2018 (3) TMI 224 - HC - Income Tax

Deduction u/s 80P(2)(a)(i) denied - interest income from bank deposits is not business income but is income from other sources - Held that - The judgment relied upon by the revenue in the case of Totgar s Co-perative Sale Society Limited 2010 (2) TMI 3 - SUPREME COURT deals with Section 80P(2)(d). As aforesaid Section 80P(2)(d) and Section 80P(2)(a)(i) of the Act being different the said judgment is not squarely applicable to the facts of the present case. The applicability of Section 80P(2)(a)(i) of the Act has to be considered in terms of the said section. The authorities mixing up the issue of Section 80P(2)(a)(i) and Section 80P(2)(d) cannot reject the claim of the assessee under Section 80P(2)(a)(i) of the Act without giving a proper finding on the issue. It is prima facie apparent on record that AO proceeded to compute the income of Rs. 25, 08, 170/- despite the same being accounted by the assessee in the consolidated income and expenditure account for the income returned by the assessee at Rs. 11, 66, 894/-. Income cannot be enhanced to Rs. 25, 00, 000/- for the purpose of levying income tax without considering the actual figures arrived at by the assessee returned while declaring the taxable income. Hence on this ground also the computation made by the Assessing Officer requires to be reconsidered. Thus the order of the Tribunal as well as the authorities are set aside and the matter is remanded to the Assessing Officer for fresh consideration. All rights and contentions of the parties are left open. The Assessing Officer shall provide an opportunity of hearing to the assessee and pass appropriate orders in the light of the judgment of the Hon ble Apex Court. Substantial question of law is not answered.

Summary

Issues Involved:
1. Whether the interest income from bank deposits is business income or income from other sources.
2. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act for interest income.
3. Correctness of the computation of total income by the Assessing Officer.
4. Determination of proportionate cost of funds and administrative expenses for deduction under Section 57 of the Act.

Detailed Analysis:

Issue 1: Nature of Interest Income
The Tribunal held that the interest income from bank deposits is not business income but income from other sources, thereby denying the appellant deduction under Section 80P(2)(a)(i) of the Act. The appellant contended that the interest income is attributable to the business of banking or providing credit facilities to its members, citing the judgment in Tumkur Merchants Souharda Credit Co-operative Limited. The court noted that the phrase "attributable to" is of wider import and includes receipts from sources other than the actual conduct of business. Thus, the income derived from interest is attributable to the activity of carrying on the business of banking or providing credit facilities to its members.

Issue 2: Eligibility for Deduction under Section 80P(2)(a)(i)
The Tribunal's decision to deny the deduction under Section 80P(2)(a)(i) was challenged. The appellant argued that the interest income should be deducted from the gross total income under Section 80P(2)(a)(i) as it is attributable to the business of banking or providing credit facilities. The court referenced the judgment in Tumkur Merchants Souharda Credit Co-operative Limited, which supported the appellant's claim. The court distinguished the judgment in Totgar’s Co-operative Sale Society Limited, noting that it dealt with Section 80P(2)(d) and not Section 80P(2)(a)(i). Therefore, the Tribunal's reliance on Totgar’s case was misplaced.

Issue 3: Correctness of Income Computation
The appellant argued that the Assessing Officer incorrectly computed the total income by adding the interest on fixed deposits, which was already accounted for in the consolidated income and expenditure account. The court found that the Assessing Officer's computation of income at Rs. 25,08,170/- was unsustainable as it did not consider the actual figures declared by the appellant. The court emphasized that income cannot be enhanced without considering the actual figures arrived at by the appellant.

Issue 4: Proportionate Cost of Funds and Administrative Expenses
The appellant contended that even if the interest income is considered as income from other sources, the Tribunal failed to examine the proportionate cost of funds and administrative expenses for deduction under Section 57 of the Act. The court noted that the Tribunal did not conduct the necessary factual exercise to determine these expenses. The court cited the remand in Totgar’s Co-operative Sale Society Limited case, where the matter was sent back to the Assessing Officer to ascertain proportionate costs and administrative expenses.

Conclusion:
The court set aside the orders of the Tribunal and the authorities, remanding the matter to the Assessing Officer for fresh consideration. The Assessing Officer is directed to provide an opportunity of hearing to the appellant and pass appropriate orders in light of the judgments of the Hon’ble Apex Court and this court. The substantial question of law was not answered, and the appeal was disposed of accordingly.