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2017 (1) TMI 1601 - AT - Income TaxEntitled to the benefit of deduction u/s 80P(2)(a)(i) - interest income earned from nationalized bank, scheduled bank and TDS on interest i.e. interest income other than derived from investments with any other co-operative society - Held that - Assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act on the interest income earned from surplus deposits held with Nationalized/Scheduled banks. Assessee will be eligible to statutory deduction of ₹ 50,000/- u/s 80P(2)(c)(ii) of the Act. Assessee will also be eligible to claim pro rata expenses for earning interest income of ₹ 8,55,854/- assessee s claim of pro rata expenses of ₹ 5,77,423/- against the interest income of ₹ 8,55,854/- after due verification by the learned Assessing Officer. We, therefore, direct the Assessing Officer to verify assessee s claim of pro rata expenses by examining the record to be shown for verification by the assessee. Needless to mention proper opportunity of being heard is to be given to the assessee. We order accordingly. The appeal of the assessee is partly allowed for statistical purposes.- Appeal of the assessee is partly allowed for statistical purposes
Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961. 2. Treatment of interest income from deposits with nationalized and scheduled banks. 3. Allowance of pro-rata expenses for earning interest income. 4. Statutory deduction under Section 80P(2)(c)(ii) of the Income-tax Act, 1961. Detailed Analysis: 1. Eligibility for Deduction under Section 80P(2)(a)(i): The primary issue was whether the assessee, a Credit Co-operative Society Ltd., was eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961. The Assessing Officer (AO) denied this deduction, arguing that the assessee was a primary credit society, not a primary agricultural society, thus falling under Section 80P(4) and not qualifying for the deduction. The Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the appeal, granting the deduction but excluding interest income from deposits with nationalized and scheduled banks. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Totgars Co-op. Sale Society Ltd. vs ITO, which held that interest income from surplus funds invested in short-term deposits does not qualify for deduction under Section 80P(2)(a)(i). 2. Treatment of Interest Income from Deposits: The CIT(A) and the Tribunal both treated the interest income from deposits with nationalized and scheduled banks as "income from other sources" under Section 56 of the Act. The Tribunal cited the jurisdictional High Court's decision in SBI vs. CIT, which clarified that such interest income is not attributable to the business of providing credit facilities to members and thus does not qualify for deduction under Section 80P(2)(a)(i). The Tribunal affirmed that the interest income of ?8,55,854 earned from these deposits should be taxed under Section 56. 3. Allowance of Pro-rata Expenses for Earning Interest Income: The assessee argued for the allowance of pro-rata expenses incurred in earning the interest income. The Tribunal accepted this contention, directing the AO to verify the claim of pro-rata expenses amounting to ?5,77,423 against the interest income of ?8,55,854. The Tribunal emphasized the need for proper verification and granted the assessee the opportunity to present records for this purpose. 4. Statutory Deduction under Section 80P(2)(c)(ii): The Tribunal also addressed the assessee's eligibility for a statutory deduction of ?50,000 under Section 80P(2)(c)(ii) of the Act. The Tribunal referenced a similar case (Kherava Co-op. Credit Society Ltd. vs. ITO) where the deduction was allowed and concluded that the assessee should be granted this statutory deduction. The Tribunal directed the AO to allow this deduction after due verification. Conclusion: The Tribunal's judgment provided a comprehensive analysis of the issues, affirming that: 1. The assessee is not eligible for deduction under Section 80P(2)(a)(i) for interest income from deposits with nationalized and scheduled banks. 2. Such interest income should be taxed under Section 56 as "income from other sources." 3. The assessee is entitled to claim pro-rata expenses for earning this interest income, subject to verification. 4. The assessee is also entitled to a statutory deduction of ?50,000 under Section 80P(2)(c)(ii). The appeal was partly allowed for statistical purposes, with directions for verification and proper opportunity for the assessee to present records.
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