2014 (2) TMI 516 - AT - Income Tax

Disallowance of claim u/s 80(P)(a)(i) of the Act Held that - The decision in Totgars Co-operative Sale Society Ltd. vs. ITO 2010 (2) TMI 3 - SUPREME COURT followed - The only interest which is received by the Cooperative Credit Society from its members for providing credit facilities to them is eligible for deduction u/s 80P(2)(a)(i) of the Act - the interest income arising from various sources and it would come in the category of Income from other sources thus, the interest income would be taxable u/s 56 of the Act - interest income do not fall within the meaning of expression Profits and Gains of Business - such business income cannot be said to be attributable to the activities of the Co-op Credit Society, namely, carrying on the business of providing credit facilities to its member or marketing facilities to its members - thus, the appellant is not eligible for deduction u/s 80P(2)(a)(i) in respect of interest the order of the CIT(A) upheld Decided against Assessee. Setting off of expenditure u/s 57 of the Act Bank Interest Held that - A statement has been submitted showing interest income and interest expenses according to which proportionate interest should have been disallowed - Since these details were not before lower authorities thus, the matter is remitted back to the AO for fresh adjudication Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of deduction under section 80P(2)(a)(i) of the Income Tax Act.
2. Alternative plea for setting off expenditure incurred to earn bank interest income under section 57 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(a)(i):

The primary issue in this case pertains to the addition of Rs. 13,58,980/- due to the disallowance of the claim made by the assessee under section 80P(2)(a)(i) of the Income Tax Act. The facts leading to this disallowance are summarized as follows:

The Assessing Officer (AO) observed that the assessee received interest income of Rs. 53,73,809/-, which included:
- Interest on members' loans: Rs. 31,16,440/-
- Interest on saving bank: Rs. 737/-
- Interest on call deposits: Rs. 12,35,592/-
- Interest on Narmada Bond: Rs. 6,39,236/-
- Interest from Bank FD: Rs. 3,81,803/-

The AO noted that only the interest income from loans advanced to members qualifies for deduction under section 80P(2)(a)(i). The interest from banks and other sources does not qualify as it is not attributable to the business of providing credit facilities to members. Consequently, the AO restricted the deduction and held that the assessee is not eligible for deduction on Rs. 22,81,357/-, which includes interest from saving bank, call deposits, Narmada Bond, Bank FD, miscellaneous income, and previous years' surplus provision.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the Supreme Court's decision in Totgars' Co-operative Sale Society Ltd. vs. ITO. The Supreme Court held that interest income arising from surplus funds invested in short-term deposits and securities, not required for business purposes, should be taxed under section 56 as "Income from other sources" and not under section 28 as business income. The CIT(A) concluded that only the interest received from members for providing credit facilities is eligible for deduction under section 80P(2)(a)(i), and other interest income should be taxed under section 56.

The Tribunal confirmed the CIT(A)'s decision, noting that the assessee's counsel did not present any contrary binding decision. Thus, the disallowance of Rs. 13,58,980/- was upheld, and this ground of the assessee was dismissed.

2. Alternative Plea for Setting Off Expenditure under Section 57:

The second issue concerns the alternative plea of the assessee to allow the setting off of expenditure incurred to earn the bank interest income as provided under section 57 of the Act. The lower authorities rejected this plea, stating that the expenses had already been debited in the profit and loss account to arrive at the net profit, and no further expenditure was required to be allowed.

Before the Tribunal, the assessee's counsel submitted a statement showing interest income and interest expenses, suggesting that proportionate interest to the extent of Rs. 6,04,390/- should have been disallowed. As these details were not presented before the lower authorities, the Tribunal deemed it proper to remand the matter back to the AO for fresh adjudication after verifying these details. Thus, this ground of the assessee's appeal was allowed for statistical purposes.

Conclusion:

In conclusion, the assessee's appeal was partly allowed for statistical purposes. The Tribunal upheld the disallowance of the deduction under section 80P(2)(a)(i) for interest income not attributable to the business of providing credit facilities to members. However, the alternative plea regarding the setting off of expenditure was remanded back to the AO for fresh adjudication. The order was pronounced in open court.