Recently, the Bangalore bench of Income Tax Appellate Tribunal (ITAT) ordered the reevaluation of a Co-Operative Society’s income tax deduction eligibility under section 80P of the Income Tax Act 1961 (ITA), observing that the assessee society’s income from interest was not verified completely.
The assessee society, Vividhoddesha Prathamika Grameena Krashi Sahakara Sangha Niyamita, registered on April 27, 1979, under the Karnataka Co-operative Societies Act, 1959, had declared a Nil income in its return and claimed a deduction of Rs. 27,28,085 under Section 80P of ITA for assessment year (AY) 2018-19.
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The case was selected for scrutiny, and during the assessment, it was observed by the Assessing Officer (AO) that the assessee had earned interest income amounting to Rs. 4,79,643 from various sources, including Rs. 4,21,606 from the Karnataka District Central Co-operative Bank Ltd. (KDCC), Rs. 25,045 from Axis Bank, and Rs. 32,992 from Totgars Co-op. Sales Society. The assessee claimed this interest income as eligible for deduction under Section 80P(2)(a)(i) of the tax legislature.
The AO scrutinized the case and determined that the interest income earned by the assessee did not qualify as a business activity related to the cooperative society’s operations with its members. As a result, the AO concluded that the deduction under Section 80P(2)(a)(i) of ITA could not be allowed.
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The AO further noted that the interest received from KDCC and Axis Bank could not be considered as income earned from investments made with another cooperative society, which is a requirement under Section 80P(2)(d). Hence, the AO categorized the sum of Rs. 4,46,650 as income from other sources and completed the assessment accordingly.
Dissatisfied with the AO’s order, the assessee filed an appeal with the First Appellate Authority (FAA).
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The FAA, after considering the detailed submissions and arguments presented by the assessee, upheld the AO’s decision. The FAA relied on various judgments, including the landmark ruling of the Karnataka High Court in the case of Totgars’ Co-operative Sales Society Ltd. (2017) 395 ITR 611 (Karnataka), which established that interest income earned by a cooperative society from investments in banks does not qualify for deduction under Section 80P(2)(a)(i) of ITA as it cannot be considered as income attributable to the society’s primary business of providing credit facilities to its members.
Aggrieved by the FAA’s decision, the assessee approached the ITAT.
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Before the tribunal, the Authorized Representative (AR) of the assessee maintained the submissions made before the lower authorities, arguing that the interest income earned from investments of surplus funds should be treated as business income eligible for deduction under Section 80P(2)(a)(i) of the tax statute. The AR also contended that if the deduction under Section 80P(2)(a)(i) was not allowed, the interest income received from cooperative banks should be eligible for deduction under Section 80P(2)(d), as cooperative banks are essentially cooperative societies registered under the Karnataka Co-operative Societies Act, 1959.
The AR further submitted that the investments were made in compliance with the liquidity ratio requirements as per the Karnataka Co-operative Societies Act. Alternatively, it was argued that if the interest income was to be taxed under the head “Income from Other Sources,” the cost of funds should be allowed as a deduction under Section 57(iii) of the tax statute.
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The Departmental Representative (DR) defended the orders of the lower authorities, and cited the judgment of the Karnataka High Court in the case of Totgars’ Co-operative Sales Society Ltd., which had conclusively held that interest income from bank deposits does not qualify as business income for deduction under Section 80P(2)(a)(i).
The DR also referred to the recent Supreme Court ruling in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. Assessing Officer (2023) 154 taxmann.com 305, where it was held that interest income received from cooperative banks, which are governed by the Banking Regulation Act, 1949, is not eligible for deduction under Section 80P(2)(d) of the income tax legislature.
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The two member bench of Mr Laxmi Prasad Sahu and Mr Keshav Dubey, after considering the rival submissions and examining the facts of the case, acknowledged that the primary issue revolved around whether the interest income earned by the assessee from its investments in cooperative banks and other banks could be claimed as a deduction under Section 80P(2)(a)(i) and/or Section 80P(2)(d) of ITA.
The Tribunal rejected the assessee’s argument that the interest income should be treated as business income since the investments were made to comply with statutory requirements, holding that compliance with statutory requirements does not alter the character of the interest income, which remains “income from other sources”.
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Regarding the deduction under Section 80P(2)(d) of the tax legislature, the tribunal pointed out that for the deduction to be applicable, the interest income must be received from another cooperative society, not a cooperative bank. Since cooperative banks are governed by the Banking Regulation Act, 1949, and function as banks rather than as cooperative societies, the interest income from such banks does not qualify for deduction under Section 80P(2)(d) of ITA.
However, the tribunal remitted the issue back to the AO for verification of whether the interest payer (the cooperative bank) was indeed carrying out banking business activities under a license from the Reserve Bank of India (RBI). If confirmed, the deduction under Section 80P(2)(d) would not be allowed.
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The ITAT also addressed the assessee’s contention regarding the cost of funds. It held that while calculating the taxable income, the net interest income should be considered after reducing the expenditure incurred towards earning such income. The ITAT directed the AO to allow the assessee to claim the cost of funds as an expenditure under Section 57(iii) and to recalculate the income accordingly.
The importance of adhering to the literal interpretation of statutory provisions, as given by the Supreme Court in New Noble Educational Society v. Chief CIT(2022) 143 taxmann.com 276 was also highlighted by the bench.
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In light of the observations made, the Tribunal remitted the case back to the AO to reassess the eligibility of the interest income for deductions under Sections 80P(2)(a)(i) and 80P(2)(d) based on the findings and guidelines provided in the judgment. The appeal of the assessee was allowed for statistical purposes, providing the AO with clear instructions on how to proceed with the reassessment.
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