2016 (4) TMI 305 - AT - Income Tax

Deduction under section 80P(2)(a)(i) for the interest earned from deposits in banks denied - Held that - Assessee is entitled for deduction of interest income derived from investment of surplus funds with banks also. See M/s. The Totgars Cooperative Sale Society Limited Versus Income Tax Officer. Karnataka 2010 (2) TMI 3 - SUPREME COURT - Decided in favour of assessee

Issues Involved:
1. Disallowance of Deduction under Section 80P(2)(a)(i) of the Income Tax Act for Interest Earned from Bank Deposits.

Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(a)(i) of the Income Tax Act for Interest Earned from Bank Deposits:

The primary issue in this appeal revolves around whether the interest income earned by the assessee, a co-operative society, from deposits in nationalized banks qualifies for deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Facts of the Case:
The assessee, a co-operative society providing credit facilities to its members, filed a return of income declaring NIL income after claiming a deduction under Section 80P amounting to ?36,52,273/-. The return was processed, and upon scrutiny, it was found that the assessee had earned interest income from various banks totaling ?3,48,982/-, which included:
- State Bank of India: ?19,922/-
- Bank of India: ?1,23,369/-
- Botad People’s Co-op. Bank Ltd.: ?2,05,691/-

The Assessing Officer (AO) disallowed the interest income earned from State Bank of India and Bank of India, totaling ?1,43,291/-, on the grounds that such income was not directly connected with the business activities of the assessee and thus did not qualify for deduction under Section 80P. However, the AO allowed the interest income from Botad People’s Co-op. Bank Ltd.

CIT(A) Decision:
The assessee appealed against the AO's decision, but the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, relying on the Supreme Court's decision in the case of Totgars’ Cooperative Sales Society Ltd. Vs. ITO, Karnataka, 322 ITR 283.

Tribunal's Analysis:
The Tribunal considered the arguments and the material on record, noting that similar issues had been addressed in numerous cases by the ITAT, Ahmedabad Bench. It referenced the decision in the case of Supa (Kural) Vibhag Seva Sahari Mandli Ltd. Vs. ITO, where the Tribunal allowed the claim of the assessee based on the Karnataka High Court's judgment in Guttigedarara Credit Co-op. Society Ltd. Vs. ITO (60 taxmann.com 215).

Key Observations:
- The Tribunal emphasized the significance of the term "attributable to" in Section 80P(2)(a)(i), which has a broader scope than "derived from." The Karnataka High Court observed that interest income from deposits made from funds not immediately required for lending to members is attributable to the business of providing credit facilities and thus qualifies for deduction under Section 80P.
- The Tribunal also referred to the case of Tumkur Merchants Souharda Credit Co-op. Ltd., where it was held that interest income from surplus funds deposited in banks is attributable to the business of providing credit facilities and is deductible under Section 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the interest income received by the assessee from fixed deposits in nationalized banks qualifies for exemption under Section 80P(2)(a)(i). However, since the assessee had already offered ?98,015/- for taxation and did not challenge this inclusion, the Tribunal directed the AO to grant exemption for the remaining amount of ?1,50,548/-. Consequently, the appeal was partly allowed.

Final Order:
The appeal of the assessee was allowed, and the disallowance of ?1,50,548/- was deleted, granting the assessee the deduction under Section 80P(2)(a)(i) for the interest income derived from investments in banks. The decision was pronounced on 5th April 2016 at Ahmedabad.

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