2016 (3) TMI 912 - AT - Income Tax

Disallowance of deduction u/s 80P - interest income received by the assessee co-operative society on investments made in deposits in Jalna Dist. Central Co-operative Bank Ltd. - Held that - The issue arising before us is similar to the issue before the Tribunal in ITO Vs. M/s. Kundalika Nagari Sahakari Patsanstha Maryadit (2016 (2) TMI 879 - ITAT PUNE ) and following the same parity of reasoning, we hold that the assessee is eligible for the claim of deduction under section 80P(2)(a)(i) of the Act in respect of interest received on deposits made in Jalna District Central Co-operative Bank Ltd - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of deduction under section 80P in respect of interest income.
2. Eligibility of the assessee to claim deduction under section 80P(2)(a)(i) or 80P(2)(d).
3. Taxability of interest income as business income or income from other sources.
4. Allowance of deduction under section 80P for interest income taxable as income from other sources.
5. Calculation of disallowance based on net income after deducting proportionate expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80P in Respect of Interest Income:
The assessee, a co-operative society, claimed a deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, for interest income earned on investments made in deposits with Jalna District Central Co-operative Bank Ltd. The authorities denied this claim, arguing that the income should be assessed as "income from other sources" rather than business income. The Tribunal referred to a similar case, ITO Vs. M/s. Kundalika Nagari Sahakari Patsanstha Maryadit, where it was held that interest income earned from investments made out of surplus funds is not eligible for deduction under section 80P(2)(a)(i).

2. Eligibility of the Assessee to Claim Deduction under Section 80P(2)(a)(i) or 80P(2)(d):
The Tribunal examined whether the interest income from fixed deposits with co-operative banks qualifies for deduction under section 80P(2)(a)(i). It referred to the Supreme Court's decision in Totgar Co-operative Sale Society Ltd. Vs. ITO, where it was held that interest income from surplus funds not required for immediate business purposes is taxable under section 56 as "income from other sources." However, the Tribunal also considered the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO, which allowed the deduction under section 80P(2)(a)(i) for interest income earned on surplus funds as it was attributable to the business of providing credit facilities to members.

3. Taxability of Interest Income as Business Income or Income from Other Sources:
The Tribunal analyzed the nature of the interest income and concluded that since the investments were made from surplus funds not immediately required for business purposes, the interest income should be taxed under section 56 as "income from other sources." However, it also recognized that if the funds were part of the business operations, the interest income could be considered business income eligible for deduction under section 80P(2)(a)(i).

4. Allowance of Deduction under Section 80P for Interest Income Taxable as Income from Other Sources:
The Tribunal noted that if the interest income is assessed as "income from other sources," the assessee should be allowed to deduct proportionate expenses incurred to earn that income. This would mean taxing only the net interest income rather than the gross amount.

5. Calculation of Disallowance Based on Net Income After Deducting Proportionate Expenses:
The Tribunal agreed with the assessee's alternate plea that if the interest income is not eligible for deduction under section 80P(2)(a)(i) or 80P(2)(d), the disallowance should be restricted to the net income after deducting proportionate expenses. This approach ensures that only the actual income earned after necessary expenses is taxed.

Conclusion:
The Tribunal held that the assessee is eligible for the claim of deduction under section 80P(2)(a)(i) for interest income received on deposits made in Jalna District Central Co-operative Bank Ltd. The alternate plea of deduction under section 80P(2)(d) was not addressed. The appeal of the assessee was allowed, and the grounds raised were upheld.

Order Pronounced:
The appeal of the assessee was allowed on February 10, 2016.