2021 (2) TMI 101 - AT - Income Tax

Deduction u/s 80P - AO was of the opinion that interest earned from Pragati Gramina bank is not an income which is chargeable under the head profit and gains of business or profession but the same was to be offered under the head income from other sources - Primary plea raised before this Tribunal is that interest earned from Pragati Gramina bank cannot be treated as income from other sources - HELD THAT - Amount invested with Pragati Gramina bank was neither due to any members nor a liability. The said money was temporarily parked with Pragati gramina bank in order to maintain the overdraft limit available to assessee with state bank of Mysore. Respectfully following the decision in case of Tumkur Merchants Souharda Credit Co-operative Society Ltd vs ITO 2015 (2) TMI 995 - KARNATAKA HIGH COURT we are of the opinion that interest earned on such deposit would partake the character of business income attributable to carrying on business of banking and is eligible for deduction under section 80P - Decided in favour of assessee.

Summary

Issues:
- Interpretation of interest income from deposits with Pragati Gramina bank under section 80P of the Income Tax Act.
- Whether interest earned on deposits with Pragati Gramina bank should be considered as income from other sources or as business income.
- Application of the decision of Hon'ble Karnataka High Court in a similar case.

Analysis:

The case involved the interpretation of interest income earned by a cooperative society from deposits with Pragati Gramina bank under section 80P of the Income Tax Act. The Assessing Officer (AO) had treated the interest earned as income from other sources, leading to an adhoc disallowance. The primary contention before the Tribunal was that the interest income should be considered as business income rather than income from other sources.

The Tribunal examined the facts of the case, noting that the cooperative society had withdrawn funds from an overdraft account to maintain the deposit with Pragati Gramina bank. The interest earned on the deposit was argued to be attributable to the business activities of the society. The Tribunal considered the nexus between the withdrawal and deposit of funds and concluded that the interest income was indeed business income.

The Tribunal referred to a decision of the Hon'ble Karnataka High Court in a similar case, where it was held that interest income derived from deposits made to earn interest should be considered as profits and gains of the business attributable to the activity of carrying on banking business. The High Court's decision was relied upon to support the argument that the interest income in question should be eligible for deduction under section 80P of the Act.

Based on the findings and the precedent set by the High Court, the Tribunal allowed the appeal filed by the assessee, ruling that the interest earned on the deposit with Pragati Gramina bank should be treated as business income attributable to carrying on the business of banking. The decision was in line with the interpretation of the word "attributable" and the broader scope of income under section 80P as discussed in the High Court's judgment.

In conclusion, the Tribunal's decision emphasized the importance of the specific circumstances of the case and the nature of the funds involved in determining the tax treatment of interest income earned by the cooperative society. The judgment provided clarity on the application of section 80P and the treatment of interest income in such scenarios, aligning with the principles established by the Hon'ble Karnataka High Court.