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2016 (3) TMI 1007 - AT - Income TaxDisallowance of deduction u/s 80P(2)(i) - addition of gross interest income treating interest received from banks and govt. securities as income from other sources u/s 56 - Held that - Major portion of interest income is from government securities and are not in the nature of short term deposits. Therefore, the facts of the case are clearly distinguishable from the facts discussed in the case of Totagars Co-op. Sale Society Ltd. vs. ITO (2010 (2) TMI 3 - SUPREME COURT) and that of co-ordinate bench in the case of Jafari Momin Vikas Co-op. Credit Society Ltd. 2014 (1) TMI 481 - ITAT AHMEDABAD . This interest income is on investments not of short term nature except bank interest which too includes interest on Fixed Deposits. In these circumstances, we are of the view that as the assessee suo moto has given a proposition of taxing the interest and commission income on investments to be taxed u/s 56 of the Act and has also shown that proportionate expenses of ₹ 3,31,828/- have been incurred to earn the above income and the same has duly been accepted by the assessing authority, so we find it justified that Assessing Officer has rightly taxed the interest income of ₹ 2,16,689/- as income from other sources. From going through the above provisions it is very clear that the assessee is eligible for deduction of ₹ 50,000/- under section 57 of the Act and the same should have been allowed by the Assessing authority. Partly allow the appeal of assessee and accordingly the addition made by Assessing Officer shall be reduced to ₹ 1,68,305/- Rs.2,16,689/- minus ₹ 50,000/- deduction u/s 80P(2)(c) .
Issues Involved:
1. Disallowance of deduction under section 80P(2)(i) of the Income-tax Act. 2. Enhancement of addition by CIT(A) treating gross interest income as income from other sources. 3. Deduction under section 57 of the Income-tax Act for expenses incurred to earn interest income. 4. Applicability of Supreme Court's decision in Totagars Co-op. Sale Society Ltd. vs. ITO. Issue-wise Detailed Analysis: 1. Disallowance of Deduction under Section 80P(2)(i): The assessee, a Co-op. Credit Society, filed its return declaring NIL income. During assessment, the Assessing Officer (AO) observed that the assessee received interest income from bank deposits and government securities. The AO taxed this interest income under section 56 as "income from other sources," disallowing the deduction under section 80P(2)(i) claimed by the assessee. The CIT(A) upheld this decision, relying on the Supreme Court's judgment in Totagars Co-op. Sale Society Ltd. vs. ITO, which held that interest on surplus funds not required for business purposes should be taxed as "other income." 2. Enhancement of Addition by CIT(A): The CIT(A) enhanced the addition from Rs. 2,18,305 to Rs. 5,48,517 by treating the entire gross interest income as "income from other sources" instead of the prorated amount calculated by the AO. The CIT(A) justified this by applying the Supreme Court's decision in Totagars, distinguishing it from the Gujarat High Court's decision in Jafari Momin Vikas Co-op. Credit Society Ltd., which was in favor of the assessee. 3. Deduction under Section 57 for Expenses Incurred: The assessee argued that if the interest income is treated as "income from other sources," then proportionate expenses incurred to earn this income should be allowed as deductions under section 57. The AO accepted this alternate submission, allowing proportionate expenses of Rs. 3,31,828. However, the CIT(A) did not consider this deduction while enhancing the addition. 4. Applicability of Supreme Court's Decision in Totagars: The Tribunal analyzed the applicability of the Totagars decision, noting that the facts were distinguishable. In Totagars, the surplus funds were from marketing agricultural produce, whereas, in the present case, the funds were from the society's operational activities of accepting deposits and lending to members. The Tribunal found that the assessee's case was more aligned with the Gujarat High Court's decision in Jafari Momin Vikas Co-op. Credit Society Ltd., which held that interest on short-term deposits maintained for liquidity should not be taxed under section 56. Conclusion: The Tribunal concluded that the interest income should not be taxed under section 56 as "income from other sources." It also held that the assessee was entitled to the deduction under section 80P(2)(c) of Rs. 50,000. Consequently, the Tribunal quashed the CIT(A)'s enhancement and reduced the addition made by the AO to Rs. 1,68,305 (Rs. 2,16,689 minus Rs. 50,000 deduction under section 80P(2)(c)). The appeal was partly allowed, and the order was pronounced on 11th February 2016.
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