2024 (6) TMI 1404 - AT - Income Tax

Deduction u/s 80P - Interest income from banking business - CIT(A) upheld the order of AO holding that interest income is not eligible for deduction - HELD THAT - We find that the issue involved is covered in favour of the assessee by a catena of decisions from ITAT as well as a decision of jurisdictional High Court. In this regard we may gainfully refer to decision in the case of CIT vs. Solapur Nagri Audyogik Sahakari Bank Ltd 2009 (6) TMI 15 - BOMBAY HIGH COURT held there being no dispute that the funds in the voluntary reserves which were utilized for investment in KVP/IVP by the co-operative banks were the funds generated from the banking business, we hold that in all these cases the Tribunal was justified in holding that the interest income received by the co-operative banks from the investments in KVP/IVP made out of the funds in the voluntary reserves were eligible for deduction under section 80P(2)(a)(i). The above case law fully supports the assessee s case. Here also surplus funds not immediately required for day to day banking were kept in Bank deposits. The income earned there from thus would be income from banking business eligible for deduction u/s 80P(2)(a)(i). Thus, we find that CIT (A) has erred in upholding the assessment order. The Appellant Cooperative society is entitled for deduction u/s 80P as claimed in the return. Decided in favour of assessee.

Summary

Issues Involved:

1. Determination of whether the income earned by the appellant is income arising in the course of business of banking.
2. Classification of income from the appellant's investment as business income or income from other sources.
3. Eligibility of the appellant for deduction under Section 80P of the Income Tax Act, 1961.

Detailed Analysis:

1. Income Arising in the Course of Business of Banking:

The appellant, a credit co-operative society, contended that its income was derived solely from banking activities, as it did not engage in any other business. The society invested in term deposits as part of its banking operations. The appellant argued that such investments were made in the course of its banking business, and hence, the income should be classified as arising from banking activities. The tribunal considered the appellant's submission that the investment was a necessary part of maintaining liquidity and fulfilling statutory requirements, thus integral to its banking business.

2. Classification of Income from Investment:

The appellant argued that the income from investments should be treated as business income, not as income from other sources. The tribunal referred to previous judgments, including the ITAT Nagpur's decision, which held that interest income earned by a co-operative society from investments in the course of its banking business is eligible for deduction under Section 80P(2)(a)(i). The appellant distinguished its case from the Supreme Court's decision in Totgars Co-operative Sales Society Ltd., emphasizing that it did not have surplus or idle funds, and the investments were part of its operational funds required for banking activities.

3. Eligibility for Deduction under Section 80P:

The appellant claimed deductions under Section 80P(2)(a)(i) and Section 80P(2)(d) for its income. The tribunal noted that the appellant fulfilled both conditions under Section 80P, being engaged in the business of banking and providing credit facilities to its members. The tribunal also considered the CBDT Circular, which clarified that income from investments by a co-operative society engaged in banking is attributable to its business, thus qualifying for deduction under Section 80P. Additionally, the tribunal referenced multiple judicial pronouncements supporting the appellant's eligibility for deduction under Section 80P(2)(d) for interest received from other co-operative societies.

Conclusion:

The tribunal concluded that the appellant's income from investments was indeed part of its banking business and eligible for deduction under Section 80P. The tribunal found that the CIT(A) erred in upholding the assessment order, and the appellant co-operative society was entitled to the claimed deductions. Consequently, the appeal was allowed, affirming the appellant's eligibility for deductions under the relevant sections of the Income Tax Act. The judgment was pronounced in favor of the appellant, granting the relief sought.