2022 (2) TMI 1449 - AT - Income Tax

Correct head of income - interest income earned on FDRs and saving bank account - income from other sources or business income - HELD THAT - When it is an accepted position that assessee is lending to its members for which it borrows funds, it has to be held that the unutilized borrowed funds temporarily parked as investments in FDRs and savings bank accounts has to be considered to be in the process of its business activity. More so, when the interest income earned merges with its funds utilized for lending to member. In case of National Co-operative Development Corporation 2020 (9) TMI 496 - SUPREME COURT while considering a similar nature of dispute has held that when fund not immediately required for utilization is invested for a short period so that the fund does not lie idle and the income generation from such investment is necessarily interlinked to the business of the assessee, would thus fall under the head of profit and gains from business or profession - thus to hold that the interest income earned by the assessee has to be assessed under the head business income. Eligibility to claim deduction u/s 80P(2)(i)(a) - It needs to be factually verified wherefrom the assessee has earned the interest income. If the interest earned is from fixed deposits and savings bank accounts held in other cooperative banks, then the assessee would be eligible to claim deduction u/s 80P(2)(a)(i) of the Act, as, cooperative banks are primarily cooperative societies. Therefore, after verifying the source of interest income, the AO may allow assessee s claim of deduction u/s 80P(2)(a)(i) of the Act.

Summary

Issues:
1. Assessment of interest income on FDRs and saving bank accounts as income from other sources instead of business income.
2. Eligibility to claim deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Issue 1:
The appellant challenged the assessment of interest income earned on FDRs and saving bank accounts as income from other sources rather than business income. The Assessing Officer held that since the banks where the investments were made were not members of the co-operative credit society, the interest income could not be considered part of the business activity. He also concluded that the appellant was not eligible for deduction under section 80P(2)(a)(i) of the Act. The Commissioner (Appeals) upheld this decision. However, the appellant argued that the interest income was earned to maximize resource utility and should be considered part of the business activity. The appellant's counsel cited relevant case law to support this argument. The Tribunal held that the interest income earned on FDRs and savings bank accounts should be assessed under the head "income from business or profession" based on the business activities of the appellant.

Issue 2:
Regarding the eligibility to claim deduction under section 80P(2)(a)(i) of the Act, the Tribunal directed the Assessing Officer to verify the source of interest income. If the interest was earned from fixed deposits and savings bank accounts held in other cooperative banks, the appellant would be eligible for the deduction. The Tribunal allowed the appellant's claim for deduction under section 80P(2)(a)(i) subject to verification of the source of interest income. As a result of the decisions on the first two issues, the fourth ground raised by the appellant became irrelevant and was not adjudicated upon. The Tribunal concluded that the appeal was partly allowed based on the decisions made regarding the assessment of interest income and the eligibility for deduction under section 80P(2)(a)(i) of the Act.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decisions on each issue.