2025 (10) TMI 525 - AT - Income Tax

Disallowance under s.80P for bank deposit interest upheld as 'other sources'; s.57 claim and specified bank notes remitted to AO

ITAT BANGALORE upheld disallowance of deduction under s.80P for interest on bank deposits, following Karnataka HC and Gujarat HC precedents that such ... Disallowance of deduction u/s 80P claimed on interest income - HELD THAT:- Hon’ble Karnataka High Court in the case of PCIT vs. Totagars Co-Op Sales Society [2017 (7) TMI 1049 - KARNATAKA HIGH COURT]and State Bank of India [2016 (7) TMI 516 - GUJARAT HIGH COURT] have categorically held that interest income earned from deposits in banks does not constitute income from the business of providing credit facilities to members. Rather, such interest is income from 'other sources' and does not qualify for deduction under Section 80P(2)(a)(i) of the Act. CIT(A) has correctly observed that the principal business of the assessee is to provide credit facilities to its members and that depositing surplus funds in banks is a secondary activity. The interest earned from these bank deposits does not directly arise from providing credit to members but represents incidental income. Thus, the disallowance made by the AO and upheld by the CIT(A) is found to be legally justified. Plea regarding deduction u/s 57 merits consideration. The assessee has demonstrated that the deposits in banks were sourced from members' interest-bearing deposits, and the interest paid to members constitutes a legitimate expense incurred to earn the interest income. The financial records, including the balance sheet and profit and loss account, support this claim. It noted that this aspect has not been verified by the lower authorities. Therefore, for the sake of justice and fair-play, I hereby set aside the issue to file of the AO. AO is directed to verify the claim of the assessee with respect to the allowances of cost against the earning of interest income in accordance with the provision of section 57 of the Act. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes. Cash deposit during the demonetization treated as unexplained cash credit u/s 68 - Specified Bank Notes (SBNs) deposited by the assessee during the demonetization period cannot be treated as unexplained money u/s 68/69A of the Act solely on the ground that they were accepted after the announcement of demonetization. Assessee has an obligation to substantiate the source of the money received during the demonetization period. In the present case, the assessee has claimed that the cash in SBNs were received from its members as loan repayments or deposits, and it has maintained all necessary records to support this claim. Notably, the lower authorities have not pointed out any specific defects or discrepancies in the assessee’s records. Accordingly, find merit in the assessee’s contention. But find that there was no verification carried out by the Revenue about explanation furnished by the assessee. Direct the AO verify the source of cash deposits in the bank as discussed above. Ground of appeal raised by the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned by a cooperative society from deposits with banks qualifies as income 'from the business of providing credit facilities to its members' and is therefore deductible under section 80P(2)(a)(i) of the Act. 2. Whether interest expense in respect of members' interest-bearing deposits can be allowed as a deduction under section 57 of the Act against interest income earned on bank deposits, where the deposits were funded by members' monies. 3. Whether cash deposits in Specified Bank Notes (SBNs) made during the demonetization period can be treated as unexplained cash credit under section 68 (and by reference section 69A) of the Act where the assessee claims the SBNs were received from members as loan repayments or deposits and records were maintained. ISSUE-WISE DETAILED ANALYSIS - Interest Income and Deduction under Section 80P(2)(a)(i) Legal framework: Section 80P(2)(a)(i) allows deduction for income of a cooperative society insofar as it is income from the business of providing credit facilities to its members. Section 80P relief is therefore tied to the source/nature of the income-i.e., whether the income arises from the qualifying business activity. Precedent Treatment: High Court decisions have held that interest earned from deposits placed with banks does not constitute income from the business of providing credit facilities to members but is income from other sources; such precedents were relied upon by the Assessing Officer and by the Tribunal in the present matter. Interpretation and reasoning: The Court examined the factual character of the activity of depositing surplus funds in banks and concluded that investing surplus funds is a secondary or incidental activity distinct from the principal business of advancing credit to members. Interest arising from deposits with banks does not directly flow from the provision of credit to members; it is incidental income arising from investment of surplus. The Tribunal therefore accepted the view that such interest cannot be treated as being derived from the business of providing credit facilities to members for the purpose of section 80P(2)(a)(i). Ratio vs. Obiter: The holding that bank-deposit interest is not eligible for deduction under section 80P(2)(a)(i) when it does not arise from credit given to members is ratio decidendi as applied to the facts before the Court; reliance on High Court precedents was treated as supporting ratio rather than being distinguished. Conclusion: The Court confirmed the legal proposition that interest income from deposits with banks is not, merely by being earned by a cooperative society engaged in lending, income from the business of providing credit facilities to members and hence does not qualify for deduction under section 80P(2)(a)(i). That part of the order disallowing section 80P deduction was therefore sustained in principle. ISSUE-WISE DETAILED ANALYSIS - Deduction of Interest Expense under Section 57 (Cross-Reference to 80P Issue) Legal framework: Section 57 governs deductions in computing income from other sources; where interest income is treated as income from other sources, expenditure incurred wholly and exclusively to earn such income (including interest paid to depositors) may be allowable under section 57. Precedent Treatment: The authorities below did not adjudicate the section 57 claim on a verified factual basis; the Tribunal noted absence of verification rather than overturning any precedent. Interpretation and reasoning: The assessee asserted that bank deposits were funded by members' interest-bearing deposits and that interest paid to members is a business expense incurred to earn the bank interest. The Tribunal found documentary indicia (balance sheet, P&L, particulars of deposits) supportive of that claim but observed that no verification was undertaken by the lower authorities. Given the potential applicability of section 57 to reduce taxable interest income, the Tribunal deemed it appropriate to remit the matter for verification rather than decide on the merits without factual inquiry. Ratio vs. Obiter: The direction to verify the section 57 claim is operative (ratio in terms of the appellate determination) limited to the administrative remand; broader pronouncements on entitlement under section 57 without such verification would be obiter. The Tribunal did not finally adjudicate entitlement to deduction under section 57. Conclusion: The Tribunal set aside the issue to the file of the Assessing Officer for verification of the factual claim that bank deposits were funded by members and that interest paid to members qualifies as an allowable deduction under section 57; the appeal on this ground was allowed for statistical purposes pending AO verification. ISSUE-WISE DETAILED ANALYSIS - Treatment of SBN Deposits under Sections 68/69A Legal framework: Section 68 pertains to unexplained cash credits-where unexplained, amounts credited are chargeable to tax unless the assessee explains source and proves genuineness. Section 69A relates to unexplained money found or ascertained by AO. The legal status of Specified Bank Notes during demonetization and statutory provisions governing acceptance/exchange affect whether such notes may be treated as worthless or as legitimate receipts during the specified window. Precedent Treatment: Tribunal decisions have held that where cash receipts represent declared business income (e.g., admitted sales) and proper books/records are maintained to show source, treating deposited SBNs as unexplained cash credit may result in double taxation and is impermissible; such precedents were cited and considered persuasive by the Tribunal. Interpretation and reasoning: The Tribunal noted that SBNs did not immediately become valueless paper upon the demonetization announcement and that until the statutory cutoff (31 December 2016 under enabling legislation), certain avenues for acceptance/exchange remained available and government/RBI obligations to accept/exchange existed. The Tribunal therefore rejected the blanket proposition that any acceptance of SBNs after 8 November 2016 renders the receipt unexplained. The assessee claimed SBNs were received from members as loan repayments or deposits and maintained records (names, addresses, PANs); lower authorities had not pointed to specific defects in those records nor conducted verification. Given the admitted record and absence of adverse findings, the Tribunal held that SBN deposits could not be treated as unexplained solely because they were SBNs accepted during the demonetization window. Ratio vs. Obiter: The determination that SBN deposits cannot be treated as unexplained cash credits purely by reason of acceptance during demonetization is a central ratio applied to the facts. The Tribunal's direction for the AO to verify the asserted sources is part of the operative order (ratio) rather than mere commentary. Conclusion: The Tribunal set aside the additions under sections 68/69A insofar as they rested solely on the fact of acceptance of SBNs during the demonetization period and directed the Assessing Officer to verify the source and genuineness of the deposits based on records. The issue was allowed for statistical purposes pending verification. INTERRELATION OF ISSUES AND FINAL DISPOSITION Cross-references: The section 80P conclusion is linked to the section 57 remand-the Tribunal held bank-deposit interest is not 80P income (income from providing credit to members) but left open the question whether corresponding interest expense is allowable under section 57, directing factual verification. The SBN issue is separable: acceptance of SBNs during demonetization does not automatically render deposits unexplained; instead the AO must verify the asserted source using maintained records. Final disposition: Both appeals were partly allowed for statistical purposes by (i) upholding that interest from bank deposits is not deductible under section 80P(2)(a)(i) but remitting the section 57 expense claim to the AO for verification, and (ii) setting aside the unexplained cash credit additions relating to SBN deposits and directing the AO to verify source and records. The operative relief is therefore remandary and limited to verification rather than outright substantive allowance of the contested amounts.