The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has restored to the Assessing Officer (AO) a dispute concerning the eligibility of deduction under Section 80P of the Income Tax Act, holding that the record did not clearly establish whether the assessee had claimed the deduction under Section 80P(2)(a)(i) or Section 80P(2)(d). 

The bench of  Prashant Maharishi (Vice President) directed the AO to re-examine the claim after verifying the nature of the deposits and the statutory basis for the interest income. 

The appeal arose from the assessment for AY 2018-19, where the assessee, a primary agricultural credit co-operative society, had filed its return declaring nil income after claiming deduction under Section 80P. During limited scrutiny, the Assessing Officer examined a deduction of ₹11.46 lakh relating to interest earned on deposits maintained with the Kodagu District Central Co-operative Bank.

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The AO treated the claim as one under Section 80P(2)(d) and denied the deduction by relying on Karnataka High Court precedents, including the decision in Totgars Co-operative Sale Society Ltd., holding that interest earned from a co-operative bank does not qualify for deduction under that provision. The Commissioner (Appeals) upheld the assessment, prompting the appeal before the ITAT. 

Before examining the merits, the Tribunal dealt with a delay of 168 days in filing the appeal.

The assessee contended that the appellate order had never been served through its registered email address or by physical communication. According to the assessee, it became aware of the order only after receiving a penalty notice under Section 270A, following which it immediately approached its chartered accountant and filed the appeal.

The Revenue opposed the condonation, arguing that the order had been emailed to the address furnished in Form 35.

However, the Tribunal noted that the assessee had supported its claim through an affidavit and the Department had failed to produce any material proving effective service of the appellate order. Accepting the explanation as constituting “sufficient cause,” the ITAT condoned the delay and admitted the appeal. 

The central controversy concerned the provision under which the deduction had actually been claimed.

The assessee argued that its claim was under Section 80P(2)(a)(i), which grants deduction for income attributable to the business of providing credit facilities by a co-operative society. It submitted that the deposits with the district central co-operative bank were statutory deposits mandated under Rule 28 of the Karnataka Co-operative Societies Rules, making the resulting interest income part of its business income.

The Revenue, on the other hand, maintained that the claim had been made under Section 80P(2)(d), under which interest received from a co-operative bank is not eligible for deduction in view of binding Karnataka High Court judgments.

Thus, the outcome depended entirely upon the precise statutory provision under which the deduction had originally been claimed. 

The Tribunal observed that the assessment order referred to a claim under Section 80P(2)(d), whereas the assessee consistently argued that it had claimed deduction under Section 80P(2)(a)(i).

Significantly, the return of income had not been placed on record. In the absence of this crucial document, the Tribunal held that it was impossible to conclusively determine the nature of the original claim.

Consequently, it declined to adjudicate the issue on merits and instead restored the matter to the Assessing Officer for a fresh examination. 

The Tribunal directed the AO to determine whether the deposits generating the interest income represented statutory reserve funds maintained under Rule 28 of the Karnataka Co-operative Societies Rules.

If the assessee establishes that the deposits were statutory in nature and the deduction was indeed claimed under Section 80P(2)(a)(i), the AO must examine whether the interest income is attributable to the assessee’s banking or credit activities and allow deduction in accordance with law.

However, if the claim is found to have been made under Section 80P(2)(d), the AO must apply the binding Karnataka High Court decisions which deny deduction for interest earned from co-operative banks under that provision. 

The Tribunal also accepted the assessee’s alternative plea based on Karnataka High Court precedent.

It directed that if the interest income is ultimately assessed as “Income from Other Sources,” the Assessing Officer must allow deduction of the corresponding cost of funds incurred for earning that interest. Necessary adjustments should also be made while computing any deduction available under Section 80P(2)(a)(i), wherever applicable. 

The Bangalore ITAT set aside the orders of the lower authorities on this issue and remanded the matter to the Assessing Officer for fresh adjudication after verifying the nature of the deduction claim, the statutory character of the deposits, and the applicability of Sections 80P(2)(a)(i) or 80P(2)(d), as the case may be. 

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