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2017 (10) TMI 1318 - AT - Income TaxExemption under section 80P - assessee is a primary agricultural credit society - reason for denying the claim of deduction was that the assessee was doing the business of banking - whether interest received on investments with subtreasury is liable to be assessed under the head income from other sources or income from business ? - Held that - A primary agricultural credit society or a primary cooperative agricultural and rural development bank who do not have license from Reserve Bank of India to carry on the business of banking, is not a cooperative bank, hit by the provisions of section 80P(4) Following the judgement in case of THE CHIRAKKAL SERVICE CO-OPERATIVE BANK LTD. VERSUS THE COMMISSIONER OF INCOME TAX 2016 (4) TMI 826 - KERALA HIGH COURT we hold that hold that the assessee is entitled to deduction u/s 80P(2) of the Act for the interest received as investment with sub-treasury - Decided in favor of assessee.
Issues Involved:
1. Denial of deduction under section 80P(2) of the Income Tax Act, 1961. 2. Classification of interest earned on deposits with Sub-Treasury as 'income from other sources' or 'income from business'. Issue-wise Detailed Analysis: 1. Denial of Deduction under Section 80P(2): The assessee, a primary agricultural credit society, was denied the deduction under section 80P(2) by the Assessing Officer on the grounds that it was engaged in the business of banking. The insertion of sub-section (4) to section 80P was cited as the basis for this denial. The CIT(A), however, allowed the claim for deduction under section 80P(2) based on the jurisdictional High Court's judgment in Chirakkal Service Co-op Bank Ltd vs CIT. The CIT(A) differentiated the interest received on deposits with Sub-Treasury, treating it as income from other sources, and denied the deduction for this portion based on the Supreme Court's ruling in M/s Totgars Cooperative Sales Society Ltd vs ITO. 2. Classification of Interest Earned on Deposits with Sub-Treasury: The main contention was whether the interest earned on investments with Sub-Treasury should be classified as 'income from other sources' or 'income from business'. The Tribunal referenced a similar case, The Azhikode Service Co-operative Bank Ltd, where it was determined that if interest income is assessed under 'income from business', the assessee would be entitled to a deduction under section 80P(2). The Tribunal noted that the assessee did not possess a banking license from the Reserve Bank of India and was not exclusively engaged in banking activities. Instead, it provided credit facilities to its members, qualifying it for the deduction under section 80P(2). The Tribunal distinguished the facts of the current case from the Supreme Court's decision in M/s Totgars Cooperative Sales Society Ltd, where the interest income was derived from surplus funds retained from marketing agricultural produce, which was shown as a liability in the balance sheet. In contrast, the interest income in the present case was from profits and gains not immediately required for lending to members and thus attributable to the business of banking. Conclusion: The Tribunal concluded that the assessee is entitled to the deduction under section 80P(2) for the interest received on deposits with Sub-Treasury, treating it as 'income from business'. The appeal was allowed, setting aside the order of the CIT(A) that denied this benefit. Order: The appeal filed by the assessee was allowed, and it was ordered that the interest received on deposits with Sub-Treasury is entitled to the benefit of deduction under section 80P(2). The order was pronounced in open court on 17th October 2017.
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