The legal position that attributable expenses must be allowed was accepted; the issue of the quantum of such expenses was remitted to the Assessing Officer for fresh adjudication in accordance with law. Issue 4 - Exclusion of overdue/accrued interest on NPAs in view of Prudential Norms and accounting recognition Legal framework: Accounting standards and statutory/prudential guidelines may affect recognition of income; NABARD prudential norms provide guidance for income recognition and asset classification for ARDBs/SCARDBs, including treatment of unrealised interest on overdue loans and requirement of corresponding provisions. Precedent Treatment: The prudential norms are guidelines and previous practice of the assessee (charging overdue interest to income) was noted; no conclusive past application of the prudential norms by the assessee was demonstrated. Interpretation and reasoning: The Tribunal noted that prudential norms permit accrual of overdue interest to income provided matching provision is made; they are not per se binding statutory overrides of income-tax accounting. Because the claim to exclude large overdue interest (Rs. 17,76,82,947) had not previously been adjudicated and the matter involves fact-specific demonstration (existence of applicable statutory guideline or compliance with accounting standards and quantification), the Tribunal refrained from altering the accounting method for the year and remitted the issue to the Assessing Officer to examine and quantify the claim in light of statutory authority or recognized accounting standards. Ratio vs. Obiter: The decision to remit for factual and documentary examination is operative (ratio) for this appeal; observations that prudential norms are guidelines and may permit accrual with matching provision are explanatory. Conclusions: The claim to exclude overdue interest on NPAs was set aside to the Assessing Officer for fresh adjudication; the Tribunal allowed the ground for statistical purposes and did not grant outright relief. Issue 5 - Adequacy of opportunity of virtual hearing before the appellate authority Legal framework: Right to be heard and procedural fairness require reasonable opportunity to present contentions before the appellate authority. Interpretation and reasoning: The Tribunal reviewed whether the Commissioner of Income Tax (Appeals) considered the assessee's contentions; finding that the CIT(A) had considered submissions and decided the appeal on merits, the Tribunal concluded that no case of denial of opportunity was made out. Conclusions: The plea of insufficient opportunity of virtual hearing was rejected. Overall Disposition - Synthesis The Tribunal upheld the legal proposition that interest on deposits with non-cooperative banks and income from lending to non-member employees/other miscellaneous receipts, lacking direct attribution to the cooperative society's qualifying activities, do not qualify for deduction under section 80P and are taxable as income from other sources (ratio followed from the Supreme Court authority). The Tribunal confirmed the disallowance aggregate, remitted the matters of netting corresponding expenses and of exclusion/quantification of overdue/NPA interest to the Assessing Officer for fact-specific adjudication in accordance with accounting standards/prudential guidelines, and rejected the procedural challenge regarding virtual hearing.