2015 (3) TMI 10 - AT - Income Tax

Tribunal affirms co-op society's tax deduction eligibility, clarifies interest income, and mandates interest charge.

The Tribunal upheld the assessee's eligibility for deduction under section 80P(2)(a)(i) of the Income Tax Act, determining that the assessee, a ... Entitlement for deduction under section 80P(2)(a)(i) - AO denying the assessee's claim on the ground that since the assessee is a co-operative bank, the provisions of section 80P(4) are attracted and not 80P(2)(a)(i) - CIT(A) allowed assessee claim - Held that:- As relying on case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha [2015 (1) TMI 821 - KARNATAKA HIGH COURT] wherein held when the status of the assessee is a co-operative society and is not a co-operative bank, the order passed by the assessing authority extending the benefit of exemption from payment of tax under section 80P(2)(a)(i) of the Act is correct. - Decided in favour of assessee. Deduction under Section 80P(2)(a)(i) - interest received by the appellant on government securities - Held that:- . Applying the ratio of the judgement of the Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. (2015 (2) TMI 995 - KARNATAKA HIGH COURT), we hold that the assessee is entitled to deduction under section 80P(2)(a)(i) of the Act in respect of the interest income earned on fixed deposit and government securities as well, as it forms part of the business income earned by the assessee and the same is not to be taxed under the head “ Other Sources.” In this view of the matter, the deduction claimed by the assessee under section 80P(2)(a)(i) of the Act in respect of interest of ₹ 3,90,246 earned from investments in fixed deposits and government securities out of surplus funds from business is allowed. - Decided in favour of assessee. Issues Involved:1. Eligibility for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.2. Applicability of section 80P(4) to the assessee.3. Taxability of interest income from fixed deposits and government securities.4. Charging of interest under section 234B of the Act.Issue-wise Detailed Analysis:1. Eligibility for Deduction under Section 80P(2)(a)(i):The primary issue was whether the assessee, a co-operative society providing credit facilities to its members, was entitled to claim deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. The CIT(A) held that the assessee was eligible for this deduction, relying on various tribunal decisions. The Tribunal upheld this view, referencing the Karnataka High Court judgment in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, which stated that the bar under section 80P(4) applies only to co-operative banks and not to co-operative societies.2. Applicability of Section 80P(4):The Assessing Officer had denied the deduction under section 80P(2)(a)(i) on the grounds that the assessee was a co-operative bank, thus invoking the provisions of section 80P(4). However, the CIT(A) and subsequently the Tribunal, referencing the Karnataka High Court judgment, concluded that the assessee was a co-operative society and not a co-operative bank. Therefore, section 80P(4) was not applicable, and the assessee was entitled to the deduction.3. Taxability of Interest Income from Fixed Deposits and Government Securities:The CIT(A) held that the interest income of Rs. 3,90,246 from fixed deposits and government securities should be assessed under the head 'Other Sources' and not eligible for deduction under section 80P(2)(a)(i), relying on the Supreme Court judgment in Totgars Co-operative Sale Society Ltd. However, the Tribunal referred to the Karnataka High Court judgment in Tumkur Merchants Souharda Credit Co-operative Society Ltd., which distinguished the Totgars case. The High Court held that interest income from surplus funds deposited in banks is attributable to the business of providing credit facilities to members and thus eligible for deduction under section 80P(2)(a)(i). The Tribunal followed this view and allowed the deduction for the interest income.4. Charging of Interest under Section 234B:The assessee contested the charging of interest under section 234B. The Tribunal noted that charging interest under section 234B is consequential and mandatory, as upheld by the Supreme Court in Anjum H. Ghaswala. The Assessing Officer was directed to recompute the interest chargeable under section 234B while giving effect to the Tribunal's order.Conclusion:The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal. It upheld the assessee's eligibility for deduction under section 80P(2)(a)(i) for both its primary business income and the interest income from fixed deposits and government securities. The Tribunal also upheld the mandatory nature of charging interest under section 234B, directing a recomputation in light of its decision. The judgments referenced were critical in determining the applicability of section 80P(4) and the treatment of interest income.