Interest income from cooperative banks not eligible for Section 80P(2)(d) deduction if payer holds banking license

ITAT Bangalore held that deduction under Section 80P(2)(d) for interest income from cooperative banks depends on whether the payer qualifies as a cooperative society versus a cooperative bank under Banking Regulation Act 1949. Following Supreme Court precedent in KSCARDB case, if the payer is a cooperative bank registered with RBI and holding banking license, deduction is not allowable. The matter was remitted to AO for verification of payer's status and fresh computation of cost of funds for interest income from investments. Appeal partly allowed for statistical purposes.

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Issues Involved:
1. Validity of the CIT(A)'s order under section 250 of the Act.
2. Assessment of total income by the AO.
3. Application of the Supreme Court judgment in Totgars Co-operative Sales Society case.
4. Taxability of interest income under "Other sources" vs. "Business income".
5. Consideration of Karnataka High Court and ITAT decisions on deduction under section 80P(2)(d).
6. Eligibility for deduction under section 80P(2)(a)(i) for interest received from co-operative banks.
7. Applicability of Supreme Court judgment in Kerala State Cooperative Agricultural and Rural Development Bank Ltd. case.
8. Additional grounds for appeal.

Detailed Analysis:

1. Validity of the CIT(A)'s order under section 250 of the Act:
The appellant argued that the order passed by the CIT(A) under section 250 is opposed to law, equity, weight of evidence, probabilities, and the facts and circumstances of the case. However, the tribunal did not find any substantial grounds to invalidate the CIT(A)'s order based on these general assertions.

2. Assessment of total income by the AO:
The appellant denied the assessment of total income determined by the AO at Rs. 31,67,724 as opposed to the NIL income reported. The AO's assessment was based on the interest/dividend income earned from investments in cooperative banks/nationalized banks/shares, which amounted to Rs. 1,81,72,951. The AO allowed costs and expenses attributable to these investments, resulting in a taxable income of Rs. 31,67,724.

3. Application of the Supreme Court judgment in Totgars Co-operative Sales Society case:
The CIT(A) applied the Supreme Court judgment in Totgars Co-operative Sales Society, which the appellant argued was distinguishable on the facts of their case. The appellant contended that their interest income was from operational funds used in the business of investing and lending to members, not surplus funds in short-term deposits. The tribunal noted that the CIT(A) relied on this judgment to deny the deduction under section 80P(2)(a)(i).

4. Taxability of interest income under "Other sources" vs. "Business income":
The CIT(A) considered the interest income earned from investments in other cooperative societies as taxable under "Other sources" and not "Business income," thereby rendering deduction under section 80P(2)(d) inapplicable. The tribunal directed the AO to examine whether the interest income was earned out of investments made in compliance with the Karnataka Cooperative Societies Rules, which could entitle the income to be considered as business income and eligible for deduction under section 80P(2)(a)(i).

5. Consideration of Karnataka High Court and ITAT decisions on deduction under section 80P(2)(d):
The appellant cited various judgments, including the Karnataka High Court in Tumkur Merchants Souharda Credit Co-op. Ltd. and ITAT decisions, supporting the eligibility for deduction under section 80P(2)(d). The tribunal noted these references but emphasized the need for the AO to verify whether the payer cooperative banks are governed by the Banking Regulation Act, 1949, which would affect the eligibility for the deduction.

6. Eligibility for deduction under section 80P(2)(a)(i) for interest received from co-operative banks:
The appellant argued that the interest received from cooperative banks should be considered as business income eligible for deduction under section 80P(2)(a)(i). The tribunal observed that if the investments were made under statutory compulsion, the interest income might have a business nexus. However, the tribunal directed the AO to verify the compliance with the Karnataka Cooperative Societies Rules and Act to determine eligibility.

7. Applicability of Supreme Court judgment in Kerala State Cooperative Agricultural and Rural Development Bank Ltd. case:
The appellant referenced the Supreme Court judgment in Kerala State Cooperative Agricultural and Rural Development Bank Ltd., arguing that cooperative banks are cooperative societies and not banks governed by the RBI. The tribunal directed the AO to verify whether the cooperative banks fall under the definition of cooperative banks as per the judgment, which would affect the eligibility for deduction under section 80P(2)(d).

8. Additional grounds for appeal:
The appellant reserved the right to add, alter, delete, or substitute any grounds of appeal. The tribunal did not address any additional grounds as they were not specifically raised during the hearing.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, directing the AO to re-examine the interest income's eligibility for deductions under sections 80P(2)(a)(i) and 80P(2)(d) based on compliance with the Karnataka Cooperative Societies Rules and the nature of the payer cooperative banks. The tribunal emphasized the need for a fresh computation of the cost of funds to determine the correct taxable income.

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