2018 (11) TMI 1420 - AT - Income Tax

Eligible for deduction u/s 80P - interest earned on deposits with Bank of Baroda and from saving bank account is not business income and hence not eligible for deduction - Held that - As per section 80P(2)(a)(i) of the act the interest income earned on providing credit facility to its members is deductible u/s. 80P(2)(a)(i). After perusal of the aforesaid provision of the act we observe that deduction u/s 80P(2)(a)(i) is not available on the interest earned on deposit maintained with the commercial bank. We find that has decided the identical issue in favour of the Revenue vide State Bank of India vs. CIT (2016 (7) TMI 516 - GUJARAT HIGH COURT) wherein it is held that interest income on deposit placed with the commercial banks is not exempt u/s. 80P(2)(a)(i). We are inclined with the decision of the ld. CIT(A) that investing surplus funds in a commercial bank is no part of the business of providing credit facilities to its members which is not deductible under section 80P(2)(a)(i) of the act - we direct the assessing officer to allow pro rata expenses in respect of interest earned from deposit held with nationalized bank to the assessee for computing the deduction u/s. 80P after examining/verification and affording adequate opportunity to the assessee

Summary

Issues:
1. Eligibility of interest income from deposits for deduction u/s 80P of the Income Tax Act, 1961.

Analysis:
The appeal pertains to the assessment year 2013-14 and involves the question of whether interest earned on deposits with a nationalized bank is eligible for deduction under section 80P of the Income Tax Act, 1961. The assessee argued that the interest income was directly connected to the funds received from members and invested in fixed deposits as per government directions. The assessing officer disallowed the deduction under section 80P, treating the interest income as not operational income from providing credit facilities to members. The CIT(A) upheld the disallowance, relying on a decision of the Hon'ble High Court of Gujarat in a similar case.

Upon careful consideration, the ITAT Ahmedabad observed that section 80P allows deduction for interest income earned on providing credit facilities to members, not on interest earned from deposits with commercial banks. Citing a judgment of the jurisdictional high court, the ITAT agreed that interest income on deposits with commercial banks is not exempt under section 80P. However, the ITAT directed the assessing officer to allow pro rata expenses for interest earned from deposits with nationalized banks after verification, in line with decisions of the Co-ordinate Benches of ITAT Ahmedabad. Consequently, the appeal of the assessee was partly allowed for statistical purposes.

In conclusion, the ITAT Ahmedabad clarified that while interest income from providing credit facilities to members is deductible under section 80P, interest earned on deposits with commercial banks does not qualify for the deduction. The decision emphasized the importance of aligning the nature of income with the provisions of the Income Tax Act to determine eligibility for deductions, ensuring compliance with legal requirements and precedents.