2017 (10) TMI 923 - AT - Income Tax

Deduction u/s.80P(2)(a)(i) - whether the appellant is entitled to claim deduction under section 80P(2)(a)(i) in respect of the interest earned on the deposits placed with Bank? - Held that - Considering the binding decisions of the Hon ble High Court in the case of SBI 2016 (7) TMI 516 - GUJARAT HIGH COURT interest income earned on surplus fund as dealt by the CIT(A) (supra) is hereby upheld to be taxed under the head income from other sources. However, we find that the Hon ble High Court is silent on the issue of allowability of proportionate expenses from the interest income, therefore, we direct the AO to consider the same afresh.

Issues Involved:
1. Taxation of interest income from fixed deposits under the head "Income from other sources" under Section 56 of the Income Tax Act, 1961.
2. Allowability of expenditure incurred for earning such interest income under Section 57 of the Act.
3. Eligibility of the appellant, a co-operative society, for deduction under Section 80P(2)(a)(i) of the Act.

Detailed Analysis:

1. Taxation of Interest Income:
The Commissioner of Income Tax (Appeals) [CIT(A)] directed the Assessing Officer (AO) to tax the entire interest income of ?2,88,815 received from fixed deposits of Sardar Sarovar Nigam Limited under the head "Income from other sources" as per Section 56 of the Income Tax Act, 1961. The appellant contended that this interest income should be taxed under the head "Income from business" and claimed deduction under Section 80P(2)(a)(i) as it was a co-operative society providing credit facilities to its members. However, the AO and CIT(A) concluded that the interest income from fixed deposits does not qualify for deduction under Section 80P(2)(a)(i) and should be taxed as income from other sources.

2. Allowability of Expenditure:
The appellant argued that even if the interest income is taxable under Section 56, the expenditure incurred to earn such income should be allowed under Section 57. The AO was directed to reconsider the allowability of proportionate expenses from the interest income in light of the Karnataka High Court's decision, as the Gujarat High Court in the case of State Bank of India vs. Commissioner of Income Tax did not address this specific issue.

3. Deduction under Section 80P(2)(a)(i):
The AO disallowed the deduction of ?13,14,930 claimed under Section 80P(2)(a)(i) by the appellant, a co-operative society set up by primary school teachers. The AO concluded that the appellant did not qualify as a "Primary Agricultural Credit Society" as defined under the Banking Regulation Act, 1949, and was therefore not entitled to the deduction. The appellant argued that the rejection was incorrect and that it should be eligible for the deduction as it was a co-operative society providing financial services to its members. The appellant cited various judicial precedents, including decisions by the CIT(A) and ITAT in their favor for previous assessment years, and relied on the Gujarat High Court's decision in CIT vs. Jafari Momin Vikash Co-op. Credit Society Ltd., which held that Section 80P(4) does not apply to credit co-operative societies.

Final Judgment:
The Tribunal upheld the CIT(A)'s decision to tax the interest income under the head "Income from other sources" based on the Gujarat High Court's ruling in the State Bank of India case. However, the Tribunal directed the AO to reconsider the allowability of proportionate expenses from the interest income in light of the Karnataka High Court's decision. Consequently, the appeal filed by the assessee was partly allowed.

← Previous Next →