2018 (12) TMI 562 - AT - Income Tax

Interest income from fixed deposits not deductible under Section 80P(2)(a)(i) despite prior rulings. Remand for re-computation.

ACIT, Circle-33, Kolkata Versus Central Bank of India Employees Co-operative Society Ltd.

The tribunal concluded that interest income from fixed deposits is not eligible for Section 80P(2)(a)(i) deduction, despite previous tribunal and CIT(A) ... Deduction u/s 80P(2)(a)(i) - interest income earned from investment in fixed deposits with various banks - assessee is a co-operative society of employees working with the Central Bank of India - Held that:- In peculiar facts and circumstances that assessee’s impugned interest income derived from investment is not eligible for u/s 80P(2)(a)(i) deduction per se. Its reliance on learned co-ordinate bench’s decision in its own case dated 01.03.2018 (2018 (3) TMI 308 - ITAT KOLKATA) is not very well founded since going against the hon'ble jurisdictional subsequent judgment on the very issue. We therefore treat learned co-ordinate bench’s earlier order to be per inquriam as per the CIT vs. B.R. Constructions (1992 (6) TMI 13 - ANDHRA PRADESH HIGH COURT) since not taking into consideration the law settled by hon'ble jurisdictional high court. The Revenue therefore succeeds in its sole substantive ground in principle. Computation of the impugned sec. 80P(2)(a)(i) deduction - Held that:- There is hardly any dispute about the assessee having derived its interest income from investments made in a nationalised and State co-operative bank (supra). We quote jurisdictional high court’s above stated latter judgment first of all make it clear that the AO needs to re-do the entire computation afresh. He shall treat assessee’s interest income if any, earned from investments made from deposits sec. 64 r.w.s. 63 of the Multi-State Co-operative Societies Act, 2002 to be very much attributable to the business of providing credit facility to its members. This shall follow the necessary netting exercise of the impugned interest income vis-à-vis the corresponding interest expenditure as well for arriving at the impugned disallowance. Needles to say, the assessee shall be afforded adequate opportunity of hearing in consequential proceedings. Issues Involved:1. Eligibility of Section 80P(2)(a)(i) deduction for interest income from fixed deposits.2. Treatment of interest income as business income or income from other sources.3. Applicability of the Supreme Court decision in Totgar’s Cooperative Sale Society Ltd. vs. Income Tax Officer.4. Requirement of netting interest income against interest expenditure.Detailed Analysis:1. Eligibility of Section 80P(2)(a)(i) Deduction for Interest Income from Fixed Deposits:The primary issue in this case is whether the assessee, a co-operative society, is eligible for a Section 80P(2)(a)(i) deduction on the interest income amounting to Rs. 2,20,70,040 earned from fixed deposits with the Central Bank of India and the West Bengal State Co-operative Bank. The CIT(A) had allowed the deduction based on previous tribunal orders favoring the assessee. However, the Assessing Officer had disallowed the deduction, referencing the Supreme Court's decision in Totgar’s Cooperative Sale Society Ltd. vs. ITO, which held that interest income from investments not directly related to the business of providing credit facilities to members is not eligible for such deductions.2. Treatment of Interest Income as Business Income or Income from Other Sources:The assessee argued that the interest income should be treated as business income as it was earned from funds that were part of their business operations, including providing credit facilities to members. They claimed that these funds were invested to ensure security, liquidity, and to earn income for business purposes. The CIT(A) accepted this argument, noting that the assessee's activities were closely integrated and that the interest income had a direct nexus with their business activities.3. Applicability of Supreme Court Decision in Totgar’s Cooperative Sale Society Ltd. vs. Income Tax Officer:The Revenue argued that the Supreme Court's decision in Totgar’s Cooperative Sale Society Ltd. vs. ITO should apply, which would categorize the interest income as income from other sources, thus making it ineligible for the Section 80P(2)(a)(i) deduction. However, the assessee distinguished their case from Totgar’s, stating that their funds were not idle but were part of their business operations. The tribunal had earlier ruled in favor of the assessee, distinguishing their case from Totgar’s on similar grounds.4. Requirement of Netting Interest Income Against Interest Expenditure:The assessee also argued that if the interest income were to be treated as income from other sources, the corresponding interest expenditure incurred to earn this income should be deducted. The CIT(A) had allowed this netting in previous years, and the assessee requested the same treatment for the current assessment year.Tribunal's Conclusion:The tribunal noted that the issue of eligibility for Section 80P(2)(a)(i) deduction had been previously decided in favor of the assessee by the tribunal and upheld by the CIT(A). However, the tribunal also recognized that the jurisdictional High Court had subsequently ruled in a similar case (South Eastern Railway Employees Co-operative Credit Society) that such interest income should be treated as income from other sources. Therefore, the tribunal concluded that the interest income from fixed deposits is not eligible for Section 80P(2)(a)(i) deduction.Remand for Re-computation:The tribunal remanded the case back to the Assessing Officer for re-computation of the deduction. The AO was directed to:- Treat interest income from investments made under Sections 63 and 64 of the Multi-State Co-operative Societies Act, 2002, as attributable to the business of providing credit facilities to members.- Net the interest income against the corresponding interest expenditure to determine the correct amount of income or loss.Order:The Revenue's appeal was allowed for statistical purposes, and the case was remanded to the Assessing Officer for fresh computation in line with the tribunal's directions. The tribunal emphasized the need for the Assessing Officer to provide the assessee with an adequate opportunity for hearing during the re-computation process.