The Bangalore Bench of Income Tax Appellate Tribual (ITAT) held that deduction on income for providing credit facilities by co-operative society to be allowed on demonstration of mandatory requirement for following the mandatory maintaining of funds as per Karnataka Souharda Sahakari Act, 1997, thus remitted the case to the files of Assessing Officer (AO).
The assessee The West Coast Paper Mill is a Souharda Co-operative Society registered under Karnataka Souharda Sahakari Act, 1997 and providing credit facilities to its members and on such income deduction is claimed under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
The assessee filed its return of income for AY (Assessment Year)2017-18 declaring gross total income of Rs.68,98,443 and after claiming deduction under Section 80P(2)(a)(i) of the same amount, NIL income was declared. The case was selected for scrutiny and statutory notices were issued to the assessee. From the documents furnished, the AO observed that the assessee is a Souhard Co-operative registered under the Karnataka Souhard Sahakari Act, 1997 and not under the Karnataka Co-op. Societies Act, 1959.
The assessee had maintained books of accounts and obtained audit report under Section 44AB as per the provisions of Karnataka Souhard Sahakari Act, 1997.
The AO noted that assessee has claimed deduction under Section 80P(2)(a)(i) of the Income Tax Act and assessee submitted that society is providing credit facilities to its members which is claimed as deduction. It was further noted that deduction under Section 80P(2)(a)(i) of the Income Tax Act is provided to a co-operative society and in the absence of registration under Karnataka Co-op. Societies Act, 1959,
The AO disallowed the claim of deduction amounting to Rs.63,48,443. Further the AO noted that the assessee has received interest income of Rs.9,93,255 on account of interest on investment with KCC Bank in FD/RFD and disallowed the same under Section 80P(2)(a)(i) of the Income Tax Act.
Aggrieved by the order the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], which confirmed the disallowance of Rs.9,93,255 made by the AO. Further aggrieved the assessee filed an appeal before the Tribunal.
The Authorised Representative of the assessee (AR) submitted that submitted that the deposits were made under the provisions of Karnataka Souharda Sahakari Act, 1997 which are required to be maintained mandatorily with the banks. Therefore, interests earned on such deposits are attributable to regular business activity of the assessee.
AR stated that assessee is required to maintain certain funds as per the statutory requirements under the Karnataka Souharda Sahakari Act, 1997, accordingly the said fund cannot be lent to the members. During the year, the assessee has received interest of Rs.9,93,255 from investments in FD/RFD from DCCB
Further he contended that the assessee is eligible to claim deduction under Section 80P(2)(a)(i) of the Income Tax Act on interest received. Alternatively, he submitted that if deduction under Section 80P(2)(a)(i) of the Income Tax Act is not allowed, then necessary cost of fund for earning income under Section 57 of the Income Tax Act should be granted to the assessee.
The Departmental Representative (DR) relied on the orders of lower authorities.
The bench comprising of George George K, Vice President and Laxmi Prasad Sahu, Accountant Member observed that if it is found in order, then the amount of deposits which are required to be maintained as per statutory requirement and interest earned to such extent will qualify for deduction under Section 80P(2)(a)(i) of the Income Tax Act. And Interest earned on deposits exceeding the statutory requirement will not be considered for allowing deduction under Section 80P(2)(a)(i) of the Income Tax Act.
Since the assessee is registered under the Karnataka Souharda Sahakari Act, 1997 therefore the issue is remitted back to the file of the AO and assessee is directed to demonstrate the mandatory requirement for following the mandatory maintaining of funds as per Karnataka Souharda Sahakari Act, 1997, the tribunal observed.
Hence the appeal of the assessee was partly allowed for statistical purpose.
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