2012 (4) TMI 832 - AT - Income Tax

Summary

Issues: Disallowance under section 80P(2)(a)(i) of the IT Act in respect of interest received on various funds and other receipts.

Detailed Analysis:

1. Disallowance under section 80P(2)(a)(i) - Interest Received on Various Funds:
The Assessing Officer (AO) disallowed interest income on Fixed Deposit-General, Reserve Fund, Bad Debt Fund, and other funds, treating them as 'Income from Other Sources' instead of allowing deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. The AO observed that the interest earned on surplus funds parked in Fixed Deposits with Banks did not qualify for the deduction under section 80P(2)(a)(i) based on the decision of the Supreme Court in Totgars' Co-operative Sale Society Ltd. vs. Income-tax Officer. The AO also disallowed subsidy and Guest House income as 'Income from Other Sources.' The CIT(A) upheld the AO's decision, emphasizing that income must constitute operational income to qualify for the deduction under section 80P(2)(a)(i).

2. Judicial Interpretation - Apex Court's Decision:
The ITAT Kolkata, after considering the rival submissions and the Apex Court's decision in The Totgars Co-operative Sale Society vs. ITO, held that interest income from Fixed Deposits did not qualify for deduction under section 80P(2)(a)(i) as it fell under 'Income from Other Sources.' However, the ITAT differentiated income from Reserve Fund, Bad Debt Fund, SBF Loan, and MSS Loan, stating that these incomes were related to the main activity of the assessee and thus eligible for the deduction under section 80P(2)(a)(i). Similarly, the net income from the Guest House was also deemed eligible for the deduction. The ITAT directed the AO to allow exemption under section 80P(2)(a)(i) for the aforementioned funds. Regarding the subsidy, the ITAT noted that it was of a non-capital nature and thus could not be disallowed based on the Supreme Court's decision in Totgars Co-operative Sales Society Ltd. vs. ITO.

3. Conclusion:
The ITAT partially allowed the appeal of the assessee, permitting the deduction under section 80P(2)(a)(i) for income from Reserve Fund, Bad Debt Fund, SBF Loan, MSS Loan, and Guest House, while also allowing the subsidy amount to remain unaffected. The decision was based on the interpretation of the Supreme Court's ruling and the operational nature of the income in question.

4. Outcome:
The ITAT's order was pronounced on 13.04.2012, allowing the appeal in part and directing the AO to grant exemption under section 80P(2)(a)(i) for certain funds and income sources while upholding the disallowance for interest income on Fixed Deposits.