Deduction u/s 57 was allowable on cost of funds and proportionate administrative expenses for earning Interest Income

Bharath Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)

Deduction u/s 57 was allowable on cost of funds and proportionate administrative expenses for earning Interest Income

Conclusion: Deduction under Section 57 was allowable on the cost of funds and proportionate administrative expenses for earning interest income to the extent of Rs.9,05,550/-.

Held: Assessee-co-operative society filed return of income declaring total income of Rs.2,50,200/-, after claiming deduction under section 80P amounting to Rs.33,00,407/-. AO, in the assessment completed under section 143(3), disallowed the claim under section 80P to the extent of Rs.23,94,857/-. Against the said Assessment Order, assessee filed appeal and the same was pending before the National Faceless Appeal Centre [CIT(A)]. In the meanwhile, AO passed an Order under section 154 r.w.s. 143(3). In the said order under section 154, AO made an addition of interest income of Rs.9,05,550/- and arrived at the income of Rs.44,56,157/-. AO in the assessment completed under section 143(3), had disallowed a sum of Rs.23,94,857/- under section 80P. Against the said disallowance under section 80P, assessee had filed an appeal before CIT(A) and was pending adjudication. Therefore, the issue of disallowance under section 80P for Rs.23,94,857/- did not arise in the present appeal. The present appeal arose out of the order passed under section 154. In the order passed under section 154, the AO was seeking to disallow the claim of deduction under section 80P to the extent of Rs.9,05,550/-. It was held that Rs.9,05,550/- was interest income received from Corporation Bank. Interest income received from a Bank could not be allowed as a deduction under sections 80P(2)(a)(i) or 80P(2)(d) in the light of the judgment of the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars C0-operative Society Ltd.,. However, the limited prayer of the assessee in this appeal was to provide deduction of cost of funds and proportionate administrative expenses as a deduction under section 57 for interest income assessed as “Income from Other Sources”. This prayer of the assessee had been accepted by the jurisdictional High Court in the case of Totgars Co-operative Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka). AO was directed to allow cost of funds and proportionate administrative expenses for earning interest income to the extent of Rs.9,05,550/- as deduction under section 57.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 23.08.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.

2. Assessee has raised revised grounds of appeal vide application dated 10.07.2023 and also additional grounds. The revised grounds raised read as follows:

1. Grounds on section 154 of the Act:

a. The notice issued under section 154 of the Act, is bad in law.

b. The learned Assessing Officer is not justified in initiating a rectification proceeding u/s 154 of the Act, when there was no mistake apparent on record on the facts and circumstances of the case.

c. The issue of whether the interest earned from banks out of the funds of the society was business income or income from other sources, was a debatable issue and no rectification ought to have been initiated, on the facts and circumstances of the case.

d. The Learned Assessing Officer has not assumed proper jurisdiction and the order passed is bad in law on the facts and circumstances of the case.

2. Without prejudice to the contention that the interest income is attributable to the activity of the appellant and the interest income was deductible under section 80P(2)(a)(i) of the Act, the learned assessing officer is not justified in levying tax on the gross interest income without providing deduction towards corresponding cost of funds and proportionate administrative expenditure under section 57 of the Act on the facts and circumstances of the case.

3. The appellant denies the liability to pay interest under section 234A, 234B and 234C of the Act in view of the fact that there is no liability to additional tax as determined by the learned assessing officer. Without prejudice the rate, period and on what quantum the interest has been levied are not in accordance with law and further are not discernible from the order and hence deserves to be cancelled on the facts and circumstances of the case.

4. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above.

5. In view of the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed and appropriate relief be granted in the interest of justice and equity.

3. The additional grounds raised read as follows:

1. The order of the learned Assessing Officer in so far as it is against the appellant is opposed to law, equity and weight of evidence, probabilities, facts and circumstances of the case.

2. The appellant denies itself liable to be assessed to a total income of Rs.26,45,057/- as against the income returned at Rs.2,50,200/- for the assessment year 2017-18 on the facts and circumstances of the case.

3. The learned assessing officer is not justified in disallowing the claim of deduction under section 80P of the Act on the facts and circumstances of the case.

4. The learned assessing officer has erred in making disallowance of Rs.23,94,857/- by stating that the interest income from business in not eligible for deduction under section 80P of the Act without appreciating that the appellant has received only Rs.9,05,550/- towards interest from banks on the facts and circumstances of the case.

5. The learned assessing officer has failed to appreciate that the funds on which the purported interest income is received are not idle funds, rather it is the working capital of the appellant and the interest on such fund is eligible for deduction under section 80P(2)(a)(i) of the Act on the facts and circumstances of the case.

6. Without prejudice, the learned assessing officer ought to have allowed cost of funds under section 57 of the Act against the interest income on the facts and circumstances of the case.

7. Without further prejudice and not conceding that the inference of Rs. 9,05,550/- was to be taxed as other income, the cost of funds and proportionate expenditure was to be allowed against the interest earned of Rs.9,05,550/- on the facts and circumstances of the case.

5. The appellant denies the liability to pay interest under section 234A, 234B and 234C of the Act in view of the fact that there is no liability to additional tax as determined by the learned assessing officer. Without prejudice the rate, period and on what quantum the interest has been levied are not in accordance with law and further are not discernible from the order and hence deserves to be cancelled on the facts and circumstances of the case.

4. Brief facts of the case are as follows:

Assessee is a co-operative society. For the Assessment Year 2017-18, the return of income was filed on 14.01.2018 declaring total income of Rs.2,50,200/-, after claiming deduction under section 80P of the Act, amounting to Rs.33,00,407/-. The assessment was completed under section 143(3) of the Act, vide order dated 27.12.2019. The AO, in the assessment completed under section 143(3) of the Act, disallowed the claim under section 80P of the Act to the extent of Rs.23,94,857/-. Against the said Assessment Order, assessee filed appeal and the same is pending before the National Faceless Appeal Centre [CIT(A)].

5. In the meanwhile, the AO passed an Order dated 29.01.2020, under section 154 r.w.s. 143(3) of the Act. In the said Order under section 154 of the Act, the AO made an addition of interest income of Rs.9,05,550/- and arrived at the income of Rs.44,56,157/-. The computation of income by the AO in the rectification order passed under section 154 of the Act reads as follows:

6. Aggrieved by the Order passed by the AO under section 154 of the Act, assessee filed appeal before the First Appellate Authority. The CIT(A) confirmed the addition made by the AO by referring to the judgment of the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars C0-operative Society Ltd., reported in 395 ITR 611.

7. 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 computation of income for the Assessment Year 2017-18, copy of the acknowledgement of the return filed for the Assessment Year 2017-18, etc. The learned AR has also filed brief written submissions which reads as follows:

a. The appellant is a credit co-operative society and has received interest income of Rs.9,05,550/- from corporation bank. (Pg.23 of paper book).

b. The appellant has considered the interest income of Rs.9,05,550/-(i.e. Rs. 4,00,329/- (page 4) in P & L account and Rs. 5,05,221/- (Pg. 2 of paper book) in the computation) and arrived at a business profit of Rs,33,00,407/- and claimed the entire sum of Rs.33,00,407/- as deduction under section 80P(2)(a)(i) and arrived at a taxable income of Rs.2,50,200/- which represents income from house property and is not a subject matter of dispute.

c. The case of the appellant was selected for scrutiny wherein it was proposed to disallow the claim of 80P(2)(a)(i) to the extent of interest income, earned from banks (purportedly Rs.9,05,550/-) by placing reliance on the decision of the Hon’ble Karnataka High Court in the case of Totagars Co-operative Sale Society reported in [2017] 395 ITR 611.

d. The learned assessing officer erroneously restricted the 80P deduction to Rs. 9,05,550/- and made a disallowance of Rs. 23,94,860/- (26,45,060-2,50,200/-), and passed the order of assessment under section 143(3) of the Act dt:27.12.2019 (Pg.16 of paper book), which ought to have been vice versa.

e. The appellant has preferred an appeal against the said order, which is pending before the Hon’ble CIT(A), NFAC.

1. The order passed under section 154 r.w.s 143(3) of the Act is erroneous:

a. Thereafter, the order of assessment was suo motto rectified under section 154 of the Act dt:29.01.2020 which is the subject matter of appeal before your Honours.

b. The learned assessing officer made addition of the interest income of Rs.9,05,550/- again and arrived at the income of Rs. 44,56,157/-(Pg.20 of paper book).

c. The 80P deduction which was erroneously adopted has not been adjusted in the rectification order.

d. The learned Assessing officer while considering the interest income under the head ‘income from other sources’ has not allowed corresponding deduction from the business profit and without providing expenditure towards cost of funds and proportionate administrative expenditure, which has been upheld by the CIT(A), NFAC.

e. The appellant tabulates hereunder the computation of income which the assessing officer ought to have passed under section 154 of the Act;

f. Thus, it is humbly prayed before your Honours to;

1. Direct the learned assessing officer to reduce the interest income from the business profit and thereafter provide deduction of cost of funds and proportionate administrative expenses under section 57 of the Act against the interest income of Rs.9,05,550/-.

2. Allow the deduction under section 80P(2)(a)(i) to the extent of Rs.23,94,857/- and the taxable income is to be arrived at Rs.2,50,200 i.e., House Property income of Rs.2,50,200/-.

8. The learned Standing Counsel supported the orders of the AO and the CIT(A).

9. I have heard the rival submissions and perused the material on record. The AO in the assessment completed under section 143(3) of the Act, had disallowed a sum of Rs.23,94,857/- under section 80P of the Act. Against the said disallowance under section 80P of the Act, assessee has filed an appeal before the CIT(A) and is pending adjudication. Therefore, the issue of disallowance under section 80P for Rs.23,94,857/- does not arise in the present appeal. The present appeal arises out of the order passed under section 154 of the Act. In the order passed under section 154 of the Act, the AO is seeking to disallow the claim of deduction under section 80P of the Act to the extent of Rs.9,05,550/-. It is admitted fact that Rs.9,05,550/- is interest income received from Corporation Bank. Interest income received from a Bank cannot be allowed as a deduction under sections 80P(2)(a)(i) or 80P(2)(d) of the Act in the light of the judgment of the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars C0-operative Society Ltd., (supra). However, the limited prayer of the assessee in this appeal is to be provide deduction of cost of funds and proportionate administrative expenses as a deduction under section 57 of the Act for interest income assessed as “Income from Other Sources”. This prayer of the assessee has been accepted by the jurisdictional High Court in the case of Totgars Co-operative Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka). In light of the above judicial judgment of the Hon’ble High Court, the AO is directed to allow cost of funds and proportionate administrative expenses for earning interest income to the extent of Rs.9,05,550/- as deduction under section 57 of the Act. It is ordered accordingly.

10. In the result, appeal filed by the assessee is allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.