2016 (6) TMI 1310 - AT - Income Tax

Disallowance of part of deduction claimed under section 80P(2)(a)(i) - interest income - Held that - In the present case there is no surplus fund available as demonstrated from the Balance Sheet and secondly the investments made in the fixed deposit is assessee s own funds and not a liability of the assessee re payable to the members - No hesitation in holding that the interest income earned by the assessee on the fixed deposits kept with the banks is to be treated as business income of the assessee and the assessee would be eligible to claim deduction under section 80P(2)(a)(i) on such income. Therefore allowing the grounds raised by the assessee we set aside the order of the learned Commissioner (Appeals) on this issue. In view of our aforesaid decision the alternative grounds raised by the assessee for allowing expenditure on the interest income has become infructuous hence not required to be adjudicated.

Summary

Issues Involved:
1. Disallowance of part of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(a)(i):

The core issue in this appeal is the disallowance of part of the deduction claimed by the assessee under section 80P(2)(a)(i) of the Income Tax Act, 1961. The assessee, a credit co-operative society, filed its return of income for the assessment year 2010-11, declaring a total income of `nil. During the assessment proceedings, the Assessing Officer (AO) observed that the assessee collected deposits and gave loans and advances, declaring a profit of `30,09,477, which was claimed as a deduction under section 80P(2)(a)(i).

The AO referred to section 80P(4) and concluded that the assessee is a primary co-operative bank and not a co-operative society, thereby disallowing the deduction under section 80P(2)(a)(i). The assessee challenged this view, and the Commissioner (Appeals) (CIT(A)) accepted that the assessee is a co-operative credit society, distinct from co-operative banks, and eligible for the deduction. However, the CIT(A) restricted the deduction to the income from the business of banking or credit facilities to the members, excluding interest income from fixed deposits, which was treated as "Income From Other Sources."

Arguments by the Assessee:

The assessee argued that there was no surplus reserve created in its accounts and that the funds invested in fixed deposits were its own and not earmarked for members. The interest income from these fixed deposits should be treated as business income. The assessee relied on decisions from other cases, such as ITO v/s Sunder Patel Co-operative Credit Society Ltd. and Yashomandir Sahakari Patpedi Ltd., to support its claim.

Arguments by the Revenue:

The Revenue supported the CIT(A)'s decision, maintaining that the interest income from fixed deposits should be assessed as income from other sources.

Tribunal's Analysis and Decision:

The Tribunal considered the submissions and reviewed the material on record. It noted that the Department accepted the CIT(A)'s decision that the assessee is a co-operative credit society eligible for deduction under section 80P(2)(a)(i). The Tribunal found that the CIT(A) erred in treating the interest income from fixed deposits as income from other sources. The investments in fixed deposits were made to maintain a statutory reserve fund as mandated by the Maharashtra Co-operative Societies Act, 1960, and had a nexus with the assessee's business activities.

The Tribunal observed that the funds invested in fixed deposits were generated from the assessee's business activities and were not liabilities payable to members. It concluded that the interest income should be treated as business income, eligible for deduction under section 80P(2)(a)(i). The Tribunal distinguished the facts of the present case from the Supreme Court's decision in Totgars Co-operative Sale Society Ltd., where the retained funds were a liability shown on the balance sheet.

The Tribunal cited the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-operative Ltd., which held that interest income from surplus funds deposited with banks is attributable to the business of providing credit facilities to members and eligible for deduction under section 80P(2)(a)(i).

Conclusion:

The Tribunal set aside the CIT(A)'s order and directed the AO to grant the assessee the deduction under section 80P(2)(a)(i) for the interest income from fixed deposits. Consequently, the assessee's appeal was partly allowed. The alternative grounds raised by the assessee for allowing expenditure on the interest income became infructuous and were not adjudicated.

Order Pronounced:

The order was pronounced in the open Court on 29.06.2016.