2011 (11) TMI 180 - AT - Income Tax

Deduction u/s 80P on banking business cancellation of banking license in preceding year - deduction under section 80-P(2)(a) in respect of the income on investments - income arising on the sale of investments as long term capital gain exclusion of the write off of unclaimed dividend from the taxable income Held that - The use of word or in Section 80P(2)(a)(i) indicate that these two are mutually exclusive deductions. Either a cooperative society is engaged in carrying on the business of banking or it is engaged in providing credit facilities to its members. Interest earned on providing credit facilities to its members is allowed. Since assessee is not in the banking business therefore income on investments cannot be allowed as a deduction under section 80P(2)(a)(i). Incomes arising on sale of capital assets cannot be considered as income from regular banking transactions. Therefore the order of CIT (A) in treating the amounts as long term capital gain/short term capital is upheld. Since the assessee has not claimed expenditure when dividend was paid the write back of the unclaimed dividend cannot be treated as income under the provisions of the Act just because the same was credited to the P&L account. - Revenue s appeals are partly allowed.

Issues Involved:
1. Deduction under Section 80P(2)(a)(i) for banking business income.
2. Deduction under Section 80P(2)(a) for income from investments.
3. Classification of investments in government securities as long-term capital assets.
4. Exclusion of unclaimed dividend write-off from taxable income.

Issue-wise Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for banking business income:
The primary issue was whether the assessee, whose banking license was canceled, could claim deductions under Section 80P(2)(a)(i) for income derived from banking activities. The Assessing Officer (AO) argued that since the assessee was no longer a banking company as per Section 5(b) of the Banking Regulation (BR) Act, it could not claim deductions for income from banking activities. The assessee contended that the income from banking activities should still qualify for deduction as the business was in the process of winding up, and income continued to accrue from investments and loans made before the license cancellation. The CIT(A) agreed with the assessee, allowing the deduction, but the Tribunal reversed this decision, stating that without a valid banking license, the assessee could not be considered as engaged in banking business, thus disqualifying the income from deduction under Section 80P(2)(a)(i).

2. Deduction under Section 80P(2)(a) for income from investments:
The AO disallowed the deduction for Rs. 10,07,82,579 earned from investments, arguing that since the assessee was not a banking company, such income could not qualify for deductions under Section 80P(2)(a). The CIT(A) overruled this, allowing the deduction on the basis that the investments were made while the assessee was a banking company. The Tribunal, however, upheld the AO's view, emphasizing that post-cancellation of the banking license, the income from investments could not be considered as arising from banking business and thus did not qualify for deductions under Section 80P(2)(a)(i).

3. Classification of investments in government securities as long-term capital assets:
The CIT(A) treated the gains from the sale of government securities as long-term capital gains, allowing indexation benefits. The AO had argued that these should be treated as business income since the investments were part of the banking business. The Tribunal upheld the CIT(A)'s decision, noting that the securities, although part of the banking business, were capital assets. Gains from their sale should be treated as capital gains, not business income, and thus eligible for indexation.

4. Exclusion of unclaimed dividend write-off from taxable income:
The AO included Rs. 1,90,88,857, representing unclaimed dividends written back to the Profit & Loss account, in the taxable income. The CIT(A) disagreed, holding that since the dividends were never claimed as expenses, their write-back should not be treated as income. The Tribunal agreed with the CIT(A), stating that the unclaimed dividends, being an application of income and not an expense, should not be included in taxable income upon write-back.

Conclusion:
The Tribunal ruled that the assessee could not claim deductions under Section 80P(2)(a)(i) for income from banking activities post-license cancellation. It also disallowed deductions for income from investments, treating gains from the sale of securities as capital gains eligible for indexation. Finally, it upheld the exclusion of unclaimed dividend write-back from taxable income.

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