1992 (5) TMI 38 - AT - Income Tax

Co-op society can only deduct net interest income post interest expenditure under ITA.

The Tribunal held that under Section 80P(2)(d) of the Income Tax Act, only net interest income after deducting interest expenditure can be claimed as a ... Co-operative Society, Deduction In Respect, Interest Income, Set Off Issues:1. Interpretation of Section 80P(2)(d) of the Income Tax Act regarding deduction of interest income by a co-operative society.2. Application of Section 263 by the Commissioner to review the assessment order.3. Determination of allowable deductions for interest expenditure related to business dealings with co-operative societies.4. Consideration of Section 80AB in computing deductions under Chapter VI-A of the Act.Detailed Analysis:1. The case involved the interpretation of Section 80P(2)(d) of the Income Tax Act, which allows a co-operative society to deduct income by way of interest or dividend derived from investments with other co-operative societies. The issue was whether the entire interest income received by the assessee from investments should be deducted or only the net income after deducting interest expenditure. The Commissioner initiated proceedings under Section 263 to review the original assessment order, leading to a dispute over the treatment of interest income and expenditure.2. The Commissioner directed the Income Tax Officer (ITO) to verify the nature of interest receipt and payment to determine the allowable deductions accurately. The ITO, in giving effect to the Commissioner's order, allowed a deduction for interest expenditure incurred by the assessee. However, the ITO's decision was challenged by the Department, leading to an appeal before the Appellate Tribunal.3. The Appellate Tribunal considered the arguments presented by both parties. The Department contended that interest expenditure should be deducted from interest income before applying Section 80P(2)(d) based on Section 80AB of the Act. Conversely, the assessee argued that the interest expenditure was related to business dealings and not solely for earning interest income from investments. The Tribunal analyzed the provisions of Section 80AB and the Andhra Pradesh High Court decision cited by the Department.4. The Tribunal highlighted that Section 80AB mandates the computation of net income for deductions under Chapter VI-A, emphasizing that only the net income is allowable for deduction under Section 80P(2)(d). It clarified that interest expenditure could be deducted in computing the net interest income only if it was laid out wholly and exclusively for earning such income. In this case, the interest expenditure was deemed as business expenditure due to delays in payment for goods purchased, not directly related to earning interest from investments. Therefore, the Tribunal dismissed the appeal, upholding the decision that the interest expenditure was not deductible from interest income derived from investments.Overall, the Tribunal's judgment clarified the interpretation of Section 80P(2)(d) regarding deductions for interest income by co-operative societies and emphasized the necessity to scrutinize the nature of expenditure to determine its deductibility in computing net income for tax purposes.