2015 (9) TMI 170 - AT - Income Tax

Appeal allowed for interest income of cooperative credit society under Income Tax Act

The tribunal allowed the appeal, holding that interest income earned on deposits with banks by a cooperative credit society is eligible for deduction ... Deduction under section 80P(2)(a)(i) for co-operative credit societies - income attributable to business as distinct from income from other sources - scope of the phrase 'attributable to' in determining business income - distinction between funds retained as liability and funds representing business profits/reserves - precedential limitation of Totgars Co-operative Sale Society Ltd. to its factsDeduction under section 80P(2)(a)(i) for co-operative credit societies - income attributable to business as distinct from income from other sources - scope of the phrase 'attributable to' in determining business income - Interest income earned on deposits placed with banks by the co-operative credit society is deductible under section 80P(2)(a)(i) as profit and gains of business attributable to its credit-providing activity, and is not exigible as income from other sources. - HELD THAT: - The Tribunal accepted the reasoning of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd., holding that the expression 'attributable to' is wider than 'derived from' and, where a co-operative credit society deposits surplus funds or reserves in banks because they are not immediately required for lending, the interest so earned is attributable to the business of providing credit to members. The Tribunal distinguished the Supreme Court's decision in Totgars Co-operative Sale Society Ltd., noting that Totgars was confined to its facts where the retained sale proceeds were shown as liabilities payable to members and therefore the interest thereon could not be treated as income attributable to the society's core business activities. Applying these principles, the Tribunal found that the assessee's deposited funds were not liabilities due to members but represented reserves/profits temporarily parked, and therefore the interest income is part of business profits attributable to its credit activity and eligible for deduction under section 80P(2)(a)(i).Interest on deposits with banks is held to be attributable to the business of providing credit and deduction under section 80P(2)(a)(i) is allowable; the CIT(A)'s contrary finding is set aside and the AO is directed to allow the deduction.Final Conclusion: The appeal is allowed; the Tribunal directs the Assessing Officer to allow deduction under section 80P(2)(a)(i) in respect of the interest income on deposits held by the assessee for Assessment Year 2010-11. Issues Involved:- Whether interest income earned on deposits kept with banks is eligible for deduction u/s 80P(2)(a)(i) of the Act.- Whether the delay in filing the appeal should be condoned.Analysis:1. Delay in Filing Appeal:The appellant challenged the order passed by the ld CIT(A) regarding the interest income earned on deposits with banks not being eligible for deduction u/s 80P(2)(a)(i) of the Act. The appeal was initially barred by a 47-day delay, but the appellant provided a bonafide reason for the delay, which the tribunal accepted, thereby condoning the delay and admitting the appeal for hearing.2. Eligibility for Deduction u/s 80P(2)(a)(i):The appellant, a co-operative credit society, claimed deduction u/s 80P(2)(a)(i) for interest income earned on deposits with banks. However, the assessing officer considered the appellant as a bank under sec. 80P(4) of the Act, denying the deduction initially. In the appellate proceedings, the ld CIT(A) reversed this decision, concluding that the appellant is not a bank, and therefore, sec. 80P(4) does not apply. However, the ld CIT(A) held that the interest income is assessable under the head 'Income from other sources,' disallowing the deduction u/s 80P(2)(a)(i).3. Judicial Interpretation:The ld CIT(A) relied on a Supreme Court judgment in Totgars Co-operative Sale Society Ltd case to disallow the deduction. The appellant argued that this judgment was misapplied and cited a Karnataka High Court decision in Tumkur Merchants Souharda Credit Cooperative Ltd case, which supported the deduction claim. The tribunal agreed with the appellant, following the Karnataka High Court's reasoning that interest income from deposits with banks is attributable to the business of providing credit facilities, making it eligible for deduction u/s 80P(2)(a)(i).4. Decision and Conclusion:Based on the Karnataka High Court's decision and reasoning, the tribunal set aside the ld CIT(A)'s order and directed the AO to allow the deduction u/s 80P of the Act. Consequently, the appeal filed by the appellant was allowed, emphasizing that the interest income earned from deposits with banks is indeed eligible for deduction under the specified provision of the Income Tax Act.In conclusion, the tribunal's judgment favored the appellant, emphasizing the eligibility of interest income from deposits with banks for deduction u/s 80P(2)(a)(i) of the Act, based on judicial interpretations and legal principles.