2017 (4) TMI 1311 - AT - Income Tax

Exemption u/s 80P(2)(a) - interest income received from State Bank of India - Held that - As decided in the case of State Bank of India Vs. CIT 2016 (7) TMI 516 - GUJARAT HIGH COURT interest income on deposits placed with State Bank of India was not exempt under section 80P(2)(a)(i) Alternatively as contended by the assessee that the matter be restored to the file of the AO with direction that only net interest income earned by the assessee from FDRs. with nationalized banks should be excluded from the claim of deduction under section 80P(2) is acceptable because, only net amount is always taxable for the purpose of income tax. If assessee has incurred any expenditure, which is attributable to the earning of interest income, then, the AO shall examine that aspect and exclude the interest expenditure if any incurred by the assessee for earning this interest from bank. The only net interest income is to be excluded from the claim of deduction under section 80P(2) of the Act. Appeal of the assessee is allowed for statistical purpose.

Summary

Issues:
Disallowance of exemption under section 80P(2)(a) on interest income.

Analysis:
The appellant, a cooperative credit society, appealed against the disallowance of exemption under section 80P(2)(a) on interest income received from State Bank of India. The Assessing Officer disallowed the deduction on interest income of ?54,31,730 earned from fixed deposits with banks. The controversy revolved around whether a cooperative credit society could claim deduction under section 80P(2) for interest income earned from investments in nationalized banks. The Hon'ble Gujarat High Court's decision in a similar case clarified that income from investments made in banks does not fall under section 80P(2)(a) categories. The court differentiated between interest income earned by providing credit facilities to members and income from investments in banks. It emphasized that interest earned from investments in cooperative societies is exempt under section 80P(2)(d), but interest earned from investments in non-cooperative banks is not deductible.

The appellant society, registered under the Gujarat Cooperative Societies Act, earned interest income from deposits with nationalized banks. The Hon'ble Court held that deduction under section 80P(2) was not applicable to interest income from bank investments. It highlighted the distinction between income from providing credit facilities and interest income from investments. The court referred to previous judgments to support its decision, emphasizing that interest income from non-cooperative banks is not eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.

The appellant's counsel did not dispute the applicability of the Gujarat High Court's decision to the current case. The counsel requested that only the net interest income earned by the appellant from fixed deposits with nationalized banks should be excluded from the deduction under section 80P(2). The Tribunal agreed with the counsel's contention, stating that only the net interest income should be taxable for income tax purposes. The Tribunal directed the Assessing Officer to examine any interest expenditure incurred by the appellant for earning the interest income and exclude it from the deduction under section 80P(2). Consequently, the appeal of the appellant was allowed for statistical purposes.

In conclusion, the judgment clarified that income earned from investments in non-cooperative banks by a cooperative credit society is not eligible for deduction under section 80P(2). The Tribunal's decision emphasized the importance of considering only the net interest income for tax purposes and excluding any related expenditure.