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2018 (6) TMI 883 - AT - Income TaxDisallowance of deduction u/s 80P - interest received on deposits with Sub Treasury - Held that - Assessee is a primary agricultural credit society registered under the Kerala Cooperative Societies Act 1969 - following the judgement of THE KIZHATHADIYOOR SERVICE COOP BANK LTD. VERSUS THE INCOME TAX OFFICER WARD 2 KOTTAYAM 2016 (7) TMI 1405 - ITAT COCHIN it is held that the investment in treasury/banks and earning interest on the same is part of the banking activity of the assessee s cooperative bank. Therefore, the said income is eligible for deduction u/s 80P(2)(a)(i) - hence we are of the view that the assessee is entitled to the benefit of deduction u/s 80P(2) with regard to interest received on deposits made by the assessee with sub treasury.- Decided in favour of assessee.
Issues Involved:
1. Refusal to grant deduction under section 80P of the Income Tax Act for interest earned on treasury deposits. Detailed Analysis: Issue 1: Refusal to Grant Deduction Under Section 80P for Interest Earned on Treasury Deposits The appeal concerns the refusal to grant a deduction under section 80P of the Income Tax Act for ?14,51,262, which was interest earned on treasury deposits by the assessee, a primary agricultural credit society registered under the Kerala Cooperative Societies Act 1969. The Assessing Officer denied the deduction on the grounds that the assessee was engaged in banking business and, due to the insertion of subsection (4) to section 80P effective from 01.04.2007, was not entitled to the benefits under section 80P(2). Upon appeal, the CIT(A) allowed the deduction under section 80P(2) but denied it for the interest earned on treasury deposits, categorizing it as "income from other sources" based on the Supreme Court's judgment in M/s Totgars Cooperative Sales Society Ltd vs ITO (322 ITR 283). The assessee contested this decision before the Tribunal, arguing that the issue was covered in their favor by a prior decision of the Cochin Bench of the Tribunal in the case of M/s.Kuttiatoor Panchayath Service Co-operative Bank Ltd. The Departmental Representative supported the orders of the CIT(A) and the AO. The Tribunal examined whether the interest from sub-treasury investments should be assessed as "income from other sources" or "income from business." It noted that if assessed under "income from business," the assessee would be entitled to the deduction under section 80P(2). The Tribunal referenced the Karnataka High Court's judgment in Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO, which clarified that a primary agricultural credit society without a banking license from the RBI does not qualify as a cooperative bank under section 80P(4). The Tribunal distinguished the facts of the present case from the Supreme Court's decision in Totgars Cooperative Sales Society Ltd, noting that the retained amounts in Totgars were liabilities shown in the balance sheet, whereas in the present case, the interest income was from surplus funds not immediately required for lending to members. The Tribunal also referenced the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd, which held that interest income from surplus funds deposited in banks was attributable to the business of banking and thus eligible for deduction under section 80P(2). The Cochin Bench of the Tribunal, in similar cases, had consistently held that interest from treasury and bank deposits was part of the banking activity and eligible for deduction under section 80P(2)(a)(i). Based on these precedents, the Tribunal concluded that the assessee was entitled to the deduction under section 80P(2) for the interest earned on treasury deposits amounting to ?14,51,262 for the assessment year 2007-2008. Conclusion: The Tribunal allowed the appeal, granting the deduction under section 80P(2) for the interest earned on treasury deposits. The order was pronounced on June 13, 2018.
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