2026 (4) TMI 767

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....7 r.w.s. 143(3) of the Act vide order dated 14-12-2018 wherein the deduction claimed under section 80P of the Act was disallowed and income was assessed at Rs. 11,64,663/- only. Against the said assessment, the assessee preferred an appeal before the learned CIT(A). 3.1 Subsequently, the order under section 263 of the Act was passed proposing to disallow/assess interest expenses/provision of Rs. 7,04,188/- which form the total interest expenses of Rs. 35,11,011/-. In order under section 263 of the Act, it was also directed to levy interest under section 234A for late filing of return. 3.2 During the assessment proceeding in pursuance to order under section 263 of the Act, the assessee submitted that its final accounts were prepared in accordance with the provisions of Karnataka Cooperative Society Act, 1959 and Rules made thereunder. The cooperative Act and rules require assessee to make adequate provision against the interest payable on deposit. 3.3 The assessee alternatively submitted that if the provision for interest payable be disallowed, the deduction under section 80P(2)(a)(i) of the Act shall be provided on the enhanced profit. The assessee in support of its claim ....

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....on 30.03.2021 wherein the Assessing Officer was directed to consider the issue of interest expense on deposits including the creation of interest payable provision amounting to Rs. 7,04,188/-. It was also directed that the AO was to be consider late filing of return of income and the Appellant's liability to pay interest u/s 234A of the Act. c) The aforesaid has led to the impugned order to be passed by the AO whereby, after considering the response of the Appellant, an addition of Rs. 7,04,188/- was made due to the fact that a provision for any expense is only allowable in the year in which the sum is actually paid by the assessee as per section 43B of the Act. d) In the Form-35 as well as in the submissions of the appellant, it is stated in ground no. 1 that the AO erred in disallowing the deduction u/s 80P(2)(a)(i) of the Act as any disallowance of such a provision will only go to enhance the profits of the appellant and deduction u/s 80P would be available on such enhanced profits. The appellant has primarily relied on the decision of the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank ltd & Ors. Vs. Commissioner of Income Tax, Calicut ....

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....ancial institution. Therefore, the provisions of section 43B(e) of the Act are not attracted to the facts of the present case. 6.1 The learned AR further submitted that section 43B of the Act is a restrictive provision which governs only certain specifically enumerated liabilities and cannot be extended to all outstanding expenses. The section applies only to the items expressly mentioned in clauses (a) to (f) such as taxes, employer's contributions to funds, interest payable to public financial institutions, State financial corporations, scheduled banks or co-operative banks, etc. Since the interest in the present case is payable to the members of the co-operative society who are neither scheduled banks nor co-operative banks within the meaning of the Banking Regulation Act. Hence, the statutory condition for invoking section 43B(e) of the Act is absent. 6.2 It was further contended that the AO has proceeded on an incorrect assumption that since the appellant is engaged in credit activities, the interest payable to its members is akin to interest payable on loans from banks. According to the learned AR, such an approach ignores the clear legal distinction between a co-operat....

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....made for the interest payable amounting to Rs. 7,04,188/- made by the AO by invoking the provisions of section 43B of the Act. 8.1 The undisputed facts of the case are that the assessee is a primary co-operative society engaged in providing credit facilities to its members. The assessee filed its return of income declaring NIL income after claiming deduction under section 80P of the Act. The assessment was originally completed under section 147 r.w.s. 143(3) of the Act wherein the deduction under section 80P was disallowed. Subsequently, in pursuance to the order passed under section 263 of the Act, the Assessing Officer examined the issue of interest expenses and disallowed a sum of Rs. 7,04,188/- representing provision for interest payable on deposits by invoking section 43B of the Act on the ground that the same was not actually paid during the year. The learned CIT(A) has confirmed the said disallowance. 8.2 The case of the assessee before us is that the interest liability relates to deposits received from its own members and not from any scheduled bank, co-operative bank or public financial institution. Therefore, according to the assessee, the provisions of section 43B(....

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.... 43B of the Act are not applicable to the interest payable by the assessee to its members. Once the said provision is held to be inapplicable, the allowability of the expenditure has to be examined under the normal provisions of the Act. Since the liability for interest has accrued during the year and the same has been accounted for in the books of account maintained in accordance with the governing co-operative laws, the said expenditure is allowable on accrual basis under section 37(1) of the Act. Therefore, the disallowance of Rs. 7,04,188/- made by the Assessing Officer and confirmed by the learned CIT(A) is not sustainable. 8.7 Even otherwise, we find merit in the alternative contention raised by the assessee. The assessee had contended that in case the disallowance of interest provision is sustained, the same would result in enhancement of the business profits which are eligible for deduction under section 80P(2)(a)(i) of the Act. In this regard, it is relevant to note that the eligibility of the assessee for deduction under section 80P of the Act, which was earlier disallowed in the original assessment order, has already been decided in favour of the assessee by this Trib....

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....ing the total income of the assessee at Z 1,164,663/-. It is apparent that the return of income for which it was reopened by issuing notice u/s. 148 of the Act of depositing the cash in the bank account of the assessee of 4,291,632/-, no addition was made on that account. 12. The id. CIT(A) has agreed that assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act as per the decision of the Hon'ble Supreme Court in case of Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021 ] 123 taxmann.com 161 (SC)/[2021 ] 279 Taxman 75 (SC)/[2021 ] 431 ITR 1 (SC)[ 12-01-2021 ], this has not been challenged by the learned AO. Therefore, now it is confirmed that the assessee is entitled to deduction under that section. 13. The Id. CIT(A) has categorically held that as the interest income is to be considered as income from other sources, relying upon the decision of the Hon'ble Karnataka High Court in case of Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/[2017] 395 ITR 611 - (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017], the income is required to be ....