Assessee's appeal allowed for statistical purposes, matter remanded to examine section 80P(2)(a)(i) deduction eligibility for co-operative bank investments

The ITAT Bangalore allowed the assessee's appeal for statistical purposes, remanding the matter to the AO for examination. Following the precedent in Canara Bank Staff Credit Co-operative Societies Ltd., the Tribunal directed the AO to determine whether investments in co-operative banks were mandatory under the Karnataka Co-operative Societies Act. If compulsory, the interest income would qualify as business income eligible for deduction under section 80P(2)(a)(i). Alternatively, if not entitled to that benefit, the AO must examine eligibility for deduction under section 80P(2)(d) considering the SC judgment in Kerala State Co-operative Agricultural Rural Development case.

---

---

Issues:
Whether the CIT(A) was justified in confirming the disallowance of claim of deduction under section 80P of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Deduction under Section 80P of the Act
The appeal was against the CIT(A)'s order confirming the disallowance of a deduction under section 80P of the Act amounting to Rs. 50,93,751/-. The assessee, a primary agricultural co-operative society, filed its return of income for the Assessment Year 2020-21 claiming the deduction under section 80P. The AO disallowed the deduction, treating the interest income received from Co-operative Banks as "income from other sources," relying on relevant judgments. The CIT(A) partly allowed the appeal, confirming the disallowance under sections 80P(2)(a)(i) and 80P(2)(d) but restored the matter to the AO regarding the claim of proportionate expenditure for earning interest income.

Issue 2: Arguments and Submissions
The assessee contended that the investments with Co-operative Banks were made in compliance with the Karnataka Co-operative Societies Act, 1959, and therefore, the interest income should be eligible for deduction under section 80P(2)(a)(i) of the Act. The assessee also relied on a judgment of the Hon'ble Apex Court to support its claim for deduction under section 80P(2)(d) of the Act. The DR supported the orders of the AO and CIT(A).

Issue 3: Tribunal's Decision
The Tribunal considered the contention that investments with Co-operative Banks were made out of compulsion as per the Karnataka Co-operative Societies Act, 1959, and relevant Rules. Referring to similar cases, the Tribunal emphasized that if investments were made under compulsion, the interest income received would be considered 'business income' eligible for deduction under section 80P(2)(a)(i) of the Act. The Tribunal cited judicial pronouncements to support its decision and directed the AO to examine whether the investments were made under compulsion. If so, the interest income would be liable to be taxed as business income, entitling the assessee to the benefit of deduction under section 80P(2)(a)(i) of the Act.

Conclusion
The Tribunal allowed the appeal for statistical purposes and directed the AO to re-examine the issue of deduction under section 80P(2)(a)(i) of the Act in light of the compulsion under the Karnataka Co-operative Societies Act, 1959. If the assessee is not entitled to this deduction, the AO was instructed to consider the eligibility for deduction under section 80P(2)(d) of the Act based on a recent judgment of the Hon'ble Apex Court.

---