2015 (7) TMI 523 - AT - Income Tax

Denial of deduction under Section 80P(2)(a)(i) - CIT upholding the action of the Assessing Officer in assessing the interest received by the appellant on short term deposits with Syndicate Bank amounting under the head Income from other sources - Held that - Respectfully following the decision of in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. (2014 (2) TMI 1184 - ITAT BANGALORE), we hold that the learned CIT(A) was not correct in denying the assessee the deduction claimed under Section 80P(2)(a)(i) of the Act in respect of ₹ 26,16,800 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 upon by the learned CIT(A) 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 are similar to the facts of the aforesaid case decided by the Hon ble High Court of Karnataka, since in both cases the assessee was a credit co-operative society and invested in fixed deposits out of the surplus funds of business. Applying the ratio of the judgment of the Hon ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. (2015 (2) TMI 995 - KARNATAKA HIGH COURT ), 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, as well as that the said interest income 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 of ₹ 26,16,800 earned from investments in fixed deposits and Govt. Securities out of surplus funds from business, is allowed. - Decided in favour of assessee. Interest under Section 234B and 234C of the Act - Held that - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon ble Apex Court in the case of Anjum H Ghaswala (2001 (10) TMI 4 - SUPREME Court) and we, therefore, uphold the action of the Assessing Officer in charging the said interest

Issues Involved:
1. Assessment of interest income under the head 'Income from Other Sources' and denial of deduction under Section 80P(2)(a)(i).
2. Applicability of the Supreme Court's decision in Totagar's Co-operative Sale Society Ltd. v. ITO.
3. Compliance with statutory provisions under Karnataka Co-operative Societies Rules, 1960.
4. Non-adjudication of certain grounds by the Commissioner (Appeals).
5. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act.
6. Assessment status as an Association of Persons.

Detailed Analysis:

1. Assessment of Interest Income:
The primary issue in this appeal is whether the interest income earned by the assessee from fixed deposits should be assessed under the head 'Income from Other Sources' and whether the assessee is entitled to deduction under Section 80P(2)(a)(i) of the Income Tax Act. The assessee, a co-operative society, argued that the interest income of Rs. 26,16,800 from fixed deposits, which were surplus funds from its business of providing credit facilities to its members, should be considered as business income and eligible for deduction under Section 80P(2)(a)(i). The Assessing Officer and the CIT(A) had denied this deduction, relying on the Supreme Court's decision in Totagar's Co-operative Sale Society Ltd., which held that such interest income should be taxed under 'Other Sources.'

2. Applicability of Totagar's Co-operative Sale Society Ltd. Decision:
The CIT(A) upheld the Assessing Officer's decision based on the Supreme Court's ruling in Totagar's Co-operative Sale Society Ltd. However, the assessee contended that the Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Society Ltd. had distinguished the Totagar's case, ruling that interest income from short-term deposits by a co-operative society engaged in providing credit facilities to its members is attributable to its business and eligible for deduction under Section 80P(2)(a)(i). The Tribunal agreed with the assessee, noting that the Karnataka High Court had clarified that the Totagar's decision was confined to its specific facts and did not lay down a general law that interest income must be assessed under 'Other Sources.'

3. Compliance with Statutory Provisions:
The assessee argued that under Rule 28 of the Karnataka Co-operative Societies Rules, 1960, and Section 58 of the Karnataka Co-operative Societies Act, 1959, it was required to maintain certain deposits in banks. The interest earned on these deposits should be considered as income from business activities. The Tribunal, following the Karnataka High Court's decision, held that the interest income from such deposits is attributable to the business of providing credit facilities and thus eligible for deduction under Section 80P(2)(a)(i).

4. Non-adjudication of Certain Grounds:
The assessee raised several grounds that the CIT(A) did not adjudicate upon, including deductions under Section 80P(2)(c) and cancellation of interest levied under Sections 234A, 234B, and 234C. The Tribunal noted that grounds 13 to 18 were not urged before it and dismissed them as infructuous.

5. Charging of Interest under Sections 234A, 234B, and 234C:
The assessee challenged the interest charged under Sections 234A, 234B, and 234C. The Tribunal upheld the Assessing Officer's action, citing the Supreme Court's decision in Anjum H Ghaswala, which held that charging of interest under these sections is mandatory and consequential. However, the Tribunal directed the Assessing Officer to recompute the interest chargeable while giving effect to its order.

6. Assessment Status as an Association of Persons:
The assessee contended that the assessment should be annulled as it was made in the status of an Association of Persons. The Tribunal did not specifically address this issue in its detailed analysis.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the interest income earned from fixed deposits is part of the business income and eligible for deduction under Section 80P(2)(a)(i). The CIT(A)'s reliance on the Totagar's decision was found to be incorrect in light of the Karnataka High Court's ruling in Tumkur Merchants Souharda Credit Co-operative Society Ltd. The Tribunal directed the Assessing Officer to recompute the interest chargeable under Sections 234B and 234C while giving effect to its order. The appeal was allowed in favor of the assessee.

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