Deduction claims u/ss 80P(2)(a)(i) and 57(iii) remanded for fresh examination of evidence, expense-income nexus

The ITAT set aside the orders denying deduction u/s 80P(2)(a)(i) on interest from fixed deposits and remanded the matter to the AO. It held that the AO and CIT(A) failed to properly examine the assessee's submissions and documentary evidence that credit facilities and investments were confined to its members, including associate and nominal members, and whether it functioned as a co-operative society eligible under s.80P. The AO was directed to reconsider the claim in light of the evidence and applicable judicial precedents. The ITAT also remanded the assessee's claim for deduction u/s 57(iii), directing the AO to verify the nexus of proportionate expenses with taxable interest income.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessee, being a Souharda registered under the Karnataka Souharda Sahakari Act, 1997 and engaged in providing credit facilities only to its members (including nominal and associate members), is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

1.2 Whether interest income earned from investments in fixed deposits with co-operative banks/societies qualifies for deduction under section 80P(2)(d), and the proper head of income under which such interest is to be assessed.

1.3 Whether the assessee is entitled to deduction under section 57(iii) towards proportionate employee cost and administrative overheads against interest income assessed under the head "Income from other sources".

1.4 Whether interest chargeable under sections 234A and 234B is to be recomputed consequentially to the outcome of the issues restored to the Assessing Officer.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Deduction under section 80P(2)(a)(i) for a Souharda co-operative society providing credit to members (including nominal/associate members)

Legal framework discussed

2.1 The Tribunal considered section 80P(2)(a)(i) and judicial principles laid down by the Supreme Court in Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. and Citizen Co-operative Society Ltd., as well as coordinate bench decisions in Basaveshwaranagara Co-operative Society and Ravindra Multipurpose Cooperative Society Ltd.

2.2 The Tribunal noted that in Mavilayi Service Co-operative Bank Ltd. the Supreme Court held that: (i) deduction under section 80P(2)(a)(i) is available to co-operative societies providing credit facilities to their members; (ii) the expression "member" is not defined in the Income-tax Act and must be construed with reference to the relevant State Co-operative Societies Act; and (iii) where nominal/associate membership is permitted under the State Act, income from providing credit facilities to such members also qualifies for deduction, subject to section 80P(4) which excludes co-operative banks carrying on banking business with the public under RBI licence.

Interpretation and reasoning

2.3 The Tribunal observed that the Assessing Officer denied deduction on the premise that the assessee was carrying on finance/banking activities with the general public and failed the test of mutuality, relying on Citizen Co-operative Society Ltd.

2.4 The Tribunal further observed that the CIT(A) (i) treated dealings with nominal members as ineligible for section 80P(2)(a)(i), and (ii) held that a Souharda society is not a "co-operative society" and therefore not eligible.

2.5 The Tribunal recorded that the assessee had placed before the CIT(A) detailed submissions and documentary evidence (including lists of deposits and loans as at 31.03.2018 with names, addresses, membership numbers, PAN, Aadhaar, and type of facility) to substantiate that all credit facilities were extended only to members (including nominal and associate members) and not to the general public.

2.6 The Tribunal found that neither the Assessing Officer nor the CIT(A) had actually examined these factual details or the legal position emerging from Mavilayi Service Co-operative Bank Ltd. with regard to treatment of nominal and associate members and the definition of "member" as per the Karnataka Souharda Sahakari Act, 1997.

2.7 Relying on the coordinate bench decision in Basaveshwaranagara Co-operative Society (which, in turn, followed Mavilayi Service Co-operative Bank Ltd. and Ravindra Multipurpose Cooperative Society Ltd.), the Tribunal considered that the factual matrix regarding who the members are, and whether the assessee deals with non-members or the general public, must be freshly verified in the light of the State law and the Supreme Court's enunciation of principles.

Conclusions

2.8 The Tribunal held that the authorities below had not properly examined the assessee's factual and legal contentions and that the applicability of section 80P(2)(a)(i) must be reconsidered.

2.9 The Tribunal set aside the findings on section 80P(2)(a)(i) and remanded the matter to the Assessing Officer to re-examine, de novo, the allowability of deduction under section 80P(2)(a)(i) after:

(a) examining the assessee's submissions and documents regarding credit facilities to members (including nominal/associate members); and

(b) applying the principles laid down by the Supreme Court in Mavilayi Service Co-operative Bank Ltd. and the relevant coordinate bench decisions.

Issue 2 - Deduction under section 80P(2)(d) on interest from co-operative banks / societies

Legal framework discussed

2.10 The Tribunal followed the reasoning in Basaveshwaranagara Co-operative Society, which in turn applied the Supreme Court's decision in Kerala State Co-operative Agricultural and Rural Development Bank Ltd., holding that interest/dividend income from investments with co-operative societies is eligible for deduction under section 80P(2)(d).

Interpretation and reasoning

2.11 The Tribunal noted that the assessee had earned interest income from fixed deposits with other co-operative societies/banks and had made an alternate claim that such income is eligible for deduction under section 80P(2)(d), even if not allowable under section 80P(2)(a)(i).

2.12 The Tribunal observed that the lower authorities had not examined, in a fact-specific manner, whether the payers of interest were co-operative societies within the meaning of section 80P(2)(d), nor had they determined the precise character and head of such income.

Conclusions

2.13 The Tribunal restored the issue of deduction under section 80P(2)(d) to the Assessing Officer with a direction to:

(a) verify whether the interest income arises from investments made with co-operative societies; and

(b) allow deduction under section 80P(2)(d) in accordance with law and judicial precedents, including Kerala State Co-operative Agricultural and Rural Development Bank Ltd., wherever the conditions are satisfied.

Issue 3 - Deduction under section 57(iii) for proportionate employee and administrative expenses against interest income taxed as "Income from other sources"

Legal framework discussed

2.14 The Tribunal referred to the coordinate bench's approach in Basaveshwaranagara Co-operative Society, which held that if interest income from deposits is finally assessed under the head "Income from other sources" under section 56, appropriate relief should be considered under section 57, subject to proof of expenditure laid out wholly and exclusively for earning such income.

Interpretation and reasoning

2.15 The assessee had earned interest income of Rs. 4,17,99,567/- from investments in fixed deposits with other co-operative societies and claimed deduction under section 57(iii) towards:

(a) cost of funds of Rs. 3,83,92,749/-; and

(b) proportionate employee cost of Rs. 91,85,684/- and administrative overheads of Rs. 35,63,408/-,

leading to a net loss under "Income from other sources".

2.16 The Assessing Officer allowed deduction only for the cost of funds and disallowed the proportionate employee and administrative expenses, holding that they were not specifically relatable to earning the interest income and that once funds are parked in deposits, income arises automatically without further services.

2.17 The CIT(A) confirmed this view, observing that section 56 read with section 57 does not allow general allocation of expenses in the same manner as section 37(1) for business income, and that the assessee had failed to correlate the claimed proportionate employee/administrative expenses to the earning of interest income.

2.18 Before the Tribunal, the assessee pointed out that workings and supporting details for the proportionate allocation of employee and administrative cost had been submitted, but not factually examined by the lower authorities.

2.19 The Tribunal, following Basaveshwaranagara Co-operative Society, considered that the entitlement to deduction under section 57(iii) required a factual determination whether the claimed expenses were incurred wholly and exclusively for earning the interest income assessed under the head "Income from other sources".

Conclusions

2.20 The Tribunal restored the issue of deduction under section 57(iii) to the Assessing Officer with a direction to:

(a) examine the assessee's workings and evidence regarding proportionate employee and administrative expenses claimed as relatable to the earning of interest income; and

(b) decide afresh, in accordance with section 57(iii) and applicable law, whether and to what extent such expenses are allowable against interest income taxed under section 56.

2.21 The assessee was directed to furnish all relevant details and evidences as may be called for by the Assessing Officer to substantiate its claim.

Issue 4 - Interest under sections 234A and 234B

Interpretation and reasoning

2.22 The CIT(A) had directed that interest under sections 234A and 234B is consequential and to be recomputed upon giving effect to the appellate order.

2.23 In view of the Tribunal's decision to restore the substantive issues (sections 80P(2)(a)(i), 80P(2)(d) and 57(iii)) to the Assessing Officer, the computation of interest under sections 234A and 234B necessarily becomes consequential to the final determination of income.

Conclusions

2.24 The Tribunal affirmed that interest under sections 234A and 234B is to be recomputed by the Assessing Officer while giving effect to the Tribunal's order and the fresh determinations directed therein.

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