AO Must Allow Interest Deduction for Cooperative Societies If Expenses Are Proven to Be Linked to Activities u/s 80P(2): ITAT [Read Order]

The Surat Bench of the Income Tax Appellate Tribunal (ITAT) held that the Assessing Officer (AO) must allow interest expenditure as a deduction for cooperative societies if the expenses were directly linked to activities covered under Section 80P(2) of the Income Tax Act, 1961.

Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd., (assessee) a cooperative society engaged in marketing agricultural produce and providing financial support to its members. The assessee filed its income tax return for the Assessment Year 2018-19, declaring “nil” income after claiming a deduction of Rs. 1,46,60,327 under Section 80P of the Income Tax Act.

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The Assessing Officer (AO) disallowed a part of the deduction, arguing that interest income from deposits in cooperative banks is taxable as “Income from Other Sources” under Section 56 and does not qualify for deduction under Section 80P(2)(d) of the Income Tax Act.

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The Principal Commissioner of Income Tax (PCIT) invoked revisionary powers under Section 263 of the Act, alleging that the AO had erroneously allowed the deduction of interest expenses amounting to Rs. 2.41 crore without adequate verification.

The PCIT contended that such an adjustment was not permissible under Section 57(iii) of the Income Tax Act 1961, as the interest expense was not incurred "wholly and exclusively" for earning interest income.

Aggrieved by the order of the PCIT, the assessee filed an appeal before ITAT. The counsel for the assessee submitted that the assessee society is a primary Agricultural Co-operative society. The counsel also submitted that the activities of the assessee were covered in the clauses of the section 80P of the Income Tax Act.

On the other hand, the counsel for the Revenue relied on the order of the PCIT. The counsel also submitted that the PCIT’s order was very detailed and well reasoned.

The two-member bench comprising Pawan Singh (Judicial Member) and Bijayananda Pruseth (Accountant Member) observed that the assessee is a primary agriculture credit society.

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The tribunal relied on the Judgement of the Supreme Court in the case of Totgar’s Cooperative Sale Society Ltd where it was held that interest earned on deposits not linked to primary cooperative activities should be classified under "Income from Other Sources."

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The tribunal also observed that if the interest expense could be directly attributed to the cooperative society's eligible activities under Section 80P(2), such expenses should be allowed as a deduction.

Therefore, the tribunal directed the AO to reassess nexus of interest paid with interest income and allow for interest expenditure after verifying its connection with business activities covered under Section 80P(2)(a). Thereby, the appeal of the assessee partly allowed.

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