2018 (3) TMI 1562 - AT - Income Tax

Eligibility for deduction u/s 80P - interest income on deposits with non co-operative banks - Held that - It is not surplus funds which has been deposited by the assessee. On the other hand, the assessee is statutorily required to deposit 25% of its profits in reserve funds, which in turn, have to be parked in FDRs with Co-operative Bank or Scheduled Banking company. The assessee before us, in line with statutory obligation of maintaining its status of Co-operative society and as per the regulations of Maharashtra State Co-operative Societies Act, was duty bound to transfer 25% of its profits to reserve funds, which it has done. There is no dispute to the same. The second aspect is the utilization of funds in reserve funds by way of making FDRs with Scheduled bank under section 70 of the said Act. The assessee has received permission of the Registrar of Maharashtra Co-operative Societies Act to make such investment with Bank of Maharashtra and also in order to carry on the business activities of providing credit facilities to its employees, it is mandatory upon the assessee to invest 25% of its profits in the reserve funds, which in turn, are parked in FDRs with Bank of Maharashtra, then interest income earned by the assessee is from carrying on its business activities. Once it is so, then the said income is assessable as Income from business and the assessee is entitled to claim deduction under section 80P(2)(a)(i) of the Act. Accordingly, we hold so. However, the assessee is not entitled to claim the said deduction on Saving Account interest. We uphold the order of CIT(A) in directing the Assessing Officer to allow eligible deduction under section 80P(2)(a)(i) of the Act on the interest income earned on FDRs of Bank of Maharashtra.

Summary

Issues Involved:
1. Eligibility for deduction under section 80P of the Income-tax Act, 1961.
2. Validity of reopening assessments under section 147/148 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P:

The primary issue in the appeals filed by the Revenue was whether the assessee society was eligible for deduction under section 80P of the Act concerning interest income on deposits with non-co-operative banks. The Revenue contended that the Commissioner of Income-tax (Appeals) erred in holding the assessee society eligible for such deduction, ignoring the Supreme Court's decision in Totgar’s Co-operative Sale Society Ltd. Vs. ITO.

The facts revealed that the assessee society, engaged in providing credit facilities to its members, had invested reserve funds in fixed deposits with the Bank of Maharashtra, a nationalized bank. The investment was made under statutory obligations per the Maharashtra Co-operative Societies Act, 1960, which required societies to maintain a reserve fund and invest it as per the provisions of section 70 of the said Act.

The Assessing Officer disallowed the deduction, citing that the interest income should be taxed under 'Income from other sources' and not as 'Business income,' based on the Totgar’s Co-operative Sale Society Ltd. Vs. ITO case. However, the CIT(A) upheld the assessee's claim, stating that the investment was part of the statutory obligation and directly arose from the business of providing credit facilities to its members, thereby making the interest income eligible for deduction under section 80P(2)(a)(i).

The Tribunal supported the CIT(A)'s decision, emphasizing that the funds invested were not surplus but statutorily required reserve funds. The Tribunal referenced earlier decisions, including CIT Vs. Karnataka State Co-operative Apex Bank, which supported the view that interest income from statutory investments is business income and eligible for deduction under section 80P(2)(a)(i).

2. Validity of Reopening Assessments under Section 147/148:

The assessee challenged the reopening of assessments under section 147/148, arguing that the Assessing Officer had no fresh information and relied only on the return of income. The CIT(A) upheld the reopening, stating that the return was initially processed under section 143(1), and the Assessing Officer had prima facie reasons to believe that income had escaped assessment, justifying the issuance of notice under section 148.

The Tribunal noted that since the assessment was made under section 143(1), the Assessing Officer needed some tangible material to record reasons for reopening. However, the Tribunal did not adjudicate this issue in-depth, as it had already decided the primary issue on merits in favor of the assessee, rendering the cross-objections academic.

Conclusion:

The Tribunal concluded that the assessee society was entitled to deduction under section 80P(2)(a)(i) for interest income earned on fixed deposits with the Bank of Maharashtra, as the investments were made under statutory obligations and were part of the business activities. The appeals of the Revenue were dismissed, and the cross-objections of the assessee on the validity of reopening assessments were not adjudicated, given the favorable decision on the primary issue.