2017 (1) TMI 385 - AT - Income Tax

Disallowance of deduction u/s. 80P(2)(c) - interest income from deposits with the nationalized banks - assessee is a housing Co-operative society - Held that - In the present case we observe that the assessee is claiming deduction on interest income earned on funds deposited with nationalized banks. The interest income on deposits with nationalized banks neither falls in clause (d) nor it partakes the character of profits and gains attributable to the activities of the assessee to fall within the ambit of clause (c) of section 80P(2). The assessee is a Co-operative housing society, therefore, interest income on bank deposits cannot be considered as income attributable to the activities of the assessee. To be eligible to claim deduction u/s. 80P(2)(c) the assessee has to show direct or proximate connection of the earnings/income with the activities of the society. It is not the case of assessee where the deposits with the nationalized Bank were made to comply with statutory condition. Had it been so, the assessee would have got the benefit of section 80P(2)(c) in the light of decision in the case of CIT Vs. Co-operative Cane Development Union Ltd.(1979 (2) TMI 91 - ALLAHABAD High Court ). In the present case we observe that there is not even a remote link between the interest income earned on deposits with nationalized banks and the activities of the assessee. Thus, in the facts and circumstances of the case we do not find any infirmity in the impugned order and the same is confirmed. - Decided against assessee

Summary

Issues:
Disallowance of deduction u/s. 80P(2)(c) of the Income Tax Act, 1961 for interest earned on fixed deposits with nationalized banks.

Analysis:
The appeal was filed by a housing Co-operative society against the disallowance of a deduction u/s. 80P(2)(c) for interest earned on fixed deposits with nationalized banks for the assessment year 2010-11. The Assessing Officer disallowed the claim, which was upheld by the Commissioner of Income Tax (Appeals). The main contention was whether the interest income from fixed deposits with nationalized banks could be considered as profits and gains attributable to the activities of the society under section 80P(2)(c) of the Act.

The assessee argued that the interest income should be allowed as per the decision of the Hon'ble Allahabad High Court and a Tribunal decision. On the other hand, the Department contended that the interest income should be chargeable under the head 'Income from other source' and not considered as profits attributable to the society's activities. The Tribunal analyzed the provisions of section 80P(2)(c) & (d) of the Act to understand the scope and applicability of the deduction.

The Tribunal observed that the interest income on fixed deposits with nationalized banks did not fall under clause (d) or qualify as profits attributable to the society's activities under clause (c) of section 80P(2). It was noted that to claim a deduction under section 80P(2)(c), there must be a direct or proximate connection between the income and the society's activities. The Tribunal emphasized that the interest income from bank deposits could not be considered as income attributable to the society's activities.

The Tribunal referred to a judgment where a similar deduction was allowed due to the construction phase of a project, which was not applicable in the current case. The Tribunal also dismissed the applicability of another Tribunal decision cited by the assessee. It was concluded that there was no link between the interest income earned on deposits with nationalized banks and the society's activities. Hence, the appeal of the assessee was dismissed, confirming the disallowance of the deduction.

In conclusion, the Tribunal upheld the decision to disallow the deduction u/s. 80P(2)(c) for interest income from fixed deposits with nationalized banks, as it did not qualify as profits and gains attributable to the activities of the Co-operative society. The judgment highlighted the importance of establishing a direct connection between income and society's activities to claim such deductions.