2018 (7) TMI 211 - AT - Income Tax

Denying the benefit of section 80P(2)(a)(i) for the interest earned on bank deposits - Held that - By virtue of the local State laws meant for cooperative societies or other statutory requirements if certain deposits in scheduled banks are required to be maintained by the cooperative society mandatorily then in such a situation, interest income on such fixed deposits with banks i.e. other than cooperative banks are also eligible for deduction u/s 80P(2)(a)(i) - if any surplus fund or any amount put in the fixed deposit for any other liabilities created under the head funds which are not statutorily required to be maintained by the assessee society then the interest earned on such bank deposits made out of these funds is liable to be assessed as income from other sources u/s 56 of the Act. Direct the Assessing Officer to conduct necessary inquiry in this matter and also direct the assessee to produce the relevant documents, records, bylaws as well as rules and regulations of cooperative society to demonstrate that the fixed deposits which have been made are for the funds statutorily required to be maintained by the society and to this extent if the assessee is able to demonstrate this fact, the benefit of section 80P(2)(a)(i) may be given to it. The Assessing Officer is directed to examine the material produced by the assessee before him and make the assessment accordingly - appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Denial of benefit under section 80P(2)(a)(i) of the Act for interest earned on bank deposits.

Analysis:
The judgment by the Appellate Tribunal ITAT Indore involved an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the denial of the benefit under section 80P(2)(a)(i) of the Act for interest earned on bank deposits. The Assessing Officer had added the interest income from fixed deposit receipts to the assessee's total income under the head "income from other sources" instead of treating it as business income. The Commissioner of Income Tax (Appeals) upheld this decision, relying on a judgment of the Supreme Court. The main contention of the assessee was that the interest income was related to funds mandatorily required to be maintained by the society, not surplus funds. The assessee cited various judgments to support this argument.

The Tribunal analyzed the facts and balance sheet of the assessee and noted that the interest income was not earned from the business operation of lending money to members. The fixed deposits with banks were made for the purpose of running the business and safeguarding the interests of society members. The Tribunal observed that certain funds were statutorily required to be maintained by the society, as per relevant sections of the manual for cooperative societies. It was emphasized that if deposits in scheduled banks are mandated by local State laws or statutory requirements, the interest income on such fixed deposits is eligible for deduction under section 80P(2)(a)(i) of the Act. However, if funds are not statutorily required to be maintained, the interest earned on bank deposits from such funds should be assessed as income from other sources.

The Tribunal directed the Assessing Officer to conduct a thorough inquiry and requested the assessee to provide relevant documents and records to demonstrate that the fixed deposits were made for funds statutorily required to be maintained. If the assessee can prove this, the benefit of section 80P(2)(a)(i) should be granted. The Tribunal stressed that the assessee must be given a fair opportunity to present their case. Ultimately, the appeal of the assessee was allowed for statistical purposes, and the decision was pronounced in open court on 29th June 2018.