2016 (10) TMI 713 - AT - Income Tax

Eligibility of deduction u/s.80P(2)(a)(i) - object of society - idle money placed in bank with interst earned thereon - Held that - There is no dispute that one of the main object of assessee society was providing credit facility to its members. AO himself has mentioned that this was the primary object for which assessee was incorporated. No doubt, out of substantial sum received as deposits from the members, only small portion were given by assessee as loans to its members. Major part of the funds were parked in FDs. However, it is an admitted position that assessee was bound to give interest to its members on the deposits received by it from them. Therefore, when there were no takers for the money, which assessee as a part of its objects wanted to lend, the only available choice for assessee, in order not to keep the funds idle, was to place it in banks for earning interest. As decided in CIT v. Tumkur Merchants Souharda Credit Cooperative Ltd 2015 (2) TMI 995 - KARNATAKA HIGH COURT 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 as the facts of the case here fit perfectly well with the facts in the judgment mentioned above, therefore, hold that assessee was eligible for claiming deduction u/s.80P(2)(a)(i) of the Act. - Decided in favour of assessee

Summary

Issues:
1. Whether the assessee, a cooperative society, is entitled to deduction u/s.80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis:
The primary issue in this case was whether the assessee, a cooperative society, was eligible for claiming a deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Assessing Officer contended that the assessee fell within the definition of a cooperative bank as per the Banking Regulations Act, 1949, and therefore, was not eligible for the deduction. The Assessing Officer argued that even transactions with a section of the public constituted 'service to the public,' making the assessee ineligible for the deduction. The CIT (A), however, allowed the deduction, emphasizing that the assessee was a cooperative society carrying on banking business, as per the judgment of the Hon'ble High Court of Karnataka. The Revenue challenged this decision, asserting that the interest income was sourced from bank deposits and not directly related to providing credit facilities to members, as required by section 80P(2)(a)(i).

The key contention revolved around whether the interest income earned by the assessee from bank deposits was attributable to the business of providing credit facilities to its members. The Revenue argued that the immediate source of income should be considered, relying on a Supreme Court decision. In contrast, the assessee maintained that the interest income was directly linked to the funds received as deposits from members, as part of its routine business activities. The CIT (A) supported the assessee's position, citing the broader interpretation of the term 'attributable to' as per a judgment regarding the CAMBAY ELECTRIC case. The assessee's argument was further supported by a judgment of the Hon'ble jurisdictional High Court, which clarified that interest income earned by depositing surplus funds in banks for earning interest was attributable to the banking business conducted by the assessee.

The final decision upheld the CIT (A)'s ruling, dismissing the Revenue's appeal. The judgment emphasized that when surplus funds meant for lending were deposited in banks to earn interest due to the absence of takers, such interest income was attributable to the business of banking carried out by the assessee. The judgment aligned with the interpretation of the term 'attributable to' and the specific circumstances of the case, concluding that the assessee was eligible for claiming the deduction under section 80P(2)(a)(i) of the Act.