Tax Appeal Decision: Disallowance under 40(a)(ia) not taxable for banking activities under 80P(2)(a)(i) rule.

The Tribunal dismissed the Revenue's appeal against the CIT(A)'s order for A.Y. 2005-06, upholding the disallowance u/s 40(a)(ia) and exemption u/s 80P(2)(a)(i) of the Act. The Tribunal ruled that the disallowance made u/s 40(a)(ia) did not become taxable when related to banking activities enjoying exemption u/s 80P(2)(a)(i). It was held that the disallowance amount was incidental to banking activities falling under section 80P(2)(a)(i), thus supporting the CIT(A)'s decision.

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Issues involved: Appeal by Revenue against CIT(A) order for A.Y. 2005-06 regarding disallowance u/s 40(a)(ia) and exemption u/s 80P(2)(a)(i) of the Act.

Disallowance u/s 40(a)(ia): The issue revolved around whether the disallowance made u/s 40(a)(ia) becomes taxable when attributable to banking activities of Credit Sanstha enjoying exemption u/s 80P(2)(a)(i) of the Act. The appellant argued that such additions are unwarranted due to the exemption u/s 80P. Citing a Tribunal decision, it was emphasized that the interest earned by the assessee would be exempt under this section. Similar views were supported by other Tribunal and High Court decisions. The Revenue, however, relied on the A.O.'s order.

Exemption u/s 80P(2)(a)(i): The CIT(A) held that once deduction u/s 80P(2)(a)(i) is allowable, any addition made due to disallowance of expenditure debited to the P & L a/c should also be covered under section 80P. The Tribunal concurred, stating that the disallowance amount was incidental to banking activities falling under section 80P(2)(a)(i). The order of the CIT(A) was upheld, supported by the citation relied upon by the appellant's counsel.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision. The judgment was pronounced on 28th February 2011.

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