2000 (9) TMI 210 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility of interest income from fixed deposits with CESC Ltd. for deduction under section 80P.
2. Validity of rectification under section 154 based on audit objections.
3. Eligibility of interest income from investments with unapproved Gratuity Fund for deduction under section 80P.
4. Eligibility of income from Unit Trust of India (UTI) for deduction under section 80P.

Detailed Analysis:

1. Eligibility of Interest Income from Fixed Deposits with CESC Ltd. for Deduction under Section 80P:
The primary issue revolves around whether the interest earned by a co-operative society from fixed deposits with CESC Ltd. qualifies for deduction under section 80P of the Income-tax Act, 1961.

Assessing Officer's View:
- The interest from fixed deposits with CESC Ltd. is not considered income from banking business.
- Funds invested in fixed deposits were surplus and not part of circulating capital.
- The deposits were not easily realisable as they were fixed for three years and could only be prematurely withdrawn at the discretion of CESC Ltd.
- The intention behind section 80P is to promote co-operative movement, which would be defeated if income from non-cooperative investments is exempted.

CIT(A)'s View:
- Upheld the Assessing Officer's decision, distinguishing it from previous cases where interest on bank deposits was considered exempt.
- Cited decisions from M.P. State Co-operative Bank Ltd. and Madhya Pradesh Rajya Sahakari Bank, which held that interest on securities earmarked for reserve funds does not qualify for exemption.

ITAT's Decision:
- The Judicial Member agreed with the lower authorities, emphasizing that the fixed deposits with CESC Ltd. were not part of circulating capital and thus not eligible for deduction under section 80P.
- The Accountant Member dissented, arguing that the investments were part of the business funds and circulating capital, and thus should qualify for the deduction.
- The Third Member sided with the Accountant Member, concluding that the interest from fixed deposits with CESC Ltd. is eligible for deduction under section 80P, as it is part of the regular banking business of the society.

2. Validity of Rectification under Section 154 Based on Audit Objections:
The issue pertains to whether the Assessing Officer was justified in rectifying the assessment under section 154 based on audit objections.

Assessing Officer's View:
- Rectified the assessment for the year 1989-90 under section 154, disallowing the interest income from fixed deposits with CESC Ltd.

CIT(A)'s View:
- Supported the rectification, stating that the mistake in the original assessment was patent and could be corrected under section 154.

ITAT's Decision:
- The Judicial Member upheld the rectification, citing that the issue was not debatable in light of the Supreme Court's decision in Madhya Pradesh Co-operative Bank Ltd.
- The Accountant Member disagreed, arguing that the issue was debatable and thus outside the purview of section 154.
- The Third Member did not specifically address this point, but the overall decision favored the assessee, implying that the rectification under section 154 may not have been justified.

3. Eligibility of Interest Income from Investments with Unapproved Gratuity Fund for Deduction under Section 80P:
The issue involves whether interest income from investments with an unapproved Gratuity Fund qualifies for deduction under section 80P.

Assessing Officer's View:
- Disallowed the deduction, treating the interest as income from 'Other sources' since the fund was not approved.

CIT(A)'s View:
- Upheld the disallowance, relying on the Madhya Pradesh High Court's decision in Madhya Pradesh Rajya Sahakari Bank, which held that interest on securities earmarked for reserve and provident funds does not qualify for deduction.

ITAT's Decision:
- The Judicial Member agreed with the CIT(A), holding that the interest on unapproved Gratuity Fund investments does not qualify for deduction under section 80P.
- The Accountant Member did not specifically address this issue separately, but the overall decision favored the assessee on similar grounds of investments being part of the business funds.

4. Eligibility of Income from Unit Trust of India (UTI) for Deduction under Section 80P:
The issue is whether income from investments in UTI qualifies for deduction under section 80P.

Assessing Officer's View:
- Disallowed the deduction, treating the income as dividend from an Indian company and taxable under the head 'Other sources'.

CIT(A)'s View:
- Allowed the deduction, stating that the investments were made in the normal course of carrying on the business.

ITAT's Decision:
- The Judicial Member upheld the CIT(A)'s decision, noting that the revenue did not argue that the UTI investments could not be withdrawn at short notice.
- The Accountant Member agreed with the decision to allow the deduction, emphasizing the business prudence of the investments.

Conclusion:
- The ITAT, by majority decision, held that the interest income from fixed deposits with CESC Ltd. is eligible for deduction under section 80P.
- The rectification under section 154 based on audit objections was implicitly not supported.
- The interest income from investments with an unapproved Gratuity Fund does not qualify for deduction under section 80P.
- The income from investments in UTI qualifies for deduction under section 80P.