Cooperative society's bank deposit interest income ineligible for Section 80P(2)(d) deduction, operational funds distinguished from idle funds

ITAT Kolkata held that interest income from bank deposits by a cooperative society cannot claim deduction under Section 80P(2)(d). The tribunal distinguished between operational funds (used for member loans, eligible for deduction) and idle funds (bank deposits, constituting income from other sources). Following Supreme Court precedent in Totgars Co-operative Sale Society, such interest income falls outside Section 80P purview. However, the matter was remanded to CIT(A) to allow reasonable expenses against the disallowed interest income, with guidance from Kisan Sahkari Chini Mills case for expense quantification. Appeal was partly allowed.

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Issues Involved:

1. Deduction under Section 80P(2)(d) of the Income Tax Act, 1961.
2. Treatment of interest income from bank deposits.
3. Allowance of expenses related to earning interest income.

Issue-Wise Detailed Analysis:

1. Deduction under Section 80P(2)(d) of the Income Tax Act, 1961:

The appellant, a Cooperative Credit Society, filed its return of income for the assessment year at 'NIL' income. The Assessing Officer (AO) added Rs. 8,27,230/- as interest income, which was deemed outside the purview of Section 80P(2)(d) of the Income Tax Act, 1961. The AO relied on the Supreme Court's judgment in Totgars, Co-operative Sale Society Ltd. vs. ITO, which held that interest income from surplus funds invested in short-term deposits and securities is not eligible for deduction under Section 80P(2)(a)(i).

The appellant argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that the funds in question were operating funds, not surplus funds, and thus should be eligible for deduction. However, the CIT(A) confirmed the AO's addition, relying on the Totgars case and other authorities.

Upon further appeal to the ITAT, the appellant reiterated that the funds were operating funds as per the West Bengal Cooperative Societies Act, 2006, and not surplus funds. The ITAT, however, upheld the AO's and CIT(A)'s decision, citing the Totgars case and the case of PCIT vs. Electro Urban Co-operative Credit Society Ltd., which similarly ruled that interest income from funds not required for business purposes falls outside Section 80P and is taxable under Section 56 as 'Income from other sources.'

2. Treatment of Interest Income from Bank Deposits:

The ITAT noted that the distinction between idle funds and operational funds is artificial. Interest from funds advanced as loans to members has been allowed as operational income. However, interest from remaining funds, irrespective of their classification, is treated as income from other sources per the Totgars case. The ITAT referenced the case of CIT vs. South Eastern Railway Employees Co-op Credit Society Ltd., which also applied the Totgars ruling to interest income from investments, treating it as taxable under Section 56.

3. Allowance of Expenses Related to Earning Interest Income:

The appellant's alternative plea was that if the interest income is treated as income from other sources, expenses incurred to earn this income should be allowed. The ITAT agreed with this contention, referencing the case of CIT vs. Kisan Sahkari Chini Mills Ltd., which provides guidance on estimating allowable expenses for such income.

The ITAT restored the matter to the CIT(A) to allow a reasonable expense for earning the interest income. The CIT(A) was directed to consider the quantum of expense to be allowed as relief on the disallowed interest income.

Conclusion:

The ITAT concluded that the impugned amount of Rs. 8,27,230/- cannot be considered for relief under Section 80P. However, the appellant's alternative submission regarding the allowance of expenses was accepted. The CIT(A) was instructed to determine a reasonable expense for earning the interest income, following the guidance from the Kisan Sahkari Chini Mills Ltd. case.

Outcome:

The appeal filed by the assessee was partly allowed, with the appellant failing on the primary ground but succeeding on the alternative ground related to the allowance of expenses. The order was pronounced in the open Court on 7th August, 2024.

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