2018 (12) TMI 977 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) - interest income from banks other than cooperative banks - interest income from surplus funds/short term deposits with banks is Income from other sources taxable u/s.56 - Held that - As the assessee in the instant case was commercially bound to maintain overdraft with State Bank of India and for that purpose it had to place FDRs, on which the interest income was earned, such an interest arising on these FDRs, in the given circumstances, is in the nature of income under the head Profits and grains from business or profession and cannot be characterized Income from other sources as held by the authorities below. Once the interest income is construed as Business income , the same becomes eligible for deduction u/s. 80P of the Act. Therefore, overturn the impugned order and direct to grant deduction u/s.80P on such interest income in all the three years under consideration. - Decided in favour of assessee.

Summary

Issues: Appeal against denial of deduction u/s. 80P(2)(a)(i) on interest income from banks; Misconception in treating interest income as "Income from other sources" instead of "Profits and gains from business or profession"; Applicability of judgment in Totgar's Cooperative Sale Society Ltd. case; Ex parte disposal of appeals due to non-appearance of assessee; Grant of deduction u/s. 80P on interest income; Levy of interest u/s. 234A, 234B, and 234C.

Analysis:

1. Denial of Deduction u/s. 80P on Interest Income:
The assessee, a Co-operative Society trading Fertilizers and Agro goods, claimed deduction u/s. 80P(2)(a)(i) on interest income from banks. The AO treated the interest income as "Income from other sources" instead of "Profits and gains from business or profession." The assessee justified the claim stating the interest was earned on FDRs maintained for obtaining credit facilities necessary for business dealings with specific suppliers. The AO relied on the Totgar's Cooperative Sale Society Ltd. case, denying the deduction. The CIT(A) upheld the AO's decision. The Tribunal noted the commercial necessity for maintaining overdraft with the bank and earning interest on FDRs, concluding the interest income as "Business income" eligible for deduction u/s. 80P.

2. Applicability of Totgar's Cooperative Sale Society Ltd. Case:
The Tribunal highlighted the misconception in applying the Totgar's Cooperative Sale Society Ltd. judgment. It emphasized that interest income from FDRs maintained with banks for business purposes falls under "Profits and gains from business or profession" and not "Income from other sources" as held in the cited case. By overturning the impugned order, the Tribunal directed the grant of deduction u/s. 80P on the interest income for all three years under consideration.

3. Ex Parte Disposal of Appeals:
As the assessee did not appear, the Tribunal proceeded ex parte. Despite the absence of the assessee, the Tribunal thoroughly examined the facts, material on record, and legal aspects before delivering the judgment.

4. Levy of Interest u/s. 234A, 234B, and 234C:
The Tribunal addressed the issue of interest levied under sections 234A, 234B, and 234C as consequential and disposed of accordingly, without delving into detailed analysis.

In conclusion, the Tribunal allowed all three appeals, granting the deduction u/s. 80P on interest income and addressing the consequential issue of interest levied under sections 234A, 234B, and 234C.