2021 (10) TMI 971 - HC - Income Tax

Deduction u/s 80P(2)(i)(a) - Additions u/s 68 - whether the CIT(Appeals) and the Tribunal are correct in extending the deduction availed under Chapter VI A to the 5% disallowed by the Income Tax Officer on interest paid to the depositors? - HELD THAT - The Society is entitled to claim deduction u/s 80P(2)(i)(a) - The exclusion of 5% from the expenditure disallowed is treated as a deduction permissible under 80P(2)(a)(i) of the Act. The argument of the Department is that the said disallowed portion will have to be treated as 'income earned from other sources'. The foundation for such argument is that the Circular relied by the Tribunal is inapplicable, and secondly the dis-allowance forms part of a situation contemplated by Section 68 of the Act. Applicability of the Circular to the case on hand. Circular Dated 02.11.2016 refers to Section 32, 40(a)(ia), 40A(3), 43B, etc . The appreciation of Revenue that it is applicable only to the sections stated therein, is unacceptable and stated so without noticing the word 'etc' used in the Circular. Therefore, the objection now raised against the Tribunal that the Tribunal relied on an inapplicable Circular is incorrect and accordingly rejected. The Circular comprehensively sets out the procedure for treating such items of expenditure. The assessee/Society, in view of the recent Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. Case 2021 (1) TMI 488 - SUPREME COURT is entitled to be treated as a Society satisfying the definition of Section 2(19) of Income Tax Act read with Kerala Societies Registration Act, 1860. The primary business of assessee/Society is accepting deposits and providing benefits to the members of the Society. The income, therefore, received by the Society is from the interest it earns on the amount lent to the members. The Society, likewise, is paying interest on the deposits it has accepted. For a reason recorded and accepted by all the authorities, the 5% of the expenditure booked against interest paid to depositors is disallowed and once disallowed portion is accepted by all the authorities, the said disallowed portion forms part of the interest earned by the Society on the amount lent by the Society to its members, vis-a-vis in other words, income earned from business carried on by the Society. Therefore, the Society is entitled to deduction u/s 80P(2)(i)(a) of the Income Tax Act. Section 68 of the Act in terms is not applicable to an entry warranted consequent to the disallowed expenditure by the Assessing Authority. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 80P(2)(i)(a) of the Income Tax Act for a registered Primary Agricultural Credit Society.
2. Allowability of deduction under Section 80P for interest on deposits.
3. Treatment of disallowed expenditure as income earned from other sources.

Analysis:

1. The judgment involves an appeal by the Revenue against the Income Tax Appellate Tribunal's decision regarding a Primary Agricultural Credit Society's claim for deduction under Section 80P(2)(i)(a) of the Income Tax Act for the Assessment Year 2012-13. The Commissioner of Income Tax (Appeals) upheld the disallowance of 5% of the interest paid on deposits but allowed it as a deduction under Section 80P(2)(a). The Tribunal dismissed the Revenue's appeal, leading to the current Income Tax Appeal.

2. The argument raised by the Senior Counsel for the Revenue was that the Society could not claim deduction on income received as interest from the Treasury and a scheduled bank like Laxmi Vilas Bank. However, the Society contended that the Revenue had accepted the deduction granted by the Assessing Officer, and the objection raised now could not be considered without proper challenge. The Court agreed that the Revenue had not challenged the deduction previously granted, and hence, the objection could not be entertained at this stage.

3. Regarding the treatment of disallowed expenditure as income earned from other sources, the Senior Advocate argued against the deduction under Chapter VI A of the Act, insisting it should be treated as income from other sources and taxed. However, the Society's representative contended that the disallowed portion should be considered part of the income earned by the Society through its business activities and thus eligible for deduction under Section 80P(2)(i)(a). The Court agreed with the Society's position, emphasizing that the disallowed portion formed part of the interest earned by the Society and was eligible for deduction under Section 80P(2)(i)(a).

4. The Court further clarified that the Circular referred to by the Tribunal was applicable, rejecting the Revenue's argument to the contrary. Ultimately, the Court ruled in favor of the Society, affirming its entitlement to the deduction under Section 80P(2)(i)(a) and dismissing the Income Tax Appeal raised by the Revenue.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved and the Court's reasoning in deciding each matter, ensuring a thorough understanding of the legal implications and interpretations presented in the case.