2015 (12) TMI 94 - AT - Income Tax

Disallowance of deduction claimed u/s 80P(2)(a)(i) - Held that - As decided in CIT Vs Grain Merchants Co-operative Bank Ltd., 2003 (10) TMI 21 - KARNATAKA High Court and Tumkur Merchants Souharda Credit Co-operative Ltd., Vs ITO (2015 (2) TMI 995 - KARNATAKA HIGH COURT ) and we hold that the learned CIT(A) was not correct in denying the assessee s claim of deduction u/s 80P(2)(a)(i) and hold the assessee is entitled to deduction under section 80P(2)(a)(i) of the Act, in respect of interest income earned on fixed deposits, as well as that the said interest income forms art of the business income earned by the assessee and the same is not to be taxed under the head Other Sources - Decided in favour of assessee.

Summary

Issues:
1. Deduction u/s 80P(2)(a)(i) of the IT Act for an agricultural co-operative society.
2. Allowability of expenses u/s 57 of the IT Act.
3. Denial of deduction by CIT(A) and AO.
4. Challenge to levy of surcharge and interest u/s 234A, 234B & 234C of the IT Act.

Analysis:

Issue 1: Deduction u/s 80P(2)(a)(i) of the IT Act
The assessee, an agricultural co-operative society, claimed deduction u/s 80P(2)(a)(i) for providing credit facilities to its members. The AO disallowed the deduction, relying on a previous case. However, the ITAT allowed the deduction, stating that the interest income earned on fixed deposits is attributable to the business of banking and hence deductible u/s 80P(1) of the Act. The ITAT distinguished previous judgments and held in favor of the assessee, allowing the deduction on interest income earned from investments in fixed deposits.

Issue 2: Allowability of expenses u/s 57 of the IT Act
The AO observed interest-free funds held by the assessee and denied deduction u/s 57(iii) of the IT Act. The AO relied on a Supreme Court decision linking borrowed amounts to deposits made. The CIT(A) upheld this decision. However, the ITAT reversed this decision, allowing the deduction under section 57(iii) for interest paid on member's deposits against income earned from fixed deposits assessed under "Other Sources."

Issue 3: Denial of deduction by CIT(A) and AO
The CIT(A) confirmed the AO's order disallowing deductions under various sections. The ITAT, however, disagreed with the CIT(A) and AO, allowing deductions under section 80P(2)(a)(i) and section 57(iii) of the IT Act. The ITAT's decision was based on distinguishing facts from previous cases and interpreting the law favorably for the assessee.

Issue 4: Challenge to levy of surcharge and interest u/s 234A, 234B & 234C
The assessee challenged the levy of surcharge and interest under sections 234A, 234B, and 234C of the IT Act. The ITAT upheld the charging of interest, citing a High Court decision. However, the ITAT directed the AO to recompute the interest chargeable under sections 234B and 234C. The ITAT allowed the appeal filed by the assessee, setting aside the decisions of the lower authorities.

In conclusion, the ITAT ruled in favor of the assessee, allowing deductions under relevant sections and directing the re-computation of interest charges. The judgment emphasized distinguishing facts from previous cases and interpreting the law to support the assessee's claims.