2017 (4) TMI 652 - AT - Income Tax

Granting exemption under section 80P(2)(a)(i) - whether cooperative credit society could claim deduction under section 80P(2) of interest income earned by it with investment in nationalized banks? - Held that - Deduction under section 80P(2)(1) is not available on the interest income earned on surplus money deposited with Nationalised Banks. But if assessee has incurred any expenditure, which is attributable to the earning of interest income, then, the AO shall examine that aspect and exclude the interest expenditure if any incurred by the assessee for earning this interest from bank. In other words, the only net interest income is to be excluded from the claim of deduction under section 80P(2) of the Act. Respectfully following the judgment in case of State Bank of India Vs. CIT 2016 (7) TMI 516 - GUJARAT HIGH COURT we set aside by the orders of the Revenue authorities and restore this issue to the file of the AO for re-adjudication. The ld.AO shall work out net interest income earned by the assessee from the FDRs. with nationalized banks. He thereafter disallow that amount only from the exemption admissible to the assessee under section 80P(2). We make it further clear that the assessee is a credit cooperative society. It is entitled for deduction under section 80P(2)(1) on the interest income earned by it from its members. The interest income earned on the investment of surplus fund with nationalized bank is only to be excluded from the claim of 80P(2)(a)(i) of the Act. The ld.AO shall carry out this exercise after providing due opportunity of hearing to the assessee. In the result appeal of the assessee is allowed for statistical purpose.

Summary

Issues:
1. Controversy over granting exemption under section 80P(2)(a)(i) of the Income Tax Act, 1961 to the assessee.

Analysis:
The Revenue appealed before the Tribunal against the order of the ld.CIT(A)-I, Baroda, claiming that the exemption under section 80P(2)(a)(i) was wrongly granted to the assessee. The case involved the assessee making fixed deposits in nationalized banks and earning interest income. The AO contended that since the assessee was engaged in banking activities and providing credit facilities to members, it was not entitled to the deduction under section 80P(2) of the Act. However, the ld.CIT(A) allowed the claim based on the judgment of the Hon’ble Gujarat High Court in a similar case. The Tribunal noted that neither the AO nor the CIT(A) had conducted a detailed analysis of the facts. The AO's confusion between treating the assessee as a cooperative bank or credit society was evident, and the CIT(A)'s order lacked analytical examination. The Tribunal emphasized the need for a thorough assessment of the interest income earned by the assessee to determine eligibility for the deduction under section 80P(2).

The controversy was further clarified by referencing a judgment of the Hon’ble Gujarat High Court in the case of State Bank of India Vs. CIT, where it was held that income from investments made in banks by a society engaged in providing credit facilities to members did not qualify for deduction under section 80P(2). The Court highlighted that interest income earned on surplus funds deposited with nationalized banks was not eligible for the deduction. The Tribunal directed the AO to re-examine the case in light of this judgment, emphasizing the need to calculate the net interest income earned by the assessee and exclude it from the deduction under section 80P(2). It was clarified that the assessee, being a credit cooperative society, was entitled to the deduction on interest income earned from members, with only the interest income from surplus funds deposited in nationalized banks to be excluded from the claim under section 80P(2)(a)(i). The appeal of the assessee was allowed for statistical purposes, and the matter was remanded to the AO for re-adjudication.

In conclusion, the judgment provided clarity on the eligibility of a credit cooperative society for deduction under section 80P(2) of the Income Tax Act, emphasizing the exclusion of interest income earned on surplus funds deposited in nationalized banks from the deduction. The Tribunal's decision was based on the interpretation of relevant legal provisions and precedents set by the Hon’ble Gujarat High Court, ensuring a fair and accurate assessment of the tax liability in the case.