2016 (6) TMI 1124 - AT - Income Tax

Disallowance of deduction u/s 80P(2)(a)(i) - Held that - The assessee is eligible for deduction u/s 80P(2)(a)(i) which is allowed. Consequently such income cannot be held as income from other sources. In view of the foregoing we decide this ground in favour of the assessee for all assessment years under consideration. See TUMKUR MERCHANTS SOUHARDA CREDIT COOPERATIVE LIMITED Versus THE INCOME TAX OFFICER WARD-1 TUMKUR 2015 (2) TMI 995 - KARNATAKA HIGH COURT

Summary

Issues Involved:
1. Re-opening of assessment under Section 147.
2. Disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Re-opening of assessment under Section 147:
The assessee did not press Ground No.1 regarding the re-opening of assessment under Section 147. Consequently, this ground was dismissed.

2. Disallowance of deduction under Section 80P(2)(a)(i):
The primary issue in the appeals was the disallowance of the claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act for various assessment years in respect of interest income received from fixed deposits (FDs) with the State Bank of India (SBI).

Facts and Contentions:
- The assessee, a Co-operative Credit Society of Supervisory Officers of SBI, earned interest on FDs with SBI and from loans advanced to its members.
- The Assessing Officer (AO) disallowed the deduction under Section 80P(2)(a)(i) for the interest income from SBI, treating it as "Income from Other Sources" based on the judgment of the Supreme Court in Totgars’ Co-operative Sale Society Ltd., 322 ITR 283 (SC).
- The AO argued that the FDs were from surplus funds, not operational funds, and thus did not qualify for the deduction.

Appellate Proceedings:
- During the appellate proceedings, the assessee contended that the funds deposited with SBI were operational funds and not surplus funds. The assessee argued that these funds were used to maintain liquidity and provide credit facilities to its members.
- The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that the interest income from FDs with SBI was not attributable to the business activity of providing credit to its members, as SBI was not a member of the society.

Tribunal’s Analysis and Decision:
- The Tribunal considered the assessee’s argument that similar issues were decided in its favor in earlier proceedings for Assessment Year 2010-11 by the ITAT, which followed the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Cooperative Ltd vs. ITO.
- The Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd held that interest income from deposits, which are not immediately required for lending to members, is attributable to the business of providing credit facilities and thus eligible for deduction under Section 80P(2)(a)(i).
- The Tribunal noted that the funds in question were not liabilities but surplus funds, and the interest income was attributable to the activities of the Co-operative Credit Society.
- The Tribunal also referred to similar decisions by the Andhra Pradesh High Court and other ITAT judgments supporting the assessee’s claim.

Conclusion:
- The Tribunal concluded that the assessee is eligible for deduction under Section 80P(2)(a)(i) for the interest income received from SBI, as it is attributable to the business of providing credit facilities to its members.
- The Tribunal allowed the appeals in favor of the assessee, holding that such income cannot be treated as "Income from Other Sources."

Result:
The assessee’s appeals were partly allowed, granting the deduction under Section 80P(2)(a)(i) for the interest income received from SBI for all assessment years under consideration.