2014 (12) TMI 1227 - AT - Income Tax

Eligibility for deduction u/s 80P - Held that - We find that total income earned by the assessee included income on fixed deposits placed with Bombay Mercantile Bank interest income from a scheduled bank and dividend income from Delhi Cooperative Bank. From the certificate as placed we find that Bombay Mercantile Cooperative Bank is a cooperative society registered under Maharashtra Cooperative Societies Act and we further find that the said society has been assessed u/s 143(3) as a cooperative society and its income was allowed to be exempt u/s 80P(2)(i) as held for Assessment Year 1990-91 and 1991-92 and for Assessment Year 1997-98/ Therefore it is held that fixed deposits placed with Bombay Mercantile Bank falls within the exemption granted by Section 80P(2)(d) of the Act. The assessee was also eligible under the provisions of Section 80P(2)a(i) as the funds placed by assessee in the form of fixed deposits can be said to be kept for the purpose of business of the assessee as the assessee had availed credit facilities also against such fixed deposits which were again used for the purpose of business of assessee - Decided against revenue

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P of the Income Tax Act, 1961.
2. Classification of income from interest and dividends as "income from other sources" or "business income."

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P of the Income Tax Act, 1961:
The primary issue revolves around whether the assessee, a cooperative society, is eligible for deduction under Section 80P of the Income Tax Act, 1961, for interest and dividends earned from its investments. The Assessing Officer (AO) disallowed the deduction, arguing that the interest and dividends earned from investments in banks and from non-members do not qualify for exemption under Section 80P. The AO relied on the Supreme Court ruling in Totgar's Co-operative Sale Society Ltd. v. ITO, which stated that interest earned on investments in short-term deposits and securities out of surplus funds is not business income but income from other sources under Section 56.

In contrast, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction, distinguishing the facts of the assessee's case from Totgar's case. The CIT(A) held that the assessee's interest income was from its main business of providing credit facilities to its members and thus eligible for deduction under Section 80P(2)(a)(i). The CIT(A) also noted that the funds kept in banks were ready for utilization in the business of providing credit facilities, making the interest income attributable to the business.

2. Classification of Income from Interest and Dividends:
The AO classified the interest and dividend income as "income from other sources," arguing that the investments were not mandated by any statute or law and were not part of the assessee's business activity of providing credit facilities to its members. The AO emphasized that the interest income from investments in banks could not be considered business income and thus was not eligible for deduction under Section 80P(2)(a)(i).

The CIT(A) disagreed, stating that the interest income from funds deposited in banks was attributable to the business of providing credit facilities, as these funds were always available for utilization for business purposes. The CIT(A) also noted that the assessee had obtained credit limits against the fixed deposits and incurred interest expenditure on these credit limits, which were used for providing credit facilities to its members. Therefore, the CIT(A) held that the interest income was part of the business income and eligible for deduction under Section 80P(2)(a)(i).

Appellate Tribunal's Decision:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, confirming that the interest earned from fixed deposits placed with Bombay Mercantile Cooperative Bank, a cooperative society, was exempt under Section 80P(2)(d). The ITAT also held that the funds placed in fixed deposits were for business purposes, making the interest income eligible for deduction under Section 80P(2)(a)(i). The ITAT distinguished the case from Totgar's Cooperative Society, noting that the assessee's case involved funds kept for business purposes and used for providing credit facilities to its members.

The ITAT also confirmed that the dividend income was exempt for all persons, including the assessee, and that the interest income from the bank, though not exempt under Section 80P(2)(d), was exempt under Section 80P(2)(a)(i).

Conclusion:
The appeal filed by the Revenue was dismissed, and the CIT(A)'s order allowing the deduction under Section 80P was upheld. The ITAT found no infirmity in the CIT(A)'s order, concluding that the interest and dividend income earned by the assessee were part of its business income and eligible for deduction under Section 80P.

Order Pronounced:
The order was pronounced in the open court on 19th Dec., 2014.