2016 (10) TMI 1195 - AT - Income Tax

Deduction u/s. 80P(2) - Whether the interest received from the Government Treasury is to be included under the head income from other sources or income from business - Held that - In the instant case the assessee is a cooperative Bank. Investment in treasury/banks and earning interest on the same is part of the banking activity of the assessee s cooperative bank. The said income is eligible for deduction u/s 80P(2)(a)(i). Income Tax Authorities were not justified in treating interest income received by the assessee as income from other source and denying the benefit of section 80P(2) of the Act. This ground of the assessee is allowed. Disallowance of interest paid - Held that - CIT(A) has very candidly admitted that the additional evidence placed before him could not be verified due to time constraints. Matter needs fresh consideration by the CIT(A). This issue to the file of the CIT(A). CIT(A) shall dispose off the matter as expeditiously as possible in accordance with law after affording reasonable opportunity of being heard to the assessee.

Summary

Issues:
1. Whether the CIT(A) is justified in confirming the disallowance made by the Assessing Officer with regard to the claim of deduction u/s. 80P(2) of the Act.
2. Whether the interest received from the Government Treasury is to be included under the head "income from other sources" or "income from business."
3. Whether the CIT(A) is justified in confirming the disallowance of interest paid on deposit amounting to ?17,17,183.

Issue 1:
The assessee, a primary agricultural credit society, filed a return for the assessment year 2012-13 claiming deduction u/s. 80P of the Income Tax Act. The Assessing Officer denied the deduction, stating the society was primarily engaged in banking. The CIT(A) upheld the denial. The assessee cited a High Court judgment supporting their claim. The Tribunal held that as the society was registered under the Kerala Cooperative Societies Act and classified as a primary agricultural credit society, it was entitled to the deduction u/s. 80P(2) of the Act.

Issue 2:
The CIT(A) classified interest received from the Government Treasury as "income from other sources" based on a Supreme Court judgment. However, the Tribunal referred to a Cochin Bench case where a cooperative bank's interest income was treated as business income eligible for deduction u/s. 80P(2)(a)(i). The Tribunal reasoned that since the assessee was a cooperative bank, the interest from treasury/banks was part of its banking activity, making it eligible for the deduction.

Issue 3:
The assessee claimed interest expenditure of ?3,43,43,667, but the Assessing Officer disallowed 5% of the interest paid on deposit due to lack of details. The CIT(A) confirmed the disallowance, citing time constraints for verification. The Tribunal found the CIT(A) couldn't verify the additional evidence due to time constraints and ordered a fresh consideration by the CIT(A) for fair assessment, providing the assessee with a reasonable opportunity to be heard.

In conclusion, the Tribunal partially allowed the appeal, granting the deduction u/s. 80P(2) to the assessee and directing a fresh consideration of the interest expenditure issue. The Stay Petition was dismissed as infructuous.