2020 (10) TMI 416 - AT - Income Tax

Entitled to deduction u/s 80P(2)(a)(i) - interest income earned from bank - PCIT held that the assessee was not entitled to deduction u/s 80P(2)(a)(i) as relying on case of Totagars Co-operative Sale Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT - assessee contended that surplus funds for which there was no immediate need were deposited with the banks and interest income earned on such investments was to be considered as income from business since these funds were relating to business of providing credit facilities to the members - PCIT accepted the assessee s contentions that it is a primary agricultural credit society and it was entitled to claim deduction - HELD THAT - Whether the source of funds were assessee's own funds or out of liability was not the subject matter of decision of the TOTAGARS CO-OPERATIVE SALE SOCIETY 2017 (7) TMI 1049 - KARNATAKA HIGH COURT relied on by the Id. PCIT. To this extent, the judgment of the Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-op. Society Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT relied on by the assessee still holds good. Hence from this aspect, the issue should be considered by the AO after examining the facts in light of the judgment of the Hon'ble Apex Court in the case of Totagars Co-operative Sales Society 2010 (2) TMI 3 - SUPREME COURT and the judgment of Hon'ble Karnataka High Court rendered in the case of Tumkur Merchants Souharda Credit Co-op. Society Ltd. (supra). Therefore, the directions of the PCIT to assess the interest income under the head income from other sources and grant permissible deduction u/s. 57 of the Act is quashed. The AO will afford adequate opportunity of being heard to the assessee for filing details/evidence to substantiate its case before deciding the issue. Assessee's appeal is partly allowed.

Summary

Issues:
- Interpretation of deduction u/s 80P(2)(a)(i) of the Income-tax Act, 1961 for interest income earned from banks by a primary Agricultural Credit Society.

Detailed Analysis:

1. Issue of Deduction u/s 80P(2)(a)(i):
- The appeal was against the CIT order under section 263 of the Income-tax Act, 1961, regarding the eligibility of a primary Agricultural Credit Society for deduction u/s 80P(2)(a)(i) for interest income from banks.
- The PCIT held that interest income from fixed deposits with banks cannot be considered as business income, thus disallowing the deduction u/s 80P(2)(a)(i) based on a Karnataka High Court judgment.
- The assessee contended that the interest income from bank deposits should be considered as "income from business" due to surplus funds related to providing credit facilities to members, making them eligible for the deduction.

2. Judicial Interpretation:
- The PCIT relied on a Karnataka High Court judgment in the case of Totagars Co-operative Sale Society, which held that interest income from banks is not deductible u/s 80P(2)(d) of the Act.
- The assessee cited the judgment of Tumkur Merchants Souharda Credit Cooperative Ltd. to support their claim that interest income from temporary investments in banks qualifies for deduction u/s 80P(2)(a)(i).
- The Tribunal noted the inconsistency in judgments and emphasized that the source of funds for investments remained the same, supporting the assessee's position that the interest income should be considered as "income from business" eligible for deduction u/s 80P(2)(a)(i).

3. Decision and Conclusion:
- The Tribunal partially allowed the appeal, quashing the PCIT's direction to assess interest income under "income from other sources" and granting an opportunity for the assessee to provide evidence supporting their claim.
- The Tribunal highlighted the need for the AO to re-examine the issue in light of relevant judgments and afford the assessee a fair hearing before making a final decision.

This detailed analysis of the judgment highlights the key legal issues, conflicting interpretations, and the final decision of the Tribunal regarding the deduction u/s 80P(2)(a)(i) for interest income earned by a primary Agricultural Credit Society from bank deposits.