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2015 (7) TMI 237 - AT - Income TaxEntitlement to exemption claimed under Section 80P(2)(a)(i) - whether interest income earned by the co-operative societies from bank deposits cannot be regarded as income earned from business of providing credit facilities to its members and are therefore not entitled to deduction under Section 80P(2)(a)(i)? - Held that - Respectfully following the order in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. (2015 (2) TMI 995 - KARNATAKA HIGH COURT) we hold that the learned CIT (Appeals) erred in refusing to allow the assessee s claim for deduction under Section 80P(2)(a)(i) of the Act in respect of interest income of ₹ 5,95,037 for Assessment Year 2009-10 and ₹ 7,58,464 for Assessment Year 2010-11 earned by the assessee. The judgment of the Hon ble Apex Court in the case of Totagars Co-operative Sale Society Ltd. (2010 (2) TMI 3 - SUPREME COURT ) relied on by the learned CIT (Appeals) has been considered and distinguished by the Hon ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. (supra). We find that the facts of the case on hand to be similar to the facts of the aforesaid case decided by the Hon ble High Court of Karnataka. Thus we hold that the assessee is entitled to deduction under Section 80P(2)(a)(i) of the Act in respect of interest income earned on fixed deposits with banks out of surplus funds from business, as it forms part of the business income earned by the assessee and the same is not to be taxed under the head Other Sources . In this view of the matter, the deduction claimed by the assessee under Section 80P(2)(a)(i) of the Act in respect of interest earned form investment in fixed deposits with banks and government securities out of surplus funds from business is allowed. - Decided in favour of assessee.
Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act for interest income earned from bank deposits. 2. Applicability of the judgment of the Hon'ble Supreme Court in the case of Totagars Co-operative Sale Society Ltd. 3. Relevance of the decision of the Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. Detailed Analysis: 1. Eligibility for Deduction under Section 80P(2)(a)(i) for Interest Income from Bank Deposits: The primary issue revolves around whether the interest income earned by the assessee, a co-operative society, from fixed deposits with banks qualifies for deduction under Section 80P(2)(a)(i) of the Income Tax Act. The assessee claimed deduction for interest income amounting to Rs. 5,95,037 for AY 2009-10 and Rs. 7,58,464 for AY 2010-11, arguing that the interest arose as part of providing credit facilities to its members and should be considered business income. 2. Applicability of the Totagars Co-operative Sale Society Ltd. Judgment: The Assessing Officer and the CIT(A) relied on the Supreme Court's decision in Totagars Co-operative Sale Society Ltd., which held that interest income earned from bank deposits should be taxed under the head "Other Sources" and not as business income. Consequently, the CIT(A) denied the deduction under Section 80P(2)(a)(i) for the interest income earned by the assessee from bank deposits. 3. Relevance of the Tumkur Merchants Souharda Credit Co-operative Society Ltd. Decision: The assessee contended that the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-operative Society Ltd. should apply. This decision clarified that interest income earned by a co-operative society from short-term deposits is attributable to the business of providing credit facilities to its members and is eligible for deduction under Section 80P(2)(a)(i). The Tribunal noted that the Karnataka High Court distinguished the Totagars case, emphasizing that the Supreme Court's decision was confined to its specific facts and did not establish a general principle that all interest income must be taxed under "Other Sources." Tribunal's Decision: The Tribunal, after considering the rival contentions and judicial pronouncements, found that the facts of the assessee's case were similar to those in the Tumkur Merchants case. It observed that the interest income earned from fixed deposits, which were made from surplus funds not immediately required for lending to members, should be considered as business income. The Tribunal held that the CIT(A) erred in denying the deduction under Section 80P(2)(a)(i) for the interest income earned from bank deposits, as it forms part of the business income of the co-operative society. Conclusion: The Tribunal allowed the appeals for both AY 2009-10 and 2010-11, granting the deduction under Section 80P(2)(a)(i) for the interest income earned from fixed deposits with banks. The decision of the Karnataka High Court in Tumkur Merchants was applied, distinguishing the facts from the Totagars case. The Tribunal concluded that the interest income should not be taxed under "Other Sources" but as part of the business income of the assessee. Order pronounced in the open court on 29th June, 2015.
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