2018 (9) TMI 1550 - AT - Income Tax

Assessees entitled to deduction under section 80P(2)(a)(i) for interest income from investments.

The Income Tax Officer Versus M/s. The Vakathanam Service Co-operative Bank Limited, M/s. The Changanassery North Service Cooperative Bank Limited

The Income Tax Officer Versus M/s. The Vakathanam Service Co-operative Bank Limited, M/s. The Changanassery North Service Cooperative Bank Limited - TMI 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. Deduction u/s 80P(2)(a)(i) for Interest Income:- Background: The assessees, primary agricultural credit societies, were denied deduction u/s 80P(2)(a)(i) by the Assessing Officer on the interest income received from investments with treasury and banks, treating it as 'income from other sources'.- CIT(A) Decision: The CIT(A) allowed the deduction, following the precedent set by the Cochin Bench of the Tribunal in the case of Kizhathadiyoor Service Co-operative Bank Ltd. The CIT(A) held that the interest income from investments with Treasury and Banks is part of the banking activity and eligible for deduction.- Revenue's Appeal: The Revenue appealed against the CIT(A)'s decision, arguing that the interest income should be classified as 'income from other sources' based on the Supreme Court's decision in Totgar's Cooperative Sale Society Ltd., which held such income as taxable under Section 56 and not eligible for deduction as business income under Section 80P(2)(i).2. Tribunal's Analysis and Decision:- Rival Submissions: The Departmental Representative supported the grounds of the appeal, while the Assessee's Representative cited various judicial pronouncements favoring the assessee, including CIT v. Karnataka State Co-operative Bank and Vaveru Co-operative Rural Bank Ltd. v CIT.- Tribunal's Consideration: The Tribunal considered whether the interest income from investments with sub-treasuries and banks should be assessed under 'income from other sources' or 'income from business'. The Tribunal noted that if assessed under 'income from business', the deduction u/s 80P(2)(a)(i) would be applicable.- Relevant Precedents: The Tribunal referenced several cases:- Azhikode Service Co-operative Bank Ltd. & Others: The Tribunal had previously decided in favor of the assessee, holding that interest income from investments is part of the banking activity and eligible for deduction.- Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamamitha vs ITO: The Karnataka High Court held that primary agricultural credit societies not possessing RBI licenses are not cooperative banks and are eligible for Section 80P(2)(a)(i) deductions.- Tumkur Merchants Souharda Credit Cooperative Ltd: The Karnataka High Court distinguished the Totgar's case, stating that interest income from deposits made in the course of business is attributable to the business of banking and eligible for deduction.- Muttom Service Co-operative Bank Ltd: The Cochin Bench of the Tribunal held that interest income from state-promoted treasury investments is part of the banking activity and eligible for deduction.- Vaveru Co-operative Rural Bank Ltd. v CIT: The Telangana & Andhra Pradesh High Court held that interest income from investments made in the course of business by cooperative societies is eligible for deduction under Section 80P(2)(a)(i).3. Tribunal's Conclusion:- The Tribunal concluded that the assessees are entitled to deduction u/s 80P(2)(a)(i) for interest income received on investments made with sub-treasuries and banks, following the judicial precedents.- The Tribunal dismissed the Revenue's appeals and the cross objections filed by the assessee as infructuous.Final Order: The appeals filed by the Revenue and the cross objections filed by the assessee were dismissed. Order pronounced on 18th September 2018.