The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that interest income from investment in Karnataka District Central Co-operative Bank ( KDCC Bank ) was not eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961 and remitted the case to the AO for fresh consideration.
The assessee Laxminarayana Suvarna a Credit Co-operative Society Ltd. filed a return of income declaring NIL income after claiming deduction under Section 80P(2)(a)(i) of the Income Tax Act of Rs.29,03,833 on interest income received on its investments made with Karnataka District Central Co-operative Bank ( KDCC Bank) . The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee filed a reply.
Regarding the alternative claim of deduction under Section 80P (2)(d) of the Income Tax Act, the AO noted that interest income of Rs.29,83,833 was earned from investments with Karnataka District Central Co-operative Bank ( KDCCB ), even though KDCCB had skeleton of a cooperative society, its activities are at par with that of a commercial bank. Hence deduction under Section 80P(2)(d) was also denied.
The CIT (A) also examined the claim of deduction under Section 80P(2)(d) on the interest income of Rs.29.03,833 earned from investment with KDCC Bank, a co-operative Bank. Relying on the judgment of Karnataka High Court judgment in the case of Totgars Cooperative Sale Society Ltd. and applying the ratio decendi of Mavilayi Service Co-operative Bank Ltd the CIT (A) observed that a co-operative bank which is working under license from RBI falls within the mischief of Section 80P(4) of the Income Tax Act.
Mr. Mahesh R. Uppin, representing the assessee submitted that the assessee was a co-operative society and carrying on business of providing credit facilities to its members. The assessee received interest income out of its investments with KDCC Bank which is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 ( KCS Act ) and accordingly deduction under Section 80P (2)(a)(i) of the Income Tax Act should be allowed. Alternatively, he submitted that interest earned by the assessee was attributable to credit business of assessee society and it was liable to be deducted from the total income as per Section 80P (2)(a)(i) of the Income Tax Act.
Mr. Ganesh R. Ghale, relied on the order of the CIT (A) and he submitted that the interest income received by the assessee is not to be considered as a business income since the Jurisdictional High Court of Karnataka has settled this issue in the case of Totgars’ Cooperative Sales Society Ltd.
The bench noted that here the issue was whether the assessee was eligible to claim deduction under Section 80P (2)(a)(i) or 80P(2)(d) on the interest income earned on its investments amount made with District co-operative banks. Section 80P (2)(d) describes that if the assessee has derived interest/dividend from its investments with any other co-operative society, then the assessee is eligible for claim of deduction on such interest/dividend derived.
The two member bench of the tribunal comprising Narendra Kumar Choudhari ( Judicial member) and Laxmi Prasad Sahu ( Accountant member ) observed that the assessee has received interest from KDCC Bank was a scheduled bank which is governed by the Banking Regulation Act of 1949 ,accordingly further hold that the assessee was not eligible for deduction under Section 80P(2)(d) on such interest income also.
Therefore relying on the judgment of Jurisdictional High Court in case of Totgars’ Cooperative Sales Society Ltd. vs ITO the assessee was eligible for claim of its cost of funds on the interest income received from bank. Reliance is also placed on the judgment of Coordinate Bench of the Tribunal in case of the West Coast Paper Mill Employees Souharda Credit Co-op. Ltd.
Accordingly, the assessee was directed to provide the details of cost of funds before the assessing officer. Therefore to allow the cost of funds, ITAT remitted this issue to the assessing officer for determining the cost of funds for earning interest income. Accordingly, the appeals are partly allowed for statistical purposes.
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