2018 (6) TMI 165 - AT - Income Tax

Eligibility of deduction u/s 80P(2)(a)(i) on interest income on investments made with Sub-Treasuries - whether assessment under the head income from other sources or income from business - Held that - Assessee had made investments with sub-treasuries in the course of its business of banking / providing credit facilities to its members - entitled to deduction u/s 80P(2)(a)(i) u/h income from business - Decided in favor of assessee.

Summary

Issues Involved:

1. Whether the CIT(A) is justified in directing the Assessing Officer to grant deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income received by the assessee on investments made with Sub-Treasuries.

Detailed Analysis:

1. Background and Context:
The appeals by the Revenue and the Cross Objections by the assessee concern four orders of the CIT(A) dated 20.03.2017 for the assessment years 2009-2010 to 2012-2013. The primary issue is whether the CIT(A) was correct in directing the Assessing Officer to grant deduction under section 80P(2)(a)(i) of the Income Tax Act (I.T.Act) for interest income received from investments in Sub-Treasuries.

2. Assessing Officer's Disallowance:
The Assessing Officer disallowed the claim for deduction under section 80P(2) of the I.T.Act, arguing that the assessee, a primary agricultural credit society, was engaged in banking activities and, due to the insertion of section 80P(4) effective from 01.04.2007, was not entitled to the deduction.

3. CIT(A)'s Ruling:
The CIT(A) ruled in favor of the assessee, citing the Kerala High Court's judgment in The Chirakkal Service Cooperative Bank Ltd. vs. CIT, which held that the assessee was entitled to the deduction under section 80P(2). The CIT(A) also concluded that the interest earned on investments with sub-treasuries was part of the banking business and thus eligible for the deduction. This decision was based on precedents from the Supreme Court in CIT v. Karnataka State Co-operative Bank and other Tribunal orders.

4. Revenue's Appeal:
The Revenue challenged the CIT(A)'s decision, raising several grounds, including:
- The CIT(A) erred in treating the interest income from Sub-Treasuries as exempt under section 80P.
- The CIT(A) wrongly relied on the Supreme Court's decision in Karnataka State Co-operative Apex Bank.
- The CIT(A) should have considered the Supreme Court's decision in Totgars Co-Operative Sale Society, which stated that interest on investments should be treated as "Income from other sources."

5. Tribunal's Analysis and Decision:
The Tribunal examined the issue of whether the interest income should be assessed under "income from other sources" or "income from business." The Tribunal noted that similar issues had been decided in favor of the assessee in previous cases, including The Azhikode Service Co-operative Bank Ltd. and others.

- Banking Definition and Eligibility: The Tribunal referenced the Banking Regulation Act's definition of banking and the Karnataka High Court's ruling in Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO, which clarified that primary agricultural credit societies not possessing a banking license from the RBI are not "co-operative banks" and thus eligible for section 80P(2) deductions.

- Distinguishing Totgars Case: The Tribunal distinguished the Totgars case, highlighting that the interest income in Totgars was from funds retained as liabilities, whereas, in the current case, the funds were the society's own and invested as part of its banking activities.

- Supporting Precedents: The Tribunal cited several supporting judgments, including the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which supported treating interest income from investments as business income eligible for deduction under section 80P(2).

6. Final Ruling:
The Tribunal concluded that the assessee's interest income from investments with sub-treasuries should be treated as business income and is eligible for deduction under section 80P(2)(a)(i) of the I.T.Act. The appeals by the Revenue were dismissed, and the Cross Objections by the assessee were deemed infructuous.

7. Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the interest income received by the assessee on investments made with Sub-Treasuries qualifies for deduction under section 80P(2)(a)(i) of the I.T.Act. The Revenue's appeals were dismissed, and the assessee's Cross Objections were dismissed as infructuous.