2008 (3) TMI 321 - HC - Income Tax

Deduction / exemption u/s 80P(2)(a)(i) - interest on bank deposit is not ancillary and incidental to carrying on of the business of providing credit facility to its members held that - a sum of Rs. 15,98,592 received by way of interest on bank deposit is ancillary and incidental to carrying out the business of providing credit facility to its members, and, as such, exempt under section 80P(2)(a)(i) of the Act - the Tribunal was not correct in remitting the case back to the Assessing Officer for fresh computation of income in the face of the income of the assessee being exempt from tax

Summary

Issues:
1. Eligibility of interest received on bank deposit for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.
2. Correctness of remitting the case back to the Income-tax Officer for fresh computation of income despite income being exempt from tax.
3. Taxability of interest on bank deposits without deducting interest paid to LIC on loans raised.

Issue 1:
The first issue revolves around the eligibility of interest received on bank deposit for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. The assessee, an apex housing co-operative society, earned interest on bank deposits while providing credit facilities to its members. The Assessing Officer disallowed the deduction under section 80P(2)(a)(i) for the interest earned on bank deposits. However, the Commissioner of Income-tax (Appeals) held that the income of the assessee is exempt under section 80P(2)(a)(i) of the Act. The Patna Bench of the Income-tax Appellate Tribunal concluded that the interest received on bank deposits was not eligible for deduction under section 80P(2)(a)(i) but remitted the issue of income exemption on the principle of mutuality. The High Court, after considering the arguments, held that the interest earned on bank deposits is ancillary and incidental to carrying on the business of providing credit facility to its members, thus exempt under section 80P(2)(a)(i) of the Act. The judgment cited the case law of CIT v. Karnataka State Co-operative Apex Bank to support this conclusion.

Issue 2:
The second issue questions the correctness of remitting the case back to the Income-tax Officer for fresh computation of income despite the income of the assessee being exempt from tax. The High Court opined that the Tribunal was not correct in remitting the case back to the Assessing Officer for fresh computation of income when the income of the assessee was already exempt from tax under section 80P(2)(a)(i) of the Act. Therefore, the judgment was against the Revenue and in favor of the assessee on this issue.

Issue 3:
The final issue pertains to the taxability of interest on bank deposits without deducting the interest paid to LIC on loans raised. The High Court deemed the opinion on this issue as academic in view of the conclusions reached on the first and second issues. The judgment did not delve into this issue further due to the resolution of the primary matters regarding the eligibility of deductions under section 80P(2)(a)(i) of the Act.

This detailed analysis of the judgment provides a comprehensive understanding of the legal issues involved and the High Court's ruling on each of them.