ITAT: Interest Income Received from Co-Operative Bank is Subject to Income Tax Deduction under section 80P(2)(d) of the Income Tax Act, 1961

ITAT: Interest Income Received from Co-Operative Bank is Subject to Income Tax Deduction under section 80P(2)(d) of the Income Tax Act, 1961

The Income Tax Appellate Tribunal (ITAT), Mumbai, by its division member bench of Sandeep Singh Karhail (Judicial Member) and S. Rifaur Rahman (Accountant Member) has allowed the income tax deduction under Section 80P(2)(d) of the Income Tax Act, 1961 (for short ‘the Act’) on the entire amount of interest income received from the Co-operative Bank.

In the present case, the assessee- Oberoi Spring Co–operative Housing Society Ltd. is a cooperative housing society, a non-profit entity formed with the objective of maintaining and protecting buildings occupied by its members. The assessee filed its return of income, declaring a total income. The return of income filed by the assessee was selected for scrutiny, and statutory notices under sections 143(2) and 142(1), along with the questionnaire, were issued and served on the assessee.

The Assessing Officer (“AO”) vide order dated 30 December, 2018 passed under section 143(3) of the Act disallowed the deduction claimed by the assessee under section 80P(2)(d) of the Act in respect of interest income of Rs. 54,74,228 received from Co-operative Bank and disclosed in the return of income. The AO also disallowed the interest income of Rs. 1,45,16,552 directly credited by the assessee to the Reserves and Surplus in the balance sheet as per the Co-operative Societies Act.

The learned Commissioner of Income Tax (Appeals) (CIT[A]) vide impugned order granted the relief in respect of interest income of Rs. 54,74,228 claimed as deduction under section 80P(2)(d) of the Act by the assessee and disclosed in the return of income.

However, as regards the ground of the assessee pertaining to the addition of interest income which was transferred to the respective repair and/or sinking fund in the balance sheet, the learned CIT(A) had dismissed the appeal filed by the assessee on the basis that neither the said claim was borne from the return of income nor same was claimed as deduction under section 80P(2)(d) of the Act.

Being aggrieved, the assessee filed an appeal before the ITAT.

The only grievance of the assessee, in the present appeal, was against the addition of interest received from Co-operative Bank to the extent the same was directly credited to the Reserves and Surplus in the balance sheet.

The ITAT undisputedly noted that the assessee is a Co-operative Society and had earned interest from Co-operative Bank. The interest income of Rs. 54,74,228, which was credited by the assessee to the profit and loss account, was allowed as a deduction under section 80P(2)(d) of the Act by the learned CIT(A).

As per the assessee, during the year, the assessee received a total interest of Rs. 1,99,90,770 from the Cooperative Banks. Out of the above, the interest of Rs. 54,74,228 was credited to the profit and loss account and was claimed as a deduction under section 80P(2)(d) of the Act while filing the return of income.

However, the bench clarified that as per the requirement of the Maharashtra Co-operative Societies Act, 1960, the interest accumulated on Sinking Fund and Reserve Fund is to be credited to the respective fund account only.

The bench found from the audited financials, the assessee had credited part of the interest income directly to the Sinking Fund Reserve, Repair Fund Reserve, and Corpus Fund Reserve of the balance sheet and thus was not claimed as deduction under section 80P(2)(d) of the Act, despite the fact this portion of the interest was also earned from Co-operative Bank.

In this regard, the ITAT remarked, “the lower authorities despite correctly noting that the said portion of the interest income is not borne from the return of income filed by the assessee and thus not claimed under section 80P(2)(d) of the Act, proceeded to make the addition on the basis that the claim of deduction against such income is possible only if the income is first declared in the return.”

The ITAT pertinently noted that in the present case, the interest which was directly credited to the Reserve and Surplus in the balance sheet by the assessee, as per the statutory requirement, at the first instance was not only treated as income by the assessee. Therefore, the question of claim of deduction against such income does not arise.

The Court stated, “from Schedule-7 forming part of the audited financials of the assessee, it has been duly substantiated that the interest income, which was transferred to the Reserves and Surplus in the balance sheet, is interest earned from Co-operative Bank which is of the same nature as has already been allowed under section 80P(2)(d) of the Act.”

The bench noted that according to the Maharashtra Co-operative Societies Act, 1960, the interest accumulated on the Sinking Fund and Reserve Fund is to be credited to the respective fund accounts only.

Therefore, in view of the above, the ITAT was of the considered opinion that the assessee was entitled to deduction under section 80P(2)(d) of the Act on the entire amount of interest income of Rs.1,99,90,770 received from the Co-operative Bank.