2016 (5) TMI 1153 - HC - Income Tax

Deduction u/s 80P(2)(a)(i) denied - interest received from employees who are not the members of the assessee-Society - Held that - The Tribunal while accepting the appeal of the revenue and adjudicating the issue against the assessee had clearly noticed that the benefit under Section 80P(2)(a)(i) of the Act is available to the assessee where the interest is earned from the core activity of the assessee-Society and the interest earned from employees would not fall for such deduction under Section 80P(2)(a)(i) of the Act. Even the interest earned from employees cannot be said to be core activity of the society and, therefore, in our opinion, interest earned from employees is not eligible for deduction u/s 80P(2)(a)(i) - Decided against assessee

Issues:
1. Legality of orders under Income Tax Act
2. Deduction under Section 80P(2)(a)(i) of the Act
3. Upholding expenses under Section 57(iii) of the Act
4. Treatment of interest income from loans advanced to employees
5. Applicability of tax on interest income from loans to employees and deposits with schedule banks
6. Core activity determination for deduction under Section 80P(2)(a)(i) of the Act

Analysis:

1. The appeal was filed against the order passed by the Income Tax Appellate Tribunal regarding the assessment year 2010-11. The appellant contested the legality of the orders under the Income Tax Act, raising substantial questions of law concerning the sustainability of the orders.

2. The issue of deduction under Section 80P(2)(a)(i) of the Act was raised, questioning the treatment of income earned from banks other than cooperative banks as interest on bank accounts. The Tribunal held that such income was not eligible for deduction under Section 80P(2)(a)(i) as it was not attributable to the core activities of the assessee-Society.

3. The Tribunal also considered the expenses of 1% of income attributable to earning interest income under Section 57(iii) of the Act. However, no substantial question of law was found to arise from this issue.

4. A significant issue arose regarding the treatment of interest income of ?27,19,241 received by the appellant as interest on loans advanced to employees for housing and conveyance. The Tribunal upheld the order of the Assessing Officer, considering this income as 'income from other sources' rather than 'income from business.'

5. The Tribunal further examined the taxability of income by way of interest on loans advanced to employees and deposits held with schedule banks under the head income from other sources. The Tribunal concluded that such income was chargeable to tax under Section 56 without allowing deductions for cost of funds and other expenses under Section 57.

6. The core activity determination for deduction under Section 80P(2)(a)(i) of the Act was crucial. The Tribunal clarified that the benefit of deduction under this section is available only for interest earned from the core activities of the assessee-Society, excluding interest earned from employees. The Tribunal's decision was based on the Supreme Court's interpretation and was upheld, dismissing the appeal.

In conclusion, the High Court dismissed the appeal, stating that no substantial question of law arose from the issues raised in the appeal. The Tribunal's decisions regarding the legality of orders, deduction under Section 80P(2)(a)(i), treatment of interest income, and core activity determination were upheld based on the relevant provisions of the Income Tax Act and judicial precedents.

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