2015 (10) TMI 1594 - AT - Income Tax

Deduction under section 80P(2)(a)(i) denied - Held that - So far as activity of doing the insurance of its members-creditors is concerned, the same can be safely said to be connected to the business activity of providing loan to the members of the society. Moreover, the concept of mutuality will also be applicable to such commission income and policy charges, etc. However, the commission income and policy charges received from non-members though the borrowers of the assessee society will neither fall within the purview of business activity of providing credit facility to its members nor the same would fall within the scope of mutuality. Hence, in view of our above discussion, we do not find any infirmity in the order of the learned CIT(A) in holding that the interest income, commission income and policy charges, etc., received from non-members will not be eligible for deduction under section 80P. - As A.R. for the assessee has submitted that the assessee society has incurred some expenditure in the course of earning interest income and from doing the insurance of non-members-borrowers and that the expenditure so incurred is required to be deducted and only the net income is liable to be taxed, we find force in this contention of the assessee. Only the net income from non-members is required to be taxed. The Assessing Officer is, therefore, directed to re-compute the taxable income accordingly. - Decided against assessee.

Issues:
1. Eligibility of deduction under section 80P for interest income, insurance commission, and LIC charges.
2. Whether lending to non-members or staff members is connected to the business activity of providing credit facilities to members.
3. Applicability of mutuality concept to commission income and policy charges.
4. Treatment of expenditure incurred in earning income from non-members.

Analysis:
1. The appeal was against the denial of deduction under section 80P for interest income, insurance commission, and LIC charges received by the Co-operative Credit Society. The Assessing Officer contended that income from non-members was not eligible for deduction. The society argued that the activities were incidental to its main business of providing credit facilities to members. The CIT(A) upheld the denial, stating that income from non-members did not qualify for the deduction.

2. The society claimed that lending to staff members was connected to its main business activities. However, it was observed that the society's primary business was providing credit facilities to its members only. Lending to staff members was not deemed connected to this core business activity. Therefore, the lending to non-members or staff members was not considered attributable to the business activity of providing credit facilities to members.

3. Regarding LIC commission and policy charges, it was argued that these were done for securing loan amounts and were connected to the business activity of providing loans. The concept of mutuality was deemed applicable to these charges when related to members. However, commission income and charges from non-members were not considered falling within the scope of mutuality or the business activity of providing credit facilities to members.

4. The society requested a deduction for the expenditure incurred in earning income from non-members. It was acknowledged that only the net income from non-members should be taxed. The Assessing Officer was directed to re-compute the taxable income accordingly. Despite this observation, the appeal of the society was ultimately dismissed, affirming the denial of deduction for income from non-members.

In conclusion, the judgment upheld the denial of deduction under section 80P for income from non-members, including interest, insurance commission, and LIC charges. The lending to non-members or staff members was not considered connected to the core business activity of providing credit facilities to members. The concept of mutuality was only deemed applicable to income related to members. The society's request for deduction of expenditure incurred in earning income from non-members was partially accepted, with only the net income being taxable.

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