2011 (5) TMI 219 - HC - Income Tax

Deduction under Section 80P(2)(a)(i) - Interest received by the assessee from commercial banks was not covered by Section 80P(2)(a)(i) - It has nothing to do with the interest income on the loan advanced to the members - The judgment of the Hon ble Supreme Court in The Totgars Cooperative Sale Society Ltd. v. I.T.O. (2010 -TMI - 35322 - SUPREME COURT), holding that interest on bank deposits or Government securities derived by a Cooperative Society could not be attributed to the activities of the Society of providing various facilities to its members and was taxable under Section 56 being income from other sources - It appears that since the judgment of the Tribunal is prior to the judgment of the Hon ble Supreme Court relied upon on behalf of the revenue, the Tribunal did not have advantage of the law laid down therein - Thus matter is covered in favour of revenue by the judgment of Hon ble Supreme Court.

Summary

Issues:
Interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961 regarding the eligibility of interest income from commercial banks for deduction.

Analysis:

1. The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal (ITA) regarding the eligibility of interest income for deduction under Section 80P(2)(a)(i) for the assessment year 2006-07. The substantial question of law raised was whether interest income from commercial banks, not directly related to loans advanced to members of a Cooperative Federation, qualifies for the deduction.

2. The Cooperative Federation claimed exemption under Section 80P(2)(a)(i) for interest income, which was disallowed by the Assessing Officer and the decision was upheld by the CIT(A). However, the Tribunal ruled in favor of the assessee, stating that the interest income was incidental to the business of providing credit facilities to its members.

3. During the hearing, the counsel for the revenue argued that the interest received from commercial banks by the assessee was not covered under Section 80P(2)(a)(i) as it was not directly linked to the interest income on loans advanced to members. Reference was made to a Supreme Court judgment which held that interest on bank deposits or Government securities derived by a Cooperative Society could not be attributed to the activities of providing facilities to members and was taxable under a different section.

4. The court noted that the Tribunal's decision was made before the Supreme Court judgment referenced by the revenue's counsel. Citing the Supreme Court's decision, the court concluded that the interest income from commercial banks, not directly related to loans advanced to members, does not qualify for deduction under Section 80P(2)(a)(i). Therefore, the court decided the question in favor of the revenue and allowed the appeal.

In conclusion, the judgment clarified the interpretation of Section 80P(2)(a)(i) regarding the eligibility of interest income from commercial banks for deduction, emphasizing the direct link between the income and the business activities of the assessee.