Interest from nationalized banks not eligible for Section 80P(2)(a)(i) deduction 

Balwa Group Coop Vs ITO (ITAT Ahmedabad)

Income Tax Appellate Tribunal (ITAT) Ahmedabad heard an appeal filed by Balwa Group Cooperative Society against an order by the National Faceless Appeal Centre (NFAC), Delhi, concerning assessment year 2018-19. The society, a credit cooperative, had declared nil income in its return, which was later selected for scrutiny. A key point of contention was the society’s claim for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, for interest income received from various banks, including nationalized banks. The Assessing Officer disallowed the deduction, adding the interest income back to the society’s income.

The society argued that the interest income, even from nationalized banks, was eligible for deduction under Section 80P(2)(a)(i) as the funds were ultimately used for the society’s objectives. They also contended that if the interest income was treated as taxable under Section 56 (Income from Other Sources), they should be allowed a deduction for proportionate expenditure incurred to earn that income, as per Section 57. The society provided a detailed breakdown of these expenses, including interest paid to members, staff salaries, and member benefits, arguing that these were necessary for managing funds and overall operations. They cited several precedents, including Chansama Taluka ni Prath Sala, Patan Vs. DCIT, Gandhinagar, M/s. The Bharathi Co-operative Credit Society Vs. The Income Tax Officer, Balasinor Vikas Co-op Credit Society Ltd. Vs. ITO, and M/s. Bharath Credit Co-operative Society Ltd. Vs. ITO, Bengaluru, to support their claims.

The Departmental Representative (DR) argued that the interest income from nationalized banks stemmed from surplus funds, not the society’s core business activity, and therefore, the expenses claimed were not wholly and exclusively incurred for earning this particular income, as required by Section 57(iii). The DR also pointed out that including interest paid to members in the proportionate expenditure calculation would amount to double deduction.

The ITAT upheld the disallowance of the deduction under Section 80P, confirming that interest from nationalized banks is not eligible for this deduction. However, regarding the proportionate expenditure claim, the ITAT observed discrepancies in the calculations presented by both the society and the DR. The tribunal noted that the society had included the entire expenditure debited to its profit and loss account in its calculation. Given these discrepancies and the need for proper verification, the ITAT set aside this specific issue back to the Assessing Officer. The AO was directed to re-examine the society’s expenditure claims, ensuring that only eligible expenses directly related to earning the interest income from nationalized banks are considered, and after providing the society with a fair hearing. The appeal was partly allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is an appeal filed against the order dated 02-07­2024 passed by National Faceless Appeal Centre (NFAC), Delhi for assessment year 2018-19.

2. The grounds of appeal are as under:-

“Your appellant being aggrieved by the order of the Hon’ble Commissioner of Income tax (Appeals), presents this appeal against the same on the following grounds:

1 The Hon’ble CIT(A) has erred in confirming the addition of Rs 18,86,277/-on account of Interest Income received from nationalize banks, it is submitted that Interest Income received from deposits with the bank which is turn to be used for the objects of the society is clearly eligible for deduction u/s 80P(2)(a)(i) of the income Tax Act. 1961. On the facts and circumstances, the addition made towards Interest Income received of Rs. 18,86,277/- is completely illegal and unlawful and the same should be deleted.

2 Without prejudice to the above ground the Hon’ble CIT(A) has erred in considering the Interest Income received from nationalize banks of Rs. 18,86,277/- as taxable u/s 56 of the Act, rejecting the Pro-rata expenditure as claimed by the Appellant u/s 57 of the Act. It is submitted that the pro rata expenditure has been correctly claimed by the Appellant. It is therefore submitted that the total Pro-rata expenditure as claimed must be allowed as deduction u/s 57 of the Act and only the net Interest Income should be taxed. The same be held accordingly

3 Your appellant craves leave to add alter and/or to amend all or any of the grounds before the final hearing.”

3. The assessee society is a credit co-operative society and filed return of income for assessment year 2018-19 on 09-10-2018 admitting income at nil. The case was selected for complete scrutiny on the following issues:-

i. Expenditure of personal nature

ii. Investment/advances/loans

iii. Deduction from total income under chapter 6A

The return was processed u/s. 143(1) of the Act, 1961 on 09-08-2019. The assessee has claimed large deduction under chapter 6A of the Income Tax Act, 1961 and the Assessing Officer observed that despite having low income comparison to the high investment and expenditure of personal nature, the assessee has claimed deduction u/s. 80P(2)(a)(i) of the Act. As per the information available, the assessee society on interest income from State Bank of India, Dena Bank and other co-operative banks amounting to Rs. 26,31,656/-, the bifurcation is as under:-

After taking into account, the assessee’s contention, the Assessing Officer disallowed the said deduction and made addition of Rs. 26,31,656/-.

4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The ld. CIT(A) partly allowed the appeal of the assessee.

5. The ld. A.R. submitted that the CIT(A) was not right in confirming the addition of Rs. 18,86,277/- on account of interest income received from nationalized banks. The ld. A.R. submitted that interest income received from deposits with the bank which is turned to be used for the objects of the society is clearly legible for deduction u/s. 80P(2)(a)(i) of the Income Tax Act, 1961. Thus, the addition made towards interest income received of Rs. 18,86,277/- is not justified. The ld. A.R. further made without prejudice ground that the CIT(A) in considering the interest income received from nationalized banks of Rs. 18,86,277/- as taxable u/s. 56 of the Act, rejecting the pro-rata expenditure as claimed by the assessee u/s. 57 of the Act. The ld. A.R. submitted that the pro-rata expenditure has been correctly claimed by the assessee. Thus, the ld. A.R. submitted that the total pro rata expenditure as claimed may be allowed as deduction u/s. 57 of the Act and only the net expenditure income should be taxed. The A.R. has given the working on proportionate expenditure as follows:-

The ld. A.R. submitted that in any event once surplus fund is there, it is not automatically that interest income is received, every year executive committee and members have to decide where to keep deposit, how to keep the deposit, how to earn interest etc and for all these activities various nature of administrative expenses are invariably incurred. The ld. A.R. relied upon the following decisions:-

(i) Chansama Taluka ni Prath Sala, Patan Vs. DCIT, Gandhinagar (ITA No 563/Ahd/2022) (ITAT Ahmedabad)

(ii) M/s. The Bharathi Co-operative Credit Society Vs. The Income Tax Officer (ITA No. 793/Bang/2022) (ITAT Bangalore)

(iii)  Balasinor Vikas Co-op Credit Society Ltd. Vs. ITO (ITA No. 280/Ahd/2017) (ITAT Ahmedabad)

(iv) M/s. Bharath Credit Co-operative Society Ltd. Vs. ITO, Bengaluru (ITA No. 674/Bang/2023) (ITAT Bangalore)

6. The ld. D.R. submitted that the revised working of the proportionate interest expenditure which is prayed by the assessee to be allowed u/s. 57 as under:

The ld. D.R. submitted that while working of the proportionate allowable expenditure, the assessee has taken into consideration the entire expenditure debited to profit and loss account of Rs. 1,22,78,772/-. The ld. D.R. further submitted that the impugned interest income of Rs. 18,86,277/ received from the nationalized banks is out of surplus funds/income earned by the assessee from its regular activity. In other words this interest cannot be said to be earned from regular activity of the assessee. By virtue of provisions of sections 57(iii) of the Act the amount expended wholly and exclusively for purpose of earning the income can be allowed as deduction. In the instant case the expenditure debited to the P&L account mainly include interest expenditure of Rs. 93,39,340/ (paid to the members) which is directly relatable to the interest credited to the P&L account of Rs. 1,01,87,962/, being interest received from the members on loans advanced to them. Therefore, it is clear that the interest debited to the P&L account is directly related to the activity of the society. Hence question of allowing this interest expenditure against income from other sources does not arise. On the contrary if the same is allowed, it will amount to double deduction. Accordingly, this interest expenditure of Rs 93,39,340/- cannot be considered for working out proportionate allowable expenditure u/s 57(iii) as claimed by the assessee. Likewise on perusal of other expenses debited to P&L account, it is seen that none of these expenses are directly relatable to earning of interest income from nationalized banks. As submitted earlier this interest income has been earned by the assessee by parking surplus/idle funds in banks which do not involve any cost, therefore, even these expenses cannot be considered to have expended wholly and exclusively for earning of interest income from nationalized banks which is taxed under the head Income From Other sources. Thus, ld. D.R. submitted that assessee’s claim of proportionate expenditure u/s. 57(iii) deserves no consideration.

7. We have heard both the parties and perused all the relevant materials on record. The interest received from nationalized banks are not an allowable u/s. 80P of the Income Tax Act. 1961. Thus, ground no. 1 of the assessee is dismissed. But at the same time, without prejudice ground taken by the assessee has to be looked into. The assessee has incurred certain expenditure on the said interest and whether the said proportionate expenditure should be allowable or not needs to be verified. The ld. D.R. submitted that the assessee while giving revised working of proportionate interest expenditure allowable u/s. 57 has taken into consideration the entire expenditure debited to profit and loss account of Rs. 1,22,78,772/-. Thus, as per the submissions of the ld. A.R. as well as ld. D.R., this issue is set aside to the file of Assessing Officer for proper verification and adjudication of the said working. The assessee be given opportunity of hearing by following principles of natural justice. Ground No. 2 is partly allowed for statistical purposes.

8. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 01-01-2025