Case Law Details
Sri Kanyakaparameshwari Vividoddesha Sahakara Sangha Niyamita Vs ITO (ITAT Bangalore)
Introduction: The case of Sri Kanyakaparameshwari Vividoddesha Sahakara Sangha Niyamita vs. ITO, heard at ITAT Bangalore, revolves around the appeal against the CIT(A)’s order related to the Assessment Year 2011-12. The primary dispute involves the ad-hoc application of a 15% flat rate by the Assessing Officer (AO) on the cost of funds concerning interest income earned by the cooperative society.
Detailed Analysis: Sri Kanyakaparameshwari Vividoddesha Sahakara Sangha Niyamita, a cooperative society, filed its return of income for the Assessment Year 2011-12, declaring ‘Nil’ income after claiming a deduction under section 80P of the Income Tax Act. The AO, during the assessment under section 143(3) r.w.s. 147, partly disallowed the claim of deduction under section 80P, taxing the interest income as ‘Income from Other Sources.’
Upon the assessee’s appeal before the CIT(A), the addition on interest earned on investments was sustained, but the CIT(A) directed the AO to allow the cost of funds. Subsequently, the AO, in the order giving effect to the CIT(A)’s order, applied a flat rate of 15% on an ad-hoc basis to calculate the cost of funds. The CIT(A) upheld this action, confirming the reduction of the cost of funds to the extent of 15% of the interest income.
In the appeal before the Tribunal, the assessee argued that the calculation of cost of funds was based on the procedure followed by nationalized banks, supported by RBI guidelines. The AO’s ad-hoc application of a 15% flat rate lacked a rational basis. The Tribunal, after considering the submissions, found merit in the assessee’s detailed workings for the cost of funds, amounting to 77% of the interest income. It held that the AO’s approach lacked legal basis and directed acceptance of the assessee’s calculation.
Conclusion: The ITAT Bangalore, in its ruling, allowed the appeal filed by Sri Kanyakaparameshwari Vividoddesha Sahakara Sangha Niyamita. It held that the AO’s application of a 15% flat rate on an ad-hoc basis for the cost of funds was invalid. The Tribunal directed the AO to accept the detailed working provided by the assessee, confirming the cost of funds to the extent of Rs. 4,27,472 assessed as ‘Income from Other Sources.’
This case emphasizes the importance of a rational and substantiated approach by the tax authorities when determining the cost of funds for entities engaged in specific business activities, such as cooperative societies providing credit facilities.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 20.08.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2011-12.
2. Grounds raised by the assessee read as follows:
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in holding that the order giving effect to the appellate order is not an appealable order before the CIT[A] without appreciating that the order giving effect to the appellate order of the learned CIT[A] modified the earlier order passed u/s. 143[3] of the Act and therefore, the same was appealable u/s. 246A of the Act under the facts and in the circumstances of the appellant’s case.
3. The learned CIT[A] ought to have appreciated that the cost of funds allowed at 15% of the interest income was erroneous and without any basis or rationale especially when the appellant had given details of the interest paid on deposits to the tune of Rs.3,28,321/- and in the absence of any valid reasons for ejection of the said claim made by the appellant, the same ought to have been allowed under the facts and in the circumstances of the appellant’s case.
4. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s.234-A, 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. Brief facts of the case are as follows:
Assessee is a co-operative society registered under the Karnataka Cooperative Societies Act, 1959. It is engaged in the business of providing credit facilities to its members. For the Assessment Year 2011-12, return of income was filed on 28.09.2012 declaring ‘Nil’ income after claiming deduction under section 80P of the Act of Rs.7,83,109/-. The assessment under section 143(3) r.w.s. 147 of the Act was completed vide order dated 23.03.2015 wherein the AO had partly disallowed the claim of deduction under section 80P of the Act to the extent of Rs.4,27,472/- by bringing to tax the interest income as ‘Income from Other Sources’, rejecting the assessee’s claim as business income.
4. Aggrieved by the Assessment Order, assessee filed appeal before the CIT(A). The CIT(A), vide order dated 19.07.2017, sustained the addition on account of interest earned on investments with Co-operative Banks and other scheduled Banks. However, the CIT(A) directed the AO to allow the cost of funds. Pursuant to the CIT(A)’s order, the AO directed the assessee to furnish the cost of funds incurred for earning the interest on investments. Assessee provided the calculations for the cost of funds. The AO held vide order dated 11.06.2018 (order giving effect to CIT(A)’s order) that cost of funds calculated by the assessee is not acceptable. The AO worked out the cost of funds by applying flat rate of 15% on ad-hoc basis on the interest income earned.
5. Aggrieved by the order of the AO dated 11.06.2018, assessee preferred appeal before the CIT(A). The CIT(A) confirmed the action of the AO in reducing the cost of funds to the extent of 15% of the amount of interest income earned and balance amount of Rs.3,28,321/- was brought to tax.
6. Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed a Paper Book enclosing therein the written submissions filed before the income tax authorities, CIT(A)’s order in the original proceedings, calculations of cost of funds and pro-rata administrative expenses. The learned AR reiterated the submissions made before the CIT(A) that the calculation of cost of funds is based on the procedure adopted by the nationalized banks following the RBI guidelines. It was submitted that the interest income earned is out of the borrowings, to which the assessee incurs interest cost, which is claimed as cost of fund and also pro-rata administrative expenses. It was submitted that the AO had on ad-hoc basis arrived at 15% of the cost of interest income without explaining any rational behind the same and CIT(A) has erred in affirming the AO’s action.
7. The learned Standing Counsel, on the other hand, submitted that on the interest income earned out of providing credit facilities to its members, the assessee is allowed deduction under section 80P(2)(a)(i) of the Act. Therefore, it was submitted that the interest paid on deposit made by members of the assessee cannot be allowed as cost of funds. The learned Standing Counsel submitted that the calculation on ad-hoc basis by the AO and confirmed by the CIT(A) is justified on the facts of the case and the same is not to be interfered with.
8. I have heard the rival submissions and perused the material on record. The solitary issue for my consideration is with respect to deduction to be allowed under section 57 of the Act while computing interest income that is liable to be taxed under the head ‘Income from Other Sources’. Assessee is a co-operative society primarily engaged in providing credit facilities to its members. Naturally, the cost of funds will be primary cost for any entity engaged in such business / activities. It is well accepted that banking institutions which have similar operation to that of the assessee will also operate on “net interest income” which is arrived at by subtracting the interest they have to pay out of the interest income generated. The assessee had furnished detailed working with respect to the cost of funds which is coming to 77% of the interest income. The claim of assessee is backed by detailed workings which had not been refuted by the authorities. The AO / CIT(A) had allowed deduction by restricting the of cost of funds to the extent of 15% on ad-hoc basis of the interest income without any legal basis. The working of the cost of funds as provided by the assessee on facts of the instant case has not been refuted. Therefore, I direct the AO to accept the same as cost of funds for earning the interest income to the extent of Rs.4,27,472/- which was assessed as ‘Income from Other Sources’. It is Ordered accordingly.
9. Before concluding, it is also to be mentioned that CIT(A) has commented that the order giving effect to the CIT(A)’s order (AO’s order dated 11.06.2018) is not an appealable order under section 246A of the Act. This statement of CIT(A) is without appreciating the fact that order of AO dated 11.06.2018 had modified the earlier Assessment Order passed under section 143(3) of the Act. Therefore, the same was appealable under section 246A of the Act.
10. In the result, appeal filed by the assessee is allowed.
Pronounced in the open court on the date mentioned on the caption page.
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