2018 (9) TMI 1557 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income received by the assessee on investments made with Sub-Treasuries, Banks etc. - whether interest income received by the assessee on investments with sub-treasuries and banks was liable to be assessed under the head income from other sources or income from business ? - Held that - Hon ble Telangana & Andhra Pradesh High Court in the case of Vaveru Co-operative Rural Bank Ltd. v CIT 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT had also decided on identical issue in favour of the assessee. The Hon ble High Court had held that co-operative societies engaged in providing credit facilities to its members had in course of business made investments with treasury, bank etc. and earned interest income, such income was eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. In the instant case the assessee had made investments with sub-treasuries and banks in the course of its business of banking / providing credit facilities to its members. Therefore, it was entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income that was received on such investments. - Decided in favour of assessee

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, Banks, etc.

Detailed Analysis:

Background:
The assessee, a primary agricultural credit society registered under the Kerala Co-operative Societies Act, 1969, engaged in banking and providing credit facilities to its members, claimed a deduction under section 80P(2)(a)(i) of the I.T.Act for interest income received from investments in treasury and banks. The Assessing Officer (A.O.) treated this interest income as "income from other sources" and denied the deduction.

First Appellate Authority's Decision:
The CIT(A) allowed the deduction, following the Cochin Bench of the Tribunal's decision in the case of Kizhathadiyoor Service Co-operative Bank Ltd. for the assessment year 2009-2010. The CIT(A) held that the interest income from investments in Treasury and Banks is part of the banking activity of the assessee and thus eligible for deduction under section 80P(2)(a)(i).

Revenue's Appeal:
The Revenue challenged the CIT(A)'s decision, arguing that the CIT(A) erred in holding that interest earned from investments in treasury and banks is part of banking activity eligible for deduction under section 80P(2)(a)(i). The Revenue cited the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd., where the interest income was categorized as "income from other sources" and not eligible for deduction as business income under section 80P(2)(i).

Tribunal's Analysis:
The Tribunal examined whether the interest income from investments with sub-treasuries and banks should be assessed as "income from other sources" or "income from business." If considered "income from business," the assessee would qualify for the deduction under section 80P(2)(a)(i).

The Tribunal noted that similar issues were considered in previous cases, including The Azhikode Service Co-operative Bank Ltd. and others, where it was decided in favor of the assessee. The Tribunal referred to the Karnataka High Court's decision in Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO, which clarified that primary agricultural credit societies or primary cooperative agricultural and rural development banks without an RBI banking license are not considered cooperative banks under section 80P(4) and thus eligible for the deduction.

The Tribunal distinguished the facts of the Totgar's case, noting that the interest income in Totgar's was from surplus funds retained from marketing agricultural produce, shown as a liability, and not attributable to the activities mentioned in section 80P(2)(a)(i). In contrast, the interest income in the present case was from investments made in the course of banking activities.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the interest income from investments with sub-treasuries and banks is part of the banking activity of the assessee and eligible for deduction under section 80P(2)(a)(i). The Tribunal dismissed the Revenue's appeal.

Order:
The appeal filed by the Revenue is dismissed, and the order pronounced on September 24, 2018, confirms the eligibility of the assessee for the deduction under section 80P(2)(a)(i) for the interest income received on investments with sub-treasuries and banks.

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