2015 (12) TMI 291 - AT - Income Tax

Eligibility of deduction u/s 80P - Held that - Assessee society in the interest of its members as well as in the interest of the object of the society as well as a safety measure minimum liquid funds and convenience of fund movements, the appellant society has kept its surplus liquid funds with different nationalized banks and relying on the judgment of Hon ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-op. Ltd. vs. ITO 2015 (2) TMI 995 - KARNATAKA HIGH COURT we hereby hold that the interest income is eligible for deduction under section 80P(2)(a)(i) of the Act. - Decided in favour of assessee. Addition adopting electricity collection charges - Held that - CIT(A) has already granted relief to the assessee by directing the AO to delete the addition as held the appellant has been providing the collection and payment of electricity bill service to its members for which a commission is earned to meet expenses. Because the service is provided to all its members, such activities formed part of the business of the appellant and the income if any out of such service will be exempted. Thus, AO is directed to delete the addition made in this ground. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 80P(2)(a)(i) for interest earned from nationalized banks.
2. Prorate deduction of interest expenses and administrative overheads.
3. Addition of electricity collection income.

Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for Interest Earned from Nationalized Banks:
The assessee claimed a deduction under Section 80P(2)(a)(i) for interest earned from nationalized banks. The AO disallowed this deduction, classifying the interest as "income from other sources" rather than business income. The CIT(A) upheld this decision, referencing the Supreme Court's ruling in Totgars Co-op. Sale Society Ltd. vs. ITO, which held that interest from surplus funds invested in short-term deposits is taxable under Section 56 and does not qualify for deduction under Section 80P(2)(a)(i).

The Tribunal, however, overturned this decision. It relied on the case of Tumkur Merchants Souharda Credit Co-op. Ltd. vs. ITO, where the Karnataka High Court ruled that interest income from funds not immediately required for business but deposited in banks is attributable to the business of banking and qualifies for deduction under Section 80P(1). The Tribunal concluded that the interest income of Rs. 365,508 is eligible for deduction under Section 80P(2)(a)(i).

2. Prorate Deduction of Interest Expenses and Administrative Overheads:
The assessee contested the AO's decision to add the entire amount of interest from nationalized banks, Gujarat Electricity Company, and IT refund without granting a prorate deduction of interest expenses and administrative overheads. The CIT(A) rejected the claim, stating that it was difficult to ascertain the exact amount spent to earn the interest income and that allowing such expenses would result in double deduction.

The Tribunal did not provide a separate detailed analysis on this issue, as it focused on the eligibility of the interest income for deduction under Section 80P(2)(a)(i), which inherently addressed the concern of prorate deductions.

3. Addition of Electricity Collection Income:
The AO added Rs. 68,932 as electricity collection income, whereas the assessee claimed the actual income was Rs. 57,350. The CIT(A) accepted the assessee's claim, recognizing the electricity collection charges as part of the services provided to its members and therefore exempt from tax.

The Tribunal upheld the CIT(A)'s decision, confirming that the electricity collection charges were indeed part of the services provided to the members and should not be taxed.

Conclusion:
The Tribunal allowed the assessee's appeal, granting the deduction under Section 80P(2)(a)(i) for interest earned from nationalized banks and upholding the CIT(A)'s decision to exclude the electricity collection income from taxation. The order pronounced on 14/10/2015 concluded that the appeal of the assessee is allowed.