Tribunal directs reassessment of interest income disallowance on fixed deposits

The Tribunal partially allowed the appeal, directing the Assessing Officer to re-compute the disallowance of interest income on fixed deposits with nationalized banks. The AO was instructed to consider deducting the interest expenditure incurred by the assessee on such deposits. The Tribunal emphasized granting the assessee an opportunity to present evidence in support of its case.

---

---

Issues Involved:

1. Confirmation of addition of Rs. 14,62,750 as interest income instead of Rs. 9,64,984.
2. Disallowance of deduction under Section 80P(2)(a)(i) on account of interest from nationalized banks.

Detailed Analysis:

1. Confirmation of Addition of Rs. 14,62,750 as Interest Income Instead of Rs. 9,64,984:

The assessee, a registered co-operative society engaged in extending credit facilities to its members, claimed a deduction of Rs. 15,12,750 under Section 80P(2)(a)(i) of the Income Tax Act, 1961. During the assessment, the Assessing Officer (AO) disallowed the claim, allowing only Rs. 50,000 under Section 80P(2)(c)(ii). The AO computed the interest income from other banks at Rs. 18,36,400 and draft/cheque charge income at Rs. 28,085, totaling Rs. 18,64,485. The AO disallowed the deduction claimed under Section 80P(2)(a)(i), stating that the income was not derived from the business of banking or providing credit facilities to members but from surplus funds invested in fixed deposits with nationalized banks. The AO argued that such interest income should be taxed under Section 56 as "Income from other sources" and not under business income. The assessee's appeal against this order was dismissed by the CIT(A), who upheld the AO's decision, relying on the Supreme Court's decision in Totgars' Cooperative Sale Society Ltd. and the Gujarat High Court's decision in State Bank of India vs. CIT.

2. Disallowance of Deduction under Section 80P(2)(a)(i) on Account of Interest from Nationalized Banks:

The CIT(A) observed that the interest earned from investments in banks does not fall under Section 80P(2)(a) and is not attributable to the business of providing credit facilities to members. The CIT(A) noted that the interest income from surplus funds invested in nationalized banks is not part of the business of providing credit facilities to members and, therefore, is not deductible under Section 80P(2)(a)(i). The CIT(A) suggested that the assessee could avail of the deduction under Section 80P(2)(d) by investing surplus funds in co-operative banks or societies. The Tribunal upheld this view, citing the Gujarat High Court's decision in State Bank of India vs. CIT, which stated that income from investments in banks does not fall within the categories mentioned in Section 80P(2)(a) but is deductible under Section 80P(2)(d) if invested in co-operative societies.

Conclusion and Directions:

The Tribunal acknowledged the assessee's dispute over the quantum of addition and remanded the matter to the AO to re-compute the disallowance of interest income on fixed deposits with nationalized banks. The AO was directed to exclude or deduct the interest expenditure incurred by the assessee on such deposits. The Tribunal emphasized that the assessee should be given an opportunity to be heard and allowed to present evidence in support of its case.

Outcome:

The appeal was partly allowed for statistical purposes, with specific directions for re-computation of the interest income disallowance and consideration of the assessee's interest expenditure on deposits with nationalized banks.

---