2012 (11) TMI 106 - AT - Income Tax

Tribunal allows deduction under IT Act, rules on bank status & interest income taxation

The Tribunal upheld the Commissioner's decision to allow the deduction u/s 80P(2)(i) of the IT Act to the appellant, ruling that the appellant did not ... Deduction u/s 80P(2)(i) - cooperative bank - primary credit society versus cooperative credit - CIT(A) allowed the claim - revenue appeal - Held that:- Under the provisions of Section 5(ccii) of Banking Regulation Act, 1949 (AACS), a cooperative credit society is defined as a cooperative society, 'the primary object of which is to provide financial accommodation to its members and includes a cooperative land mortgage bank.' . The distinction between a primary credit society and a cooperative credit is with reference to their nature of business - 'Primary Credit Society', is when its paid up capital and reserve attain the level of Rs. 1 lac, which can carry on business of banking until it is granted a license or notified that a license cannot be granted to it. These credit societies would not get the benefit of the deduction u/s 80P(2)(a)(i). Also as decided in Salgaon Sanmitra Sahakari Pathpedhi Ltd. Versus Additional Commissioner of Income-tax, Ward-17(3) [2011 (5) TMI 356 - ITAT, MUMBAI] hat the cooperative credit society is not a co-operative bank. Considering the above facts, it is clear that the appellant is not allowed to do banking business as defined under Banking Regulation Act and therefore, is not a co-operative bank. Therefore, it is not excluded from the benefit of deduction u/s 8OP(2)(a)(i) as it does not fall under the exceptions as provided u/s 8OP(4). However, the AO is directed to find out whether there was any interest income on the short term bank deposits and securities taxable u/s 56 included in the total income of this society which has been claimed by them as exempt foolowing the decision of M/s. The Totgars' Cooperative Sale Society Limited Versus ITO, Karnataka [2010 (2) TMI 3 - SUPREME COURT ] - in favour of assessee. Issues:Appeal against Commissioner of Income Tax (Appeals) order allowing deduction u/s 80P(2)(i) of IT Act.Analysis:1. Issue of Deduction u/s 80P(2)(i): The Revenue appealed the order of the Commissioner of Income Tax (Appeals) allowing a deduction u/s 80P(2)(i) of the IT Act amounting to Rs. 401,89,490. The Assessing Officer disallowed the claim for deduction during the scrutiny assessment. The Commissioner, after considering submissions, partly allowed the appeal. The Revenue contended that the Commissioner wrongly allowed the claim, arguing that the assessee was not a cooperative bank and thus not eligible for the deduction. The Tribunal examined the definition of banking under the Banking Regulation Act and various judgments to determine if the credit society qualified as a cooperative bank. The Tribunal referred to the RBI report on Urban Cooperative Banks to understand the nature of cooperative credit societies. It concluded that the appellant did not qualify as a cooperative bank and was entitled to the deduction u/s 80P(2)(i) of the IT Act.2. Interest Income Issue: The Tribunal addressed the issue of interest income earned from surplus funds kept in banks. Citing a Supreme Court judgment, it clarified that interest income from such surplus funds would not qualify for deduction u/s 80P and should be taxed as 'Income from Other Sources.' The Tribunal directed the Assessing Officer to determine if there was any such income from banks, excluding cooperative societies functioning as banks, and include it in the total income. The appellant was to be given an opportunity to be heard during this determination.3. Judicial Precedents and Decision: The Tribunal upheld the Commissioner's order, finding no error in allowing the deduction u/s 80P(2)(i) to the appellant. It relied on the decision of a Co-ordinate Bench regarding the nature of cooperative credit societies and their classification as cooperative banks. The Tribunal dismissed the Revenue's appeal, affirming the Commissioner's directive to include any taxable income u/s 56 as 'Income from Other Sources' and disallowing deduction u/s 80P on such income. The appeal was thus concluded in favor of the appellant, and the Revenue's appeal was dismissed.In conclusion, the Tribunal's detailed analysis of the issues surrounding the deduction u/s 80P(2)(i) and the treatment of interest income provided a comprehensive understanding of the case, leading to the dismissal of the Revenue's appeal.