2017 (10) TMI 1498 - AT - Income Tax

Tribunal allows bank interest deduction, denies holiday home profit deduction.

The Tribunal partly allowed the appeal by upholding the Commissioner of Income Tax (Appeals) decision to allow the deduction on interest income from ... Deletion of addition on interest income earned from nationalized Banks - provisions of section 80P(1), 80P(2) and 80P(2)(d) of the Income Tax Act, 1961 ignored - deletion of addition made by the A.O. on profit from the business of Holiday Homes. Addition on account of interest income from other sources - AO is of the view that the assessee has parked its surplus funds by way of depositing the same in the current, savings and fixed deposits account with the bank - HELD THAT:- The AO is directed to allow the deduction as claimed by the assesee u/s 80P(2)(a)(i) of the Act. Deduction u/s 80P(2)(a)(i) of the Act from business of holiday homes - AO rejected the claim of the assessee for the deduction u/s 80P(2)(a)(i) of the Act on the ground that deduction is available on the income attributable to the business providing credit facilities to the members. As such the activity of holiday home is not eligible for deduction - HELD THAT:- The deduction is available to the assessee from the business of banking or providing credit facilities the members. The present issue is with regard to the income earned by the assessee from the running and maintenance of holiday homes for the members. Thus, the same cannot be allowed as deduction under the provisions of section 80P(2)(a)(i) of the Act - Deduction not allowed. Appeal allowed in part - decided partly in favor of Revenue. Issues Involved:1. Deletion of addition on interest income from nationalized banks.2. Deduction under section 80P(2)(a)(i) of the Income Tax Act for profit from the business of holiday homes.Issue-wise Detailed Analysis:1. Deletion of Addition on Interest Income from Nationalized Banks:The first issue raised by the revenue is that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition made by the Assessing Officer (AO) of Rs. 1,60,76,939/- on account of interest income from other sources. The assessee, a Co-operative credit society, declared gross total income of Rs. 1,68,45,861/- and claimed deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. The AO disallowed the deduction on the interest income earned from deposits in current, savings, and fixed deposits with banks, citing the Supreme Court judgment in the case of Totgar’s Co-operative Sale Society Ltd. vs ITO, which held that interest earned on investment of funds not required immediately for business purposes falls under 'Income from Other Sources.'The assessee argued that the surplus funds were kept with banks to provide loans to members, and similar issues were decided in favor of the assessee by the Uttarakhand High Court and Patna High Court. The CIT(A) allowed the deduction, distinguishing the facts from the Totgar’s case, and referred to various judgments, including the Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Society Ltd., which held that interest earned by a co-operative society engaged in providing credit facilities to its members is eligible for deduction under section 80P(2) of the Act.The Tribunal, following the jurisdictional High Court's decision in Commissioner of Income Tax-X, Kolkata vs. South Eastern Railway Employees Co-operative Credit Society, upheld the CIT(A)'s order, directing the AO to allow the deduction as claimed by the assessee under section 80P(2)(a)(i) of the Act.2. Deduction Under Section 80P(2)(a)(i) of the Income Tax Act for Profit from the Business of Holiday Homes:The second issue is whether the CIT(A) erred in providing deduction under section 80P(2)(a)(i) of the Act for the profit earned from the business of holiday homes. The assessee earned a profit of Rs. 5,11,100/- from maintaining holiday homes and claimed it as a deduction under section 80P(2)(a)(i). The AO disallowed the deduction, stating that the activity of holiday homes is not related to providing credit facilities to members.The assessee argued that the holiday homes were run for the mutual benefit of members, and the surplus was used for providing credit facilities, making the activity ancillary to the society's primary objective. The CIT(A) allowed the deduction, citing similar cases where income from guest houses was held to qualify for deduction under section 80P.However, the Tribunal reversed the CIT(A)'s order, stating that the deduction under section 80P(2)(a)(i) is available only for businesses of banking or providing credit facilities to members. Since the income from holiday homes does not fall under these categories, the deduction cannot be allowed. Thus, the Tribunal allowed the revenue's appeal on this ground.Conclusion:The appeal was partly allowed. The Tribunal upheld the CIT(A)'s decision to allow the deduction on interest income from nationalized banks but reversed the CIT(A)'s decision on the deduction for income from holiday homes, disallowing it under section 80P(2)(a)(i) of the Act.