2016 (3) TMI 1113 - AT - Income Tax

Eligibility of deduction u/s 80P(2) - Held that - In the present case, it is undisputed that the amount in question, which was invested in SBI to earn interest, was not an amount due to any members. It was not the liability. It was also not shown as liability in their account. This amount, which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore, the assessee had deposited the money in SBI so as to earn interest. The said interest income was attributable to carrying on the business of banking and therefore it was liable to be deducted in terms of Section 80P(1) of the Act. See Tumkur Merchants Souharda Credit Cooperative Ltd 2015 (2) TMI 995 - KARNATAKA HIGH COURT - Decided in favour of assessee

Summary

Issues:
1. Jurisdiction under section 263 of the Income Tax Act.
2. Eligibility for deduction under section 80P(2)(a)(i) of the Act.
3. Interpretation of income derived from interest by a cooperative society.

Issue 1: Jurisdiction under section 263 of the Income Tax Act
The appeal challenged the assumption of jurisdiction by the Commissioner of Income-Tax, Ahmedabad-1, under section 263 of the Act. The appellant contended that the CIT had erred in assuming jurisdiction. However, the CIT found substantial loss of revenue due to the incorrect treatment of interest income derived from a non-cooperative society. Consequently, the CIT held the assessment order as erroneous and prejudicial to the interest of revenue, leading to the cancellation of the assessment for the relevant year.

Issue 2: Eligibility for deduction under section 80P(2)(a)(i) of the Act
The appellant, a cooperative society providing credit facilities, claimed deduction under section 80P of the Act for interest income earned from SBI. The CIT disallowed the deduction, citing section 80P(2)(d) which allows deductions for income derived from investments with other cooperative societies. The CIT held that since the interest income was from SBI, not a cooperative society, the appellant was ineligible for the deduction. The appellant relied on a Karnataka High Court decision, arguing that the interest income was attributable to the business of providing credit facilities and thus deductible under section 80P(1) of the Act. The Tribunal agreed with the appellant, setting aside the CIT's order and allowing the appeal.

Issue 3: Interpretation of income derived from interest by a cooperative society
The Tribunal analyzed the nature of the interest income earned by the cooperative society from SBI. It was established that the amount invested in SBI to earn interest was not a liability to any members and was not immediately required for lending. As per the Karnataka High Court decision, such interest income attributable to the business of providing credit facilities was considered deductible under section 80P(1) of the Act. The Tribunal, in line with the legal precedent, concluded that the interest income was rightly deductible, overturning the CIT's decision.

In conclusion, the Tribunal allowed the appeal, emphasizing the correct interpretation of provisions under section 80P of the Income Tax Act and highlighting the importance of considering the nature of income derived by cooperative societies for eligibility of deductions.