Disallowed portion of interest exp. forms part of income; eligible for Sec. 80P deduction: HC

Case Details: PCIT v Ettumanoor Service Co-operative Bank Ltd. - [2021] 132 taxmann.com 33 (Kerala)

Judiciary and Counsel Details

• • S.V. Bhatti and Bechu Kurian Thomas, JJ.
  • P.K.R. Menon, Sr. Counsel and Jose Joseph, SC for the Appellant. 
  • Firoze B. Andhyarujina, Sr. Adv. and S. Arun Raj, Adv. for the Respondent.

Facts of the Case

The assessee was a primary agricultural credit society. It claimed expenditure towards interest paid on various deposits accepted by it from its members. The Assessing Officer (AO) believed that the assessee could not be considered a primary agricultural credit society. Accordingly, he disallowed 5 percent of such interest expenditure claimed by the assessee and added the same to the assessee’s income.
The CIT(A) upheld the order of the AO. However, he included the exclusion as a deduction permissible under section 80P(2)(a). However, AO contended that the 5 percent expenditure excluded does not merit a deduction under Chapter VIA. The exclusion has to be treated as an occasion falling under section 68. However, Tribunal confirmed the action of CIT(A). Aggrieved-AO filed the instant appeal before the Kerala High Court.

High Court Held

The Kerala High Court held that the assessee satisfied the definition of section 2(19) read with Kerala Societies Registration Act, 1860. The primary business of the assessee is accepting deposits and providing benefits to the members of the Society. Thus, it is entitled to be treated as Society.
Thus, the income received by the Society is from the interest it earns on the amount lent to the members. The Society is also paying interest on the deposits it has accepted. For a reason recorded and accepted by all the authorities, the 5 percent of the expenditure booked against interest paid to depositors is disallowed. Once the disallowed portion is accepted, the said disallowed portion forms part of the interest earned by the Society on the amount lent by the Society to its members.
Therefore, the Society is entitled to deduction under section 80P(2)(i)(a) on such amount. Further, Section 68 in terms does not apply to an entry warranted consequent to the disallowed expenditure by the Assessing Authority.

List of Cases Referred to

• • Mavilayi Service Co-operative Bank Ltd. v. CIT 2021 (1) KLT 485 (SC) (para 4).