The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that interest / dividend income out of investments with co-operative society is eligible for deduction under Section 80P(2) of Income Tax Act, 1961.
The assessee M/s. The Karnataka State Co-operative Agriculture and Rural Development Bank Ltd. earned interest from investments in cooperative banks and co-operative societies. These investments are of two kinds are the investments in the nature of statutory reserves or funds which the assessee is mandated by law (either under the Act or under its bye-laws registered under the Act) to invest. These include the reserve fund, the co-operative education fund, the dividend equalization fund, the building fund and the common good fund and the assessee has other investments with cooperative banks and cooperative society. The authorities did not consider the interest earned by the assessee under section 80P (2) (d) of the Income Tax Act.
Mr. D.K. Mishra representing the revenue submitting that principle of mutuality is not satisfied as the assessee extends credit facilities to nominal / associate members who do not have any right in the assessee society. In respect of Section 80P (2)(d) deduction, further submitted that interest / dividend income earned by assessee by making investments which has been simply accrued falls out the ambit of 80P and therefore the AO has rightly treated the entire interest as income from other sources.
Accordingly, the bench held that the interest earned from the credit activities of the assessee to its members including nominal / associate is allowable under Section 80P(2)(a)(i) of the Income Tax Act. Also held that the interest earned by the assessee from loan to its employees are to be treated as Income from other sources, not eligible for deduction under the provisions of Section 80P of Income Tax Act.
Further directed the A.O. to verify whether interest / dividend was received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, as observed by Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. , the same was entitled to deduction under Section 80P(2)(d) of the Income Tax Act.
The two member bench of the tribunal comprising Chandra Poojari (Accountant member) and Beena Pillai (Judicial member) directed the AO to carry out necessary verification based on the evidences filed by the assessee and to compute the deduction under Section 80P (2)(a)(i)/(d) in accordance with law, and proper opportunity of being heard must be granted to the assessee. Accordingly, appeal was allowed.
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