2016 (4) TMI 649 - AT - Income Tax

Benefit of deduction u/s.80P(2)(a)(i) - Held that - Assessee is entitled for deduction of interest income derived from investment of surplus funds with banks also. - Decided in favour of assessee

Issues Involved:
1. Whether the interest income earned by the assessee from investments in nationalized banks qualifies for deduction under section 80P of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Deduction under Section 80P for Interest Income:
The primary issue in this case revolves around the assessee, a co-operative society, and its claim for deduction of interest income under section 80P of the Income Tax Act. The assessee filed its return of income declaring total income at NIL and claimed a deduction of ?28,38,890/- under section 80P(2) of the Act, which included ?5,80,704/- as interest income from banks. The Assessing Officer (AO) disallowed this deduction, arguing that the interest income from nationalized banks is not directly connected with the business activities of the assessee and hence does not qualify for deduction under section 80P.

2. CIT(A) Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, leading the assessee to appeal to the ITAT. The CIT(A) relied on the Supreme Court's decision in the case of M/s. The Totgars’ Cooperative Sales Society Ltd. Vs. ITO, Karnataka, which held that interest income from surplus funds not immediately required for business purposes should be taxed under section 56 as "income from other sources" and not under section 28 as "business income."

3. Assessee's Argument:
The assessee contended that the issue is covered in its favor by several decisions, including those of the Andhra Pradesh High Court in CIT, Hyderabad Vs. Andhra Pradesh State Co-op. Bank Ltd., the Allahabad High Court in CIT Vs. Muzaffarnagar District-Co-op. Bank Ltd., and the ITAT Ahmedabad Bench in Jafari Momin Vikas Co-op. Credit Vs. ITO and Shree Siddeshwar Souhardhana Sah. Niyamit Vs. ITO. The assessee argued that the interest income is attributable to the business of providing credit facilities to its members and should be exempt under section 80P.

4. Tribunal's Consideration:
The ITAT considered the rival contentions and reviewed the record. It noted that similar issues had been addressed in various cases by the ITAT Ahmedabad Bench, which had allowed the claims of the assessee. The Tribunal referred to the Karnataka High Court's decision in the case of Guttigedarara Credit Co-op. Society Ltd. Vs. ITO, which allowed the deduction under section 80P for interest income earned from deposits in nationalized banks, emphasizing that the interest income is attributable to the business of providing credit facilities to members.

5. Tribunal's Findings:
The Tribunal found that the word "attributable" in section 80P(2)(a)(i) has a wider import than "derived from," and the interest income earned from deposits in banks is attributable to the business of providing credit facilities to members. The Tribunal also distinguished the facts of the present case from the Totgars’ case, noting that in Totgars’, the interest income was from surplus funds retained from marketing agricultural produce, which was not the case here.

6. Precedents and Conclusion:
The Tribunal referred to several precedents, including the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-op. Ltd., which supported the assessee's claim. It concluded that the interest income from FDRs in nationalized banks qualifies for exemption under section 80P(2)(a)(i). However, since the assessee had offered ?98,015/- for taxation, the Tribunal directed the AO to grant exemption for the remaining amount of ?1,50,548/-.

Judgment:
The appeal of the assessee was allowed, and the disallowance was deleted. The Tribunal directed the AO to grant the exemption under section 80P(2) for the specified amount.

Order Pronounced:
The order was pronounced in the Court on 5th April 2016 at Ahmedabad.

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