2015 (10) TMI 2833 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - Addition u/s 56 - bank interest received by the assessee - HELD THAT - As assessee was a co-operative society engaged in the business of providing credit facility to its members. The assessee claims that it was engaged in the business of banking and consequently, the income earned by the assessee from its activities including the interest received from Union Bank of India against the FDR s kept with the said bank, was income from business, which was eligible for deduction under section 80P(2)(a)(i) - Assessing Officer held that the interest income was assessable as income from other sources, in view of the ratio laid down by the Hon ble Supreme Court in Totgars Co-Op. Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT In view of the ratio laid down by the Hon ble Supreme Court in Totgars Co-Op. Sale Society Ltd. Vs. ITO (supra), the interest income from surplus fund / short deposits with the bank was assessable as income from other sources, which in turn, is taxable under section 56 of the Act. The said income assessed under the head Income from other sources is not eligible for deduction under section 80P(2)(a)(i) of the Act. The plea of the assessee that it was required to keep the funds in specified securities with the banks does not entitle the assessee to claim it as expenditure since the same being assessed as income from business being eligible for deduction under section 80P(2)(a)(i) of the Act. Accordingly, we uphold the order of CIT(A) in this regard. Alternate plea of the assessee is that it has only positive income Assessing Officer had not disallowed any of the expenses in the hands of assessee - In view thereof, we find no merit in the directions of CIT(A) to the Assessing Officer to examine the claim of expenses made by the assessee and also the same as inadmissible under section 56 of the Act. On the other hand, in case the interest income of Rs.31,62,825/- is assessed under section 56 of the Act as income from other sources and there is net loss of Rs.20,94,884/- assessable in the hands of assessee as income from business, then in view of the provisions of the Act, the assessee is entitled to the claim the benefit of set off of business loss against the income from other sources of the instant assessment year. Accordingly, we direct the Assessing Officer to allow the claim of the assessee after due verification and in accordance with law. Appeal of the assessee is partly allowed.

Summary

Issues:
1. Addition of interest income under section 56 of the Income-tax Act, 1961.
2. Eligibility of deduction under section 80P(2)(a)(i) for interest income.
3. Set off of business loss against income from other sources.

Analysis:

Issue 1: Addition of interest income under section 56 of the Income-tax Act, 1961
The appeal was filed against the order of CIT(A) confirming the addition of Rs.31,62,825 as income under section 56. The Assessing Officer held that the interest income received by the assessee was assessable under this section. The assessee argued that the income from banking activities should be considered as business income, eligible for deduction under section 80P(2)(a)(i). However, the Tribunal upheld the decision, stating that the interest income was assessable as income from other sources, following the precedent set by the Supreme Court in Totgars Co-Op. Sale Society Ltd. Vs. ITO.

Issue 2: Eligibility of deduction under section 80P(2)(a)(i) for interest income
The assessee contended that the interest income should be eligible for deduction under section 80P(2)(a)(i) as it was related to the business of banking. However, both the Assessing Officer and the CIT(A) held that the interest income was to be assessed under the head 'Income from other sources' and not eligible for the deduction under section 80P(2)(a)(i). The Tribunal upheld this decision, emphasizing that the interest income from surplus funds with the bank did not qualify for the deduction.

Issue 3: Set off of business loss against income from other sources
The assessee raised an alternate plea that if the interest income was considered as income from other sources, it would result in a net loss under the head 'Income from business'. The Tribunal agreed that if there was a net loss under the business head due to the interest income being assessed separately, the assessee could set off this business loss against the income from other sources. The Tribunal directed the Assessing Officer to allow this set off after verification and in accordance with the law.

In conclusion, the Tribunal partly allowed the appeal, confirming the addition of interest income under section 56 but allowing the set off of business loss against income from other sources.