2014 (10) TMI 848 - AT - Income Tax

Tribunal allows appeal on interest income eligibility for deduction under Income Tax Act

The Tribunal ruled in favor of the assessee, allowing the appeal regarding the eligibility of interest income for deduction under section 80P(2)(a)(i) of ... Eligibility for deduction u/s 80P - whether the interest income earned by the assessee society from making deposits in short term deposit in banks will qualify for exemption u/s 80P(2)(a)(i) - Held that:- The deposits which are made by the assessee are out of the deposit collected by the assessee from its members. The assessee society also provides loan and credit facilities to its members. When the funds are lying idle they are invested in the short term in bank deposits. In this view of the matter we find that assessee's contention is cogent that when the real income from the bank deposit has to be considered, it is to be seen in the light of the interest which the assessee has to pay to its members on its deposits and also the administration cost of making such deposits. This contention of the assessee has duly been accepted by the Revenue as is emanating from the order of AO in A.Yr.2009-10. In the said assessment order the AO had computed the gross interest on bank deposit at ₹ 1,24,16,335/-. From this the AO has allowed the interest paid by the assessee to its members amounting to ₹ 1,21,31,880/-. Only the resultant income from bank deposits amounting to ₹ 2,84,445/- was brought to tax. We do not find any reason as to why this principle should not be adopted in the current year. In our considered opinion the ld. CIT(A) has erred in not entertaining this plea of the assessee. We further find that the issue involved is covered in favour of the assesee by catena of decisions of the Tribunal in assessee's own case to held income from investment in banks and other financial institutions is the business income of the assessee society and it is eligible to get deduction under Section 80P(2)(a)(i) - Decided in favour of assessee Issues Involved:1. Eligibility of interest income for deduction under section 80P(2)(a)(i) of the Income Tax Act.2. Application of previous judgments in similar cases.3. Proportionate deduction of interest paid to members.4. Proportionate deduction of administrative and other expenses.5. Application of the 'principle of mutuality' to the entire income earned by the assessee.Detailed Analysis:1. Eligibility of Interest Income for Deduction under Section 80P(2)(a)(i):The primary issue is whether the interest income earned by the assessee society from short-term bank deposits qualifies for exemption under section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that such interest income did not qualify for the deduction, as it was not directly related to the primary objective of providing credit facilities to the members but was rather income from other sources.2. Application of Previous Judgments:The CIT(A) relied on the judgments in the cases of Totgars Co-operative Sale Society vs ITO and Bihar Rajya Sahkari Bhoomi Bikash Co-op. Bank Ltd vs CIT, which held that interest income from investments in banks and financial institutions does not qualify for deduction under section 80P(2)(a)(i). However, the assessee argued that these judgments were not applicable to its case and that the principle of consistency should apply, as similar deductions had been allowed in previous and subsequent years.3. Proportionate Deduction of Interest Paid to Members:The assessee contended that the real income from bank deposits should be considered after deducting the interest paid to its members. This argument was accepted by the AO in the subsequent assessment year, where only the net interest income (after deducting the interest paid to members) was taxed. The Tribunal found this contention cogent and saw no reason why this principle should not be applied in the current year.4. Proportionate Deduction of Administrative and Other Expenses:The assessee also argued for the deduction of proportionate administrative and other expenses from the interest income earned. The Tribunal did not specifically address this issue in detail but implied that the net income approach (considering both interest paid and administrative costs) should be applied.5. Application of the 'Principle of Mutuality':The assessee claimed that the entire income, including the interest income, was immune from tax under the 'principle of mutuality.' The Tribunal did not directly address this principle but focused on the specific provisions of section 80P(2)(a)(i) and the relevant case laws.Tribunal's Conclusion:The Tribunal held that the issue was covered in favor of the assessee by the decisions of the Tribunal and the Hon'ble Jurisdictional High Court in the assessee's own case for previous years. The Tribunal emphasized the principle of consistency, as reiterated by the Hon'ble Apex Court in CIT vs Excel Industries, and found no convincing reason to deviate from the earlier decisions. The Tribunal also distinguished the facts of the present case from the Totgars Co-operative Sale Society and Bihar Rajya Sahkari Bhoomi Bikash Co-op. Bank Ltd cases, noting that the interest income in the present case was not from retained sale proceeds but from investments of idle funds.Final Judgment:The Tribunal set aside the orders of the AO and CIT(A) and decided the issue in favor of the assessee, allowing the appeal.