2016 (4) TMI 908 - AT - Income Tax

Deduction u/s 80P(2) - Held that - Interest income earned by a credit cooperative society on the FDRs with nationalized bank would qualify for grant of exemption under section 80P(2).

Summary

Issues Involved:
1. Taxability of interest received from fixed deposits with commercial banks.
2. Eligibility for deduction under Section 80P of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Interest Received from Fixed Deposits with Commercial Banks:

The primary issue in this appeal is whether the interest income earned from fixed deposits with commercial banks by a cooperative society should be taxed as 'profits and gains of business' eligible for deduction under Section 80P, or as 'income from other sources' not eligible for such deduction. The Assessing Officer (AO) argued that the interest income should be taxed under 'income from other sources' based on the Supreme Court's decision in Totgars Co-operative Sale Society Ltd., which held that interest earned on surplus funds invested in short-term deposits is not eligible for deduction under Section 80P(2)(a)(i).

2. Eligibility for Deduction under Section 80P:

The learned CIT(A) directed that the interest income from fixed deposits should be taxed as 'profits and gains of business' eligible for deduction under Section 80P, contrary to the AO's position. The Tribunal's decision in Anant Sahakari Sharafi Mandli Limited vs. ITO was cited, where it was observed that interest income attributable to the business of providing credit facilities to members should be eligible for deduction under Section 80P.

The Tribunal referenced the Karnataka High Court's decision in the case of Guttigedarara Credit Co-op. Society Ltd., which emphasized that the word 'attributable' in Section 80P(2)(a)(i) is broader than 'derived from,' thus covering receipts from sources other than the direct conduct of business. The Court noted 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 eligible for deduction under Section 80P.

The Tribunal also referenced the Andhra Pradesh High Court's decision in CIT v. Andhra Pradesh State Co-operative Bank Ltd., which supported the view that interest income from deposits made from surplus funds is attributable to the business of providing credit facilities and eligible for deduction under Section 80P.

Separate Judgments Delivered:

The Tribunal consistently held that interest income earned by a credit cooperative society on fixed deposits with nationalized banks qualifies for deduction under Section 80P(2). The Tribunal upheld the CIT(A)'s decision, rejecting the AO's grounds and allowing the assessee's appeal, directing the AO to grant the exemption under Section 80P.

Conclusion:

Respecting the Tribunal's decision and the precedents set by higher courts, the appeal by the AO was dismissed, affirming that the interest income earned from fixed deposits by cooperative societies is eligible for deduction under Section 80P(2)(a)(i) as it is attributable to the business of providing credit facilities to its members.