2016 (12) TMI 560 - HC - Income Tax

Entitlement to the benefit of Section 80P(2)(a)(i) - interest received from employees - Held that - Questions of law are decided in favour of the assessee but only on the basis that the assessee is engaged in carrying on the business of providing credit facilities to its members. The Tribunal shall decide the appeal afresh only on the question as to whether the assessee is also engaged in carrying on the business of banking. In the event of the finding being against the assessee, it would not be entitled to succeed on the issues before us, in any event. However, in the event of the Tribunal finding that the assessee is engaged in carrying on the business of banking, the Tribunal shall decide as to whether on that basis the assessee is entitled to the benefit of Section 80P(2)(a)(i) or under any other provision in respect of the claims that are the subject matter of this appeal. Disallowance on provision of non-performing assets - Held that - As it is admitted that the assessee would be entitled to the same only in the event of it being found that it is also engaged in carrying on the business of banking. It does not arise under Section 80P(2)(a)(i) on account of the business of providing credit facilities to the assessee s members. Question is, therefore, answered against the assessee insofar as the claim is based only on the assessee being engaged in carrying on the business of providing credit facilities to its members.

Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income-tax Act for interest received from employees.
2. Allowability of deduction under Section 80P(2)(a)(i) for provision for non-performing assets (NPA).
3. Eligibility for deduction under Section 80P(2)(a)(i) for interest on reserve funds.
4. Eligibility for deduction under Section 80P(2)(a)(i) for interest on call deposits.

Detailed Analysis:

Issue 1: Eligibility for Deduction for Interest Received from Employees
The assessee claimed a deduction under Section 80P(2)(a)(i) for interest earned from advances to its employees. The court held that the term "members" does not include employees under the Punjab Cooperative Societies Act, 1961. Therefore, the interest earned from employees does not qualify for the deduction under Section 80P(2)(a)(i).

Issue 2: Allowability of Deduction for Provision for Non-Performing Assets (NPA)
The court noted that the deduction for provision for NPA is allowable only if the assessee is engaged in the business of banking. Since the Tribunal had not considered whether the assessee was engaged in banking, the court held that the deduction for NPA cannot be allowed solely on the basis that the assessee is providing credit facilities to its members. Thus, this issue was decided against the assessee.

Issue 3: Eligibility for Deduction for Interest on Reserve Funds
The assessee earned interest on reserve funds and claimed it under Section 80P(2)(a)(i). The Tribunal had allowed this claim, but the court referenced the Supreme Court's judgment in Totgar's Co-operative Sale Society Ltd. v. ITO, which held that interest on funds not immediately required for business purposes falls under "Income from other sources" and not under business income. The court concluded that interest on reserve funds, which are not immediately required for business purposes, does not qualify for deduction under Section 80P(2)(a)(i).

Issue 4: Eligibility for Deduction for Interest on Call Deposits
The assessee also claimed a deduction for interest earned on call deposits. Similar to the interest on reserve funds, the court held that interest earned from call deposits, which are funds not immediately required for business purposes, does not qualify for deduction under Section 80P(2)(a)(i). This conclusion was also based on the Supreme Court's judgment in Totgar's case.

Conclusion:
The court set aside the Tribunal's order and remanded the case back to the Tribunal to decide whether the assessee is engaged in the business of banking. If the Tribunal finds that the assessee is engaged in banking, it will then decide whether the assessee is entitled to the benefits under Section 80P(2)(a)(i) or any other provision for the claims in question. The appeal was disposed of with these directions.

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