ITAT remits section 80P(2)(d) deduction case requiring RBI registration clarification and allows section 57 expenditure deduction claim

The ITAT Bangalore remitted the case back to the AO regarding deduction under section 80P(2)(d) for interest income from cooperative banks, requiring clarification on whether the payer bank is RBI-registered and licensed under the RBI Act, following the SC judgment in Kerala State Cooperative Agricultural and Rural Development Bank Ltd. The tribunal allowed the assessee's claim for deduction of expenditure under section 57 for cost of funds on interest income, directing the assessee to provide cost details to the AO for determination, relying on Karnataka HC precedents.

---

---

Issues Involved:
1. Eligibility of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Eligibility of deduction under Section 80P(2)(d) of the Income Tax Act.
3. Deduction of expenditure under Section 57 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Eligibility of Deduction under Section 80P(2)(a)(i):

The primary issue was whether the assessee, a co-operative society, was eligible for deduction under Section 80P(2)(a)(i) for interest income earned on investments made with co-operative banks. The Assessing Officer (AO) disallowed the deduction, relying on various judgments, including the jurisdictional High Court's decision in Pr.CIT Hubballi vs. Totagars Co-operative Sale Society, which held that interest income from investments with co-operative banks is not eligible for deduction under Section 80P(2)(a)(i). The CIT(A) concurred, allowing only the deduction related to income from providing credit facilities to its members.

The Tribunal noted that the assessee argued that the interest income was attributable to the business of banking and should be included under the term "profits and gains" in Section 80P(2). However, the Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Totgars Co-operative Sales Society, which clarified that interest income not directly attributable to the business operations of the society should not be allowed as a deduction under Section 80P(2)(a)(i).

2. Eligibility of Deduction under Section 80P(2)(d):

The second issue was whether the interest income from investments in co-operative banks qualified for deduction under Section 80P(2)(d). The assessee contended that co-operative banks are also co-operative societies, and thus, interest earned from them should be deductible under Section 80P(2)(d). The Tribunal noted that the CIT(A) rejected this claim, relying on the judgment of the Karnataka High Court and subsequent ITAT decisions, which held that interest from co-operative banks does not qualify for deduction under Section 80P(2)(d).

The Tribunal further emphasized that the definition of a co-operative bank, as discussed in the Supreme Court's ruling in Kerala State Co-operative Agricultural and Rural Development Bank Ltd., should be considered. If the payer bank is registered with the RBI and holds a license for banking business, it does not qualify as a co-operative society for the purposes of Section 80P(2)(d). Consequently, the Tribunal remitted this issue back to the AO for verification.

3. Deduction of Expenditure under Section 57:

The third issue was whether the proportionate expenses incurred in earning the interest income should be allowed as a deduction under Section 57. The assessee argued that if the interest income is assessed as "income from other sources," the related expenses should be deductible. The Tribunal agreed, citing the Karnataka High Court's judgment in Totgars Co-operative Sales Society Ltd. vs. ITO Sirsi, which held that net income should be considered after reducing the expenditure incurred towards earning such income.

The Tribunal directed the AO to determine the cost of funds for earning the interest income and allow the deduction accordingly. This issue was remitted back to the AO for further examination and calculation.

Conclusion:

The Tribunal partly allowed the appeals for statistical purposes, directing the AO to re-examine the eligibility of deductions under Sections 80P(2)(d) and 57, based on the definitions and principles outlined in the relevant judgments. The decision emphasized the need for a detailed examination of the nature of the interest income and the status of the payer bank to determine the correct tax treatment.

---