2019 (7) TMI 127 - AT - Income Tax

Deduction u/s. 80P - pro rata expenses in respect of interest earned from deposit held with nationalized bank - HELD THAT - We direct the assessing officer to allow pro rata expenses in respect of interest earned from deposit held with nationalized bank and cooperative bank for computing the deduction u/s. 80P after examining/verification and affording adequate opportunity to the assessee. Therefore, the appeal of the assessee is partly allowed for statistical purposes.

Issues Involved:
1. Classification of ?1,51,81,968/- as Income from Other Sources instead of Business Income.
2. Disallowance of deduction under Section 80P of ?1,51,81,968/-.
3. Taxation of gross amount instead of net amount.
4. Charging of interest under Section 234B.
5. Charging of interest under Section 234C.

Detailed Analysis:

1. Classification of ?1,51,81,968/- as Income from Other Sources instead of Business Income:
The primary issue in this appeal is whether the interest income of ?1,51,81,968/- earned from a Nationalized Bank should be classified as "Income from Other Sources" or "Business Income." The assessee, a registered Co-operative Society, claimed this income under "Business Income" and sought deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. However, the Assessing Officer (AO) treated this income as "Income from Other Sources" under Section 56 of the Act, disallowing the deduction. This decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], referencing the Gujarat High Court's judgment in State Bank of India vs. CIT, which confirmed that interest income from Nationalized Banks does not qualify for deduction under Section 80P(2)(a)(i).

2. Disallowance of Deduction under Section 80P of ?1,51,81,968/-:
The assessee's claim for deduction under Section 80P(2)(a)(i) was disallowed on the grounds that the interest income was not derived from the activity of providing credit facilities to its members. The CIT(A)'s decision to disallow this deduction was based on the Gujarat High Court's ruling in State Bank of India vs. CIT, which was further supported by various judicial pronouncements from the ITAT. The ITAT bench observed that interest income earned from surplus funds deposited with banks does not qualify for deduction under Section 80P(2)(a)(i) as it is not attributable to the business operations of providing credit facilities to members.

3. Taxation of Gross Amount Instead of Net Amount:
The assessee contested the taxation of the gross interest income instead of the net amount. The ITAT referred to its earlier decision in ITA No.108/Ahd/2017 for A.Y. 2013-14, wherein it was held that the assessee is entitled to pro rata expenses in respect of interest earned from deposits held with banks. The ITAT directed the AO to allow pro rata expenses after verification, thereby partially allowing the appeal for statistical purposes.

4. Charging of Interest under Section 234B:
The assessee raised an issue regarding the charging of interest under Section 234B. The ITAT noted that the levy of interest under Section 234B is mandatory as per the provisions of the Act and dismissed this ground of appeal.

5. Charging of Interest under Section 234C:
Similarly, the issue of charging interest under Section 234C was also raised. The ITAT upheld that the levy of interest under Section 234C is mandatory and dismissed this ground of appeal as well.

Conclusion:
The ITAT dismissed the appeal regarding the classification of income and disallowance of deduction under Section 80P, affirming the CIT(A)'s decision. However, it directed the AO to allow pro rata expenses for computing the deduction under Section 80P after verification, thereby partly allowing the appeal for statistical purposes. The grounds related to the charging of interest under Sections 234B and 234C were dismissed as they are mandatory provisions. The overall appeal was partly allowed for statistical purposes.

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