2010 (1) TMI 923 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) in relation to the income earned by way of interest from commercial banks - assessee has been earning interest by way of providing credit facilities to its members - AO has not treated the income earned from the monies kept in the commercial banks as eligible for section 80P(2)(a)(i) - Held that - Income earned on deposit of surplus funds with the bank is entitled to exemption under section 80P(2)(a)(i). It is noteworthy that the assessee was also an Apex Housing Co-operative Society whose members were primary Co-operative Societies order of the lower authorities set aside and directed the Assessing Officer to allow deduction under section 80P(2)(a)(i) in relation to the income earned by way of interest from commercial banks appeal of the assessee is allowed.

Summary

Issues:
Taxability of interest income from fixed deposits and saving balances with commercial banks under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Detailed Analysis:

1. Background and Dispute Overview:
The appeal concerns the taxability of income earned through interest on fixed deposits and saving balances with commercial banks for the assessment year 2006-07. The primary contention is whether the income is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961.

2. Assessee's Claim and Assessing Officer's Stand:
The assessee, a Co-operative Society, declared income under section 80P(2) as exempt, attributing the interest income to its business of providing credit facilities to members. However, the Assessing Officer treated the interest income as 'income from other sources' and denied the exemption under section 80P.

3. Legal Interpretation of Section 80P(2)(a)(i):
The key contention revolves around section 80P of the Act, which allows deduction for income of co-operative societies. Section 80P(2)(a)(i) permits deduction for profits and gains attributable to the business of banking or providing credit facilities to members. The term 'attributable to' is interpreted to have a broader scope than 'derived from,' requiring a proximate connection between the income and the business activity.

4. Judicial Precedents and Interpretation:
The Tribunal analyzed various judgments, including those of the Hon'ble Supreme Court and High Courts, to determine the eligibility of the interest income for exemption under section 80P(2)(a)(i). The Tribunal concluded that the interest income from commercial banks, though not directly derived from loans to members, was incidental to and in proximity to the business of providing credit facilities, thus qualifying for exemption.

5. Decision and Rationale:
The Tribunal held that the interest income from commercial banks is attributable to the business of providing credit facilities, falling within the purview of section 80P(2)(a)(i) of the Act. Citing relevant judicial precedents, the Tribunal set aside the lower authorities' orders and directed the Assessing Officer to allow the deduction under section 80P(2)(a)(i) for the interest income. Consequently, the appeal of the assessee was allowed.

In conclusion, the Tribunal's judgment clarifies the interpretation of section 80P(2)(a)(i) regarding the taxability of interest income from commercial banks for Co-operative Societies, emphasizing the importance of a proximate connection between the income and the business activity to qualify for exemption under the Income-tax Act, 1961.