1999 (4) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Whether the dividend income received on shares of Jaipur Metals & Electricals Ltd. held as banking assets qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act.

Detailed Analysis:

1. Rejection of Deduction Claim Under Section 80P(2)(a)(i):

The primary issue in this case is whether the dividend income received by the assessee, a cooperative society, on shares of Jaipur Metals & Electricals Ltd. (J.M.E.L.) held as banking assets qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act.

The assessee claimed exemption under section 80P(2)(a)(i) for the dividend income received, asserting that it was part of its banking activities. The Assessing Officer disallowed the exemption, stating that the dividend income on shares does not qualify under section 80P(2)(a)(i) as this exemption is only allowed for income derived from the business of banking.

2. Appeal to CIT(A) and Subsequent Findings:

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the Assessing Officer's decision. CIT(A) distinguished the present case from other cases cited by the assessee, noting that in the other cases, the income was earned as interest on Government securities, which is directly attributable to the banking business. In contrast, the present case involved income earned as dividends on shares, which could fluctuate and potentially result in losses.

3. Arguments and Case Laws Cited:

During the appeal, both parties presented lengthy arguments and cited various case laws. The assessee relied on several cases, including CIT v. Co-op. Cane Development Union Ltd., CIT v. Orissa State Co-op. Housing Corpn. Ltd., and Maharashtra State Co-op. Land Development Bank Ltd. v. ITO, arguing that the share activities were part of the banking business and thus qualified for the exemption.

The Departmental Representative (D/R) cited cases such as CIT v. Co-op. Supply & Commission Shop Ltd. and Kottayam Co-op. Land Mortgage Bank Ltd., arguing that the dividend income was not attributable to banking activities and therefore did not qualify for the exemption.

4. Analysis of Section 80P(2)(a)(i):

The Tribunal examined the relevant provisions of section 80P(2)(a)(i), which allows deductions for income earned by cooperative societies engaged in banking or providing credit facilities to its members. The Tribunal noted that the assessee's activities included both banking and investment in shares, as per the society's bye-laws and with permission from the Government of Rajasthan.

5. Distinguishing Features and Final Decision:

The Tribunal found that the purchase of shares was not the main object of the assessee and that there could be potential losses due to market fluctuations, unlike Government securities, which are more stable and can be encashed at any time. The Tribunal concluded that the dividend income from shares could not be considered attributable to banking activities under section 80P(2)(a)(i).

The Tribunal also noted that the assessee had borrowed funds from outside sources and paid more interest than it earned, indicating that there were no surplus funds for investment in shares. Therefore, the dividend income did not qualify for exemption under section 80P(2)(a)(i).

Conclusion:

The Tribunal confirmed the CIT(A)'s findings and dismissed the appeal, holding that the dividend income earned by the assessee on shares could not be attributed to banking income and thus did not qualify for the exemption under section 80P(2)(a)(i) of the Income Tax Act. The appeal of the assessee was dismissed.