2016 (4) TMI 1001 - AT - Income Tax

Deduction under section 80P(2)(a)(i) in respect of interest income denied - Held that - Assessee is entitled for deduction of interest income derived from investment of surplus funds with banks also. See M/s. The Totgars Cooperative Sale Society Limited Versus Income Tax Officer. Karnataka 2010 (2) TMI 3 - SUPREME COURT - Decided in favour of assessee

Summary

Issues Involved:
1. Deduction under section 80P(2)(a)(i) of the Income Tax Act in respect of interest income earned from a nationalized bank.

Detailed Analysis:

Issue 1: Deduction under section 80P(2)(a)(i) of the Income Tax Act in respect of interest income earned from a nationalized bank.

Background:
The assessee, a credit co-operative society, filed its return of income for the Assessment Year 2012-13, declaring a total income of NIL. The assessee derived interest income of Rs. 2,21,43,270/-, out of which Rs. 9,76,625/- was earned from the State Bank of India. The Assessing Officer (AO) disallowed the deduction under section 80P(2)(a)(i) for the interest income from the nationalized bank, stating that only interest income earned from investments/deposits with cooperative societies is eligible for deduction.

Appellate Proceedings:
The CIT(A) upheld the AO's decision, leading the assessee to appeal to the ITAT.

Arguments by the Assessee:
The counsel for the assessee argued that the issue is covered in favor of the assessee by the decision of the Karnataka High Court in the case of Guttigedarara Credit Co-op. Society Ltd. Vs. ITO (2015) 377 ITR 464. The assessee also cited a similar decision by the ITAT, Ahmedabad Bench, in the case of Shree Balaji Urban Coop. Credit Society Ltd. Vs. ITO.

Arguments by the Revenue:
The Senior Departmental Representative (DR) contended that the CIT(A) correctly followed the Supreme Court's decision in the case of Totgars’ Cooperative Sales Society Ltd. Vs. ITO, Karnataka, 322 ITR 283.

Tribunal's Findings:
The Tribunal noted that similar issues had been addressed in multiple cases by the ITAT, Ahmedabad Bench, which had consistently allowed the deduction. The Tribunal referred to the Karnataka High Court's judgment in Guttigedarara Credit Co-op. Society Ltd. Vs. ITO, which emphasized that interest income from deposits in nationalized banks is attributable to the business of providing credit facilities to its members and thus qualifies for deduction under section 80P(2)(a)(i).

Key Judicial Observations:
1. Guttigedarara Credit Co-op. Society Ltd. Vs. ITO: The Karnataka High Court held that interest income earned from deposits in nationalized banks is attributable to the business of providing credit facilities to members and forms part of the profits and gains of the business.
2. Tumkur Merchants Souharda Credit Co-op. Ltd.: The Karnataka High Court reiterated that interest income from deposits not immediately required for lending to members is attributable to the business of providing credit facilities and qualifies for deduction under section 80P(2)(a)(i).
3. Distinction from Totgars’ Case: The Supreme Court in Totgars’ case dealt with surplus funds retained from marketing agricultural produce, which were a liability and not attributable to the business of providing credit facilities. This distinction was crucial in differentiating the present case from Totgars’.

Conclusion:
The Tribunal concluded that the interest income earned from FDRs in nationalized banks qualifies for exemption under section 80P(2)(a)(i). However, since the assessee itself offered Rs. 98,015/- for taxation and did not challenge this inclusion, the Tribunal directed the AO to grant exemption for the remaining amount. The appeal of the assessee was partly allowed.

Order:
The appeal of the assessee was allowed, and the AO was directed to grant exemption under section 80P(2) for Rs. 1,50,548/-. The order was pronounced on 16th March 2016 at Ahmedabad.