2009 (12) TMI 948 - AT - Income Tax

Summary

Issues Involved:
1. Denial of exemption u/s 80P(2)(a)(i).
2. Addition of Rs. 21,61,240 on account of interest received from members.
3. Addition of Rs. 3,92,660 out of NPA provision.

Summary:

1. Denial of exemption u/s 80P(2)(a)(i):
The assessee, a primary co-operative agricultural development bank, claimed exemption u/s 80P(2)(a)(i) for interest income received from loans advanced to its members for non-farming schemes. The AO denied this exemption, stating that the activities fell under s. 80P(2)(c) and restricted the deduction to Rs. 50,000. The CIT(A) upheld the AO's decision. The Tribunal, however, found that the assessee was entitled to the deduction under s. 80P(2)(a)(i) as the interest income was attributable to the business of banking or providing credit facilities to its members, irrespective of whether the loans were for agricultural or non-farming purposes. The Tribunal emphasized the broader interpretation of "attributable to" as opposed to "derived from," citing the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. vs. CIT.

2. Addition of Rs. 21,61,240 on account of interest received from members:
The AO added Rs. 21,61,240 as estimated gross interest earned from loans advanced to members for non-farming schemes without considering the interest paid and other expenses incurred. The Tribunal noted that the assessee had provided sufficient evidence, including instructions from the Punjab State Co-operative Agricultural Bank Ltd., Chandigarh, directing the advancement of loans under non-farming sector. The Tribunal concluded that the interest income from these loans was part of the business of banking or providing credit facilities to members and thus eligible for deduction u/s 80P(2)(a)(i).

3. Addition of Rs. 3,92,660 out of NPA provision:
The AO disallowed Rs. 3,92,660 as excess provision u/s 36(viia). The CIT(A) upheld this disallowance. The Tribunal, however, held that even if the disallowance for excess provision was upheld, it would enhance the income entitled to deduction under s. 80P(2)(a)(i). The Tribunal referenced a similar case (Punjab State Co-op. Agri. Dev. Bank Ltd.) where the disallowance was deleted by the Tribunal, Chandigarh Bench. Following this precedent, the Tribunal deleted the addition of Rs. 3,92,660.

Conclusion:
The Tribunal allowed both appeals, granting the assessee the claimed deductions and deleting the disputed additions.