2024 (12) TMI 376 - AT - Income Tax

Interest income from Kerala State Co-operative Agricultural and Rural Development Bank qualifies for Section 80P(2)(d) deduction as co-operative society

M/s. Punalur Primary Co-operative Agricultural and Rural Development Bank Versus The Income Tax Officer, Ward – 2, Kollam.

ITAT Cochin held that interest income received from Kerala State Co-operative Agricultural and Rural Development Bank Ltd. is eligible for deduction under ... Disallowance u/s. 80P(2)(a)(i) - interest income received from The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. - HELD THAT:- The assessee is entitled for deduction on the interest derived from its investments with any other co-operative society. The authorities below on the wrong notion had treated the said Kerala State Co-operative Agricultural and Rural Development Bank Ltd. as a bank and therefore held that the assessee is not entitled for deduction u/s. 80P(2)(d) of the Act. Insofar as status of the The Kerala State Cooperative Agricultural and Rural Development Bank Ltd. is concerned, the issue came up for hearing before the Hon’ble Supreme Court and the Hon’ble Supreme Court after elaborately discussing the provisions, had categorically held that The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. is a co-operative society and not a bank registered under the Banking Regulations Act. The said finding is given in its judgment in the case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd. vs. AO [2023 (9) TMI 761 - SUPREME COURT] Therefore the status of The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. was decided by the Hon’ble Supreme Court and therefore we are applying the said judgment to the facts of the present case and held that the interest income received from the said The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. is eligible for deduction u/s. 80P(2)(d) Thus, the assessee is entitled for deduction on the interest income received from the said The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. being a co-operative society u/s. 80P(2)(d) - The balance if received from the other banks, then the assessee is not entitled to claim deduction u/s. 80P(2)(d) of the Act as per the judgment of Mavilayi Service Co-operative Bank Ltd. [2021 (1) TMI 488 - SUPREME COURT] In order to ascertain the correct figures, we are remitting this issue to the AO to verify. Disallowance of 30% of interest expenses incurred by the appellant due to non-deduction of TDS u/s 40(a)(ia) - We have perused the provisions and the audit report submitted for the A/Y 2018-19 and we are in agreement with the argument advanced by the Ld.AR and hold that the assessee need not deduct the TDS while making the payment to The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. which is a co-operative society as well as to its members. It seems that the assessee had not furnished any details about the payment of interest to the said bank as well as its members while the CIT(A) had decided the appeal and therefore we are of the opinion that this issue may also be remitted to the AO for verifying the said facts and if the AO find that the interest was paid to The Kerala State Co-operative Agricultural and Rural Development Bank Ltd. and also to the members, then the deduction of 30% u/s. 40(a)(ia) need not be made. We also made it clear that the assessee will also submit the necessary records in support of their case before the AO before passing the order. Appeal filed by the assessee is allowed for statistical purposes. Issues Involved:1. Disallowance of interest income received from Kerala State Cooperative Agricultural and Rural Development Bank Ltd. under Section 80P(2)(d) of the Income Tax Act.2. Disallowance of 30% of interest expenses incurred by the appellant due to non-deduction of TDS under Section 40(a)(ia) of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Interest Income under Section 80P(2)(d):The appellant, a cooperative society, claimed a deduction under Section 80P(2)(d) for interest income received from Kerala State Cooperative Agricultural and Rural Development Bank Ltd. The authorities below disallowed this deduction, relying on the judgment in Totgars Co-op Sale Society Ltd v/s ITO, which categorized such income as 'income from other sources.' However, the appellant argued that the interest income was derived from a cooperative society, thus qualifying for deduction under Section 80P(2)(d) as interpreted by the jurisdictional High Court in Pr.CIT Vs Peeroorkada Service Co-Operative Bank Ltd. The Tribunal considered the Supreme Court's ruling in Kerala State Co-operative Agricultural & Rural Development Bank Ltd. vs. AO, which confirmed the bank's status as a cooperative society. Consequently, the Tribunal held that the interest income from the said bank is eligible for deduction under Section 80P(2)(d), provided it is indeed received from the cooperative society and not from other banks. The matter was remitted to the AO to verify the source of interest income and allow the deduction accordingly.2. Disallowance of Interest Expenses under Section 40(a)(ia):The second issue pertained to the disallowance of 30% of interest expenses due to non-deduction of TDS. The appellant contended that the interest payments were made to Kerala State Cooperative Agricultural and Rural Development Bank Ltd., a cooperative society, and thus exempt from TDS under Section 194A(3)(iii). Additionally, interest payments to members were claimed to be exempt under Section 194A(3)(v) & (viia). The Tribunal agreed with the appellant, citing the Supreme Court's decision affirming the cooperative status of the bank, and concluded that TDS was not required on these payments. However, since the appellant had not provided sufficient details to the CIT(A), the Tribunal remitted the issue back to the AO for verification of the interest payments. The AO was directed to ascertain whether the payments were made to the cooperative society and its members, and if so, the disallowance under Section 40(a)(ia) should not be made. The appellant was instructed to furnish necessary records to support their claims during the reassessment process.Conclusion:The appeal was allowed for statistical purposes, with instructions for the AO to verify the facts and apply the appropriate provisions of the Income Tax Act. The appellant was granted the opportunity for a personal hearing before the final order. The stay petition was dismissed as infructuous.