2015 (11) TMI 740 - AT - Income Tax

Deduction u/s.80P(2)(a)(i) - interest earned on the FDs placed by it with banks - Held that - The money meant for lending, remaining surplus, there being no takers, if deposited in banks for earning interest, such interest income would be attributable to the business of banking carried out by the assessee. Thus assessee was eligible for claiming deduction u/s.80P(2)(a)(i) of the Act, on the interest earned on the FDs placed by it with banks, this being a part of its business income. See Tumkur Merchants Souharda Credit Cooperative Ltd., v. ITO 2015 (2) TMI 995 - KARNATAKA HIGH COURT - Decided in favour of assessee. Denied deduction u/s.80P(2)(a)(iv) on income from operation of water treatment plant - Held that - What is exempted by virtue of Section 80P is income arising on account of purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to the members. Here admittedly there was no purchase. Further, the water was not exclusively intended for agricultural use. We are, therefore, of the opinion that claim of the assessee was rightly denied by the lower authorities. We do not find any ground to interfere with the orders of authorities below. - Decided in favour of revenue.

Issues Involved:
1. Deduction under Section 80P(2)(a)(i) for interest income from fixed deposits.
2. Deduction under Section 80P(2)(a)(iv) for income from the operation of a water treatment plant.
3. Deduction under Section 57(iii) for interest paid on deposits.

Issue-wise Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for Interest Income from Fixed Deposits:
The assessee, a Co-operative Society engaged in various activities including banking, claimed a deduction under Section 80P(2)(a)(i) for interest income earned from fixed deposits (FDs). The Assessing Officer (AO) disallowed this claim, stating that the primary object of the society was to provide credit facilities to its members, not to make bank deposits. The AO cited the Supreme Court's decision in Totagars Cooperative Sale Society, which held that interest from surplus funds placed in banks should be assessed under 'income from other sources' and not eligible for deduction under Section 80P(2)(a)(i).

The CIT(A) upheld the AO's view but allowed the assessee's alternate contention that if interest income from bank deposits was considered under 'income from other sources', then interest paid on deposits to its members should be allowed as a deduction under Section 57(iii), provided a direct nexus was shown.

On appeal, the ITAT referred to the jurisdictional High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which held that interest earned from bank deposits by a cooperative society engaged in providing credit facilities to its members is attributable to the business of banking and eligible for deduction under Section 80P(2)(a)(i). The ITAT concluded that the facts of the present case fit well with this judgment and allowed the deduction under Section 80P(2)(a)(i) for interest income from FDs.

2. Deduction under Section 80P(2)(a)(iv) for Income from Operation of Water Treatment Plant:
The assessee claimed a deduction under Section 80P(2)(a)(iv) for income derived from the operation of a water treatment plant, which supplied treated water to its members. The AO disallowed this claim, arguing that the water was supplied for both agricultural and commercial purposes, and there was no cost for purchasing water. The AO relied on the Mumbai High Court's decision in CIT vs. Shetkari Sahakari Sakhar Karkhana Ltd., which held that only water used for irrigation could be considered for agricultural purposes.

The CIT(A) upheld the AO's disallowance, stating that the water was not exclusively intended for agricultural use. The ITAT agreed with the lower authorities, noting that the water was used for both drinking and agricultural purposes, and there was no purchase involved. Therefore, the claim under Section 80P(2)(a)(iv) was rightly denied.

3. Deduction under Section 57(iii) for Interest Paid on Deposits:
The CIT(A) directed the AO to allow a deduction under Section 57(iii) for interest paid on deposits, based on the assessee's contention that there was a direct nexus between the funds received from members and the deposits placed in banks. However, since the ITAT allowed the deduction under Section 80P(2)(a)(i) for interest income from FDs, the grounds raised by the Revenue on this issue became irrelevant and infructuous.

Conclusion:
The assessee's appeal was partly allowed, granting the deduction under Section 80P(2)(a)(i) for interest income from FDs, while the claim under Section 80P(2)(a)(iv) for income from the water treatment plant was denied. The Revenue's appeal was dismissed as the grounds became irrelevant due to the ITAT's decision on the primary issue.

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