Tribunal Upholds Deduction for Interest Income from Investments in Banking Activity

The Tribunal upheld the CIT(A)'s decision, allowing deduction under section 80P(2)(a)(i) for interest income received by the agricultural credit society from investments with sub-treasuries and banks. The Tribunal distinguished the case law cited by the Revenue, emphasizing that the interest income was part of the banking activity and thus eligible for the deduction. The decision was based on various judicial pronouncements supporting the assessee's position, leading to the dismissal of the Revenue's appeals.

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Issues Involved:
1. Whether the CIT(A) is justified in directing the Assessing Officer to grant deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income received by the assessee on investments made with Sub-Treasuries, Banks, etc.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Granting Deduction u/s 80P(2)(a)(i):

The primary issue in these appeals is whether the CIT(A) was correct in directing the Assessing Officer to grant deduction under section 80P(2)(a)(i) of the Income Tax Act for the interest income received by the assessee from investments in Sub-Treasuries and Banks. The assessee, a primary agricultural credit society registered under the Kerala Co-operative Societies Act, 1969, engaged in banking and providing credit facilities to its members, had its interest income from such investments treated as "income from other sources" by the Assessing Officer, thereby denying the deduction claim.

The CIT(A) relied on the Cochin Bench Tribunal's decision in the case of Kizhathadiyoor Service Co-operative Bank Ltd. for the assessment year 2009-2010, which held that interest income from investments with Treasury and Banks is part of the banking activity and eligible for deduction under section 80P(2)(a)(i). The Revenue's appeal against this decision was based on the argument that the CIT(A) erred in relying on the Tribunal's decision, which was not challenged further due to low tax effect, and should have considered the Supreme Court's decision in Totgar's Cooperative Sale Society Ltd., where such interest income was categorized as "income from other sources" under section 56 and not eligible for deduction as business income under section 80P(2)(a)(i).

2. Tribunal's Consideration and Findings:

The Tribunal examined whether the interest income received by the assessee from investments with sub-treasuries and banks should be assessed under "income from other sources" or "income from business." If categorized under "income from business," the assessee would be eligible for the deduction under section 80P(2)(a)(i). The Tribunal referred to its previous decision in the case of The Azhikode Service Co-operative Bank Ltd. & Others, which favored the assessee, stating that such interest income is part of the banking activity and thus eligible for the deduction.

The Tribunal also considered the Karnataka High Court's judgment in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs. ITO, which clarified that a primary agricultural credit society or a primary cooperative agricultural and rural development bank without an RBI license does not lose eligibility for deduction under section 80P(2)(a)(i). The Tribunal distinguished the Supreme Court's decision in Totgar's Cooperative Sale Society Ltd., noting that it dealt with a different context where the interest income was from surplus funds retained from marketing agricultural produce, which was shown as a liability and not attributable to the activities mentioned in section 80P(2)(a)(i).

3. Judicial Pronouncements and Conclusion:

The Tribunal cited several judicial pronouncements supporting the assessee's claim, including CIT v. Karnataka State Co-operative Bank, Vaveru Co-operative Rural Bank Ltd. v CIT, and other relevant cases. It concluded that the interest income from investments with sub-treasuries and banks is part of the banking activity and eligible for deduction under section 80P(2)(a)(i).

Final Decision:

The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decision, allowing the deduction under section 80P(2)(a)(i) for the interest income received by the assessee from investments with sub-treasuries and banks. The order was pronounced on September 03, 2018.

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