2016 (4) TMI 473 - AT - Income Tax

Assessee wins deductions for Locker Rent & other expenses under Section 80P in Tribunal decision.

The Tribunal partly allowed the assessee's appeals for assessment years 2010-11 and 2011-12. The Tribunal held that the assessee is eligible for deduction ... Deduction under section 80P - Hiring out of safe deposit vaults constitutes banking business - Income from Other Sources vs Income from Business - Allowability of expenses attributable to specific income - Proportionate deduction versus ad hoc estimation - Residuary deduction under section 80P(2)(c)(ii) - Treatment of rental income as Income from House Property and allowable statutory deduction - Principles of natural justice in withdrawal of deductionDeduction under section 80P - Hiring out of safe deposit vaults constitutes banking business - Whether locker rent income of the co-operative credit society is eligible for deduction under section 80P. - HELD THAT: - The Tribunal held that locker (safe deposit vault) income falls within banking activity for a co-operative credit society and is therefore deductible under section 80P, following the principle applied in Mehsana District Central Co-op. Bank Ltd. The CIT(A)'s direction to treat such income as not eligible under section 80P was set aside and the assessee's claim for deduction in respect of locker rent was allowed. [Paras 10]Locker rent income is eligible for deduction under section 80P; direction of CIT(A) on this point set aside.Allowability of expenses attributable to specific income - Proportionate deduction versus ad hoc estimation - Whether expenses attributable to ambulance hire, MSEB bill collection commission and health club fees should be allowed on actual/proportionate basis rather than by ad hoc estimation at 10% of gross receipts. - HELD THAT: - The Tribunal found the CIT(A)'s blanket reduction of deductible expenses to an ad hoc 10% of gross receipts to be without objective basis. For ambulance rent the Tribunal held that actual/proportionate expenses incurred in running the ambulance (fuel, driver salary, repairs, depreciation, etc.) must be allowed and the net result determined; similarly, income from MSEB commission and health club fees were held to warrant allowance of proportionate/actual expenses in computing taxable income. For MSEB commission the Tribunal accepted precedents treating such collection activity as akin to banking business and thus eligible under section 80P, and in any event required proportionate expenses to be allowed. [Paras 10]Authorities to allow expenses attributable to ambulance, MSEB commission and health club on actual/proportionate basis instead of applying ad hoc 10% estimation; income to be recomputed accordingly.Residuary deduction under section 80P(2)(c)(ii) - Principles of natural justice in withdrawal of deduction - Whether the assessee was entitled to the residuary deduction under section 80P(2)(c)(ii) (the Rs.50,000 deduction) and whether its withdrawal by the CIT(A) without notice was valid. - HELD THAT: - The Tribunal observed that where a cooperative society carries out activities not otherwise covered by clauses (a) or (b) of section 80P(2), it is eligible for the residuary deduction under clause (c)(ii). The CIT(A)'s withdrawal of the Rs. 50,000 deduction granted by the Assessing Officer was held to have been effected without affording the assessee an opportunity and therefore to offend principles of natural justice and statutory requirements. Accordingly the assessee was held entitled to the residuary deduction in relation to activities not covered by clauses (a) or (b). [Paras 11]Assessee entitled to deduction under section 80P(2)(c)(ii) for activities not covered by clauses (a) or (b); withdrawal by CIT(A) set aside for lack of opportunity.Treatment of rental income as Income from House Property and allowable statutory deduction - Income from Other Sources vs Income from Business - Treatment of rent from leased out property and allowance of statutory deduction. - HELD THAT: - The Tribunal accepted the CIT(A)'s approach to treat rent received from leasing part of the constructed property as income from house property rather than business income, with the result that the assessee is entitled to the statutory deduction (30% under section 24) when computing taxable income under that head. The Tribunal sustained the CIT(A)'s direction on taxation under 'Income from House Property' and allowance of the statutory deduction. [Paras 8, 9, 10]Property rent to be assessed under Income from House Property and statutory deduction to be allowed; CIT(A)'s direction in this regard sustained.Final Conclusion: Both appeals for A.Y. 2010-11 and A.Y. 2011-12 are partly allowed: locker rent deduction under section 80P is restored; expenses attributable to ambulance, MSEB collection and health club fees are to be allowed on actual/proportionate basis and income recomputed; assessee is entitled to residuary deduction under section 80P(2)(c)(ii) for activities not covered by clauses (a) or (b) (withdrawal by CIT(A) set aside); rent from property is to be treated as income from house property with statutory deduction allowed. Authorities are directed to recompute assessments accordingly. Issues Involved:1. Taxability of income under the head 'Income from Other Sources'.2. Disallowance of deduction claimed under section 80P.3. Restriction of deductions of expenses attributable to various income sources.4. Taxation of property rent income under the head 'Income from House Property'.5. Withdrawal of deduction granted under section 80P(2)(c)(ii).Issue-wise Detailed Analysis:1. Taxability of Income under the Head 'Income from Other Sources':The assessee, a Co-operative Credit Society, declared income from various sources such as Locker Rent, Ambulance Rent, Commission on collection of MSEB bills, Shop Rent, and Health Club Fees. The Assessing Officer (AO) opined that this income was not attributable to the main activity of the society and thus, was not eligible for full deduction under section 80P of the Income-tax Act, 1961. The CIT(A) confirmed this view, directing that such income should be taxed under 'Income from Other Sources' with an ad hoc deduction of 10% for expenses.2. Disallowance of Deduction Claimed under Section 80P:The assessee claimed deductions under section 80P for income earned from Locker Rent, Ambulance Rent, MSEB Bill collection commission, and Health Club Fees. The CIT(A) disallowed these claims, stating that these activities were not part of the business activities of the society and thus, the income could not be assessed under 'Income from Business'. The CIT(A) also withdrew the deduction of Rs. 50,000/- granted by the AO under section 80P(2)(c)(ii), as the society was covered by clause (a) of sub-section (2) of section 80P.3. Restriction of Deductions of Expenses Attributable to Various Income Sources:The CIT(A) allowed only 10% of the gross receipts of the income sources as expenses, rejecting the actual expenses claimed by the assessee. The assessee argued that the actual expenses incurred for running the Ambulance, Health Club, and other activities should be allowed as deductions. The Tribunal agreed with the assessee's contention that expenses should be allowed on an actual/proportionate basis rather than an arbitrary 10%.4. Taxation of Property Rent Income under the Head 'Income from House Property':The CIT(A) directed the AO to tax the property rent income under 'Income from House Property' and grant a statutory deduction of 30% under section 24. The assessee accepted this finding and did not press this issue further.5. Withdrawal of Deduction Granted under Section 80P(2)(c)(ii):The CIT(A) withdrew the Rs. 50,000/- deduction granted by the AO under section 80P(2)(c)(ii) without giving notice of enhancement. The Tribunal found merit in the assessee's plea that a co-operative society engaged in any business activity not eligible for deduction under section 80P(2)(a) or (b) is entitled to a deduction of Rs. 50,000/-. The Tribunal held that the CIT(A)'s action violated principles of natural justice and directed the AO to allow the deduction.Conclusion:The Tribunal held that the assessee is eligible for deduction under section 80P for Locker Rent income, following the Supreme Court decision in Mehsana District Central Co-op. Bank Ltd. For Ambulance Rent, MSEB Bill collection commission, and Health Club Fees, the Tribunal directed the AO to allow actual/proportionate expenses. The withdrawal of the Rs. 50,000/- deduction under section 80P(2)(c)(ii) was reversed. The appeals for both assessment years 2010-11 and 2011-12 were partly allowed.Order Pronounced:The appeals of the assessee in ITA No.1521/PN/2015 (A.Y. 2010-11) and ITA No.1522/PN/2015 (A.Y. 2011-12) were partly allowed, as pronounced on 10th March 2016.