2016 (8) TMI 1395 - AT - Income Tax

Entitlement to deduction u/s.80P(2)(a)(i) on the interest income kept with various banks other than cooperative banks/societies - Held that - The assessee cooperative society is entitled to deduction u/s.80P(2)(a)(i) on the interest income of fixed deposits kept with banks other than cooperative banks/societies. Grounds raised by the assessee are accordingly allowed. See - TUMKUR MERCHANTS SOUHARDA CREDIT COOPERATIVE LIMITED VERSUS THE INCOME TAX OFFICER, WARD-1, TUMKUR 2015 (2) TMI 995 - KARNATAKA HIGH COURT - decided in favour of assessee.

Summary

Issues Involved:
1. Whether the interest earned on investments made with nationalized banks should be classified as "income from other sources" and taxed under Section 56 of the Income Tax Act, 1961.
2. Whether the assessee is entitled to deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, for the interest income earned from fixed deposits with nationalized banks.

Detailed Analysis:

Issue 1: Classification of Interest Income
The primary issue in this case is whether the interest income of ?10,77,065/- earned from fixed deposits with Bank of India and IDBI Bank should be classified as "income from other sources" and taxed under Section 56 of the Income Tax Act, 1961. The Assessing Officer (AO) held that this interest income was not derived from the business activity of providing credit facilities to members and was therefore taxable under Section 56. This view was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who relied on the Supreme Court decision in Totgar’s Cooperative Sale Society Ltd. vs. ITO (322 ITR 283).

Issue 2: Deduction under Section 80P(2)(a)(i)
The second issue is whether the assessee is entitled to a deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, for the interest income earned from fixed deposits with nationalized banks. The assessee argued that this interest income should be treated as business income and thus eligible for deduction under Section 80P(2)(a)(i), citing various decisions of the Coordinate Benches of the Tribunal in support of this position.

Tribunal's Findings:

On Classification of Interest Income:
The Tribunal noted that the only dispute in the appeal was regarding the allowability of the claim of deduction under Section 80P(2)(a)(i) on the interest income of ?10,77,065/- received from fixed deposits with nationalized banks. The revenue's position was that such interest income should be treated as "income from other sources," thereby making the assessee ineligible for the deduction under Section 80P(2)(a)(i).

On Deduction under Section 80P(2)(a)(i):
The Tribunal referred to its previous decisions, including the case of Chandraprabhu Gramin Bigar Sheti Sahkari Patsantha Maryadit vs. ITO, where it was held that the assessee is entitled to deduction under Section 80P(2)(a)(i) on interest income from deposits with banks other than cooperative banks/societies. The Tribunal also considered the decision of the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO, which supported the view that interest income from short-term deposits is attributable to the business of providing credit facilities to members and thus eligible for deduction under Section 80P(2)(a)(i).

In light of these precedents, the Tribunal found merit in the assessee's argument and held that the interest income on fixed deposits with nationalized banks should be treated as business income eligible for deduction under Section 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the assessee cooperative society is entitled to deduction under Section 80P(2)(a)(i) on the interest income of fixed deposits kept with banks other than cooperative banks/societies. The appeal filed by the assessee was allowed, and the order of the CIT(A) was set aside. The Tribunal's decision was pronounced in the open court on 26-08-2016.