2016 (8) TMI 465 - AT - Income Tax

Deduction u/s.80P(2)(a)(i) - interest income earned from transactions with non-members and nominal members and interest income earned from non-SLR (Statutory Liquidity Ratio) investments - Held that - CIT(A) was justified in allowing deduction u/s.80P(2)(a)(i) of the Act on interest income earned from transactions with non-members and nominal members and interest income earned from non-SLR (Statutory Liquidity Ratio) investments, i.e., investments made not owing to any compulsion of Reserve Bank of India regulations to maintain Statutory Liquidity Ratio (SLR).

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act.
2. Eligibility of deduction under Section 80P(2)(a)(i) for interest income from transactions with non-members and nominal members.
3. Eligibility of deduction under Section 80P(2)(a)(i) for interest income from non-SLR investments.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:
The Assessee challenged the initiation of reassessment proceedings under Section 147 of the Income Tax Act for the assessment years 1996-97 to 2000-01, which was rejected by the CIT(A). The Tribunal, however, did not find it necessary to adjudicate on this issue, as the main issue regarding the eligibility of deduction under Section 80P(2)(a)(i) was decided in favor of the Assessee.

2. Eligibility of Deduction under Section 80P(2)(a)(i) for Interest Income from Transactions with Non-Members and Nominal Members:
The common issue in the appeals by the Revenue was whether the CIT(A) was justified in allowing deduction under Section 80P(2)(a)(i) of the Income Tax Act on interest income earned from transactions with non-members and nominal members. The AO contended that such income was not eligible for deduction, as nominal members could not hold shares or attend annual general meetings, and thus could not be regarded at par with regular members. The AO estimated the interest income from transactions with non-members and nominal members and held it was not eligible for deduction under Section 80P.

The CIT(A) allowed the Assessee's claim, relying on previous Tribunal decisions and judicial precedents, including the cases of Mehsana District Central Co-Op. Bank Ltd. vs. ITO, CIT vs. Baroda Peoples Co-Op. Bank Ltd., and Milli Co-Op. Urban Bank Ltd. vs. ITO. The CIT(A) observed that the issues were covered by the decisions of the jurisdictional ITAT, which held that interest income from transactions with non-members and nominal members was eligible for deduction under Section 80P(2)(a)(i).

3. Eligibility of Deduction under Section 80P(2)(a)(i) for Interest Income from Non-SLR Investments:
The AO also held that income derived from non-SLR investments was not eligible for deduction under Section 80P(2)(a)(i), as such investments were not part of the banking business. The AO estimated the interest income from non-SLR investments and held it was not eligible for deduction.

The CIT(A) disagreed, noting that the interest income from non-SLR investments was eligible for deduction under Section 80P(2)(a)(i), as per the principles laid down by the ITAT. The CIT(A) found the AO's estimation of income to be arbitrary and without basis, and directed the AO to allow the Assessee's claim for deduction.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, confirming that the interest income from transactions with non-members and nominal members, as well as from non-SLR investments, was eligible for deduction under Section 80P(2)(a)(i). The Tribunal relied on its previous decisions in the Assessee's own case for earlier assessment years and other judicial precedents. The Tribunal also addressed the Revenue's emphasis on the Supreme Court's decision in Totgars Co-operative Sale Society Ltd. vs. ITO, distinguishing it from the present case.

Conclusion:
The appeals by the Revenue were dismissed, and the Tribunal confirmed the CIT(A)'s orders allowing the Assessee's claim for deduction under Section 80P(2)(a)(i). The cross-objections filed by the Assessee regarding the validity of reassessment proceedings were dismissed as not calling for any adjudication.

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