2019 (4) TMI 682 - AT - Income Tax

CIT cannot tax full interest amount when Section 80P deduction applies to entire sum

The ITAT Pune held that the CIT's order treating the assessment as erroneous and prejudicial to revenue was unsustainable. The dispute concerned deduction ... Deduction u/s.80P - interest income from FDRs - erroneous and prejudicial to the interest of the Revenue - income chargeable to tax without any reduction of interest paid to members on the money invested in FDs and interest paid on FD-OD account - HELD THAT:- Net figure which has been considered by the CIT for treating the assessment order as erroneous and prejudicial to the interest of the Revenue by holding that the gross amount of interest should have been charged to tax and not net interest. In our considered opinion, when the interest itself is eligible for deduction u/s.80P the compulsion of the assessee to offer certain amount in order to enable the completion of the assessment, cannot be stretched so far so as to bring the entire amount of interest received from bank to tax which is otherwise deductible in view of various decisions discussed in the preceding para. Once we hold that the entire amount of interest is eligible for deduction u/s.80P, the order of the CIT directing the AO to charge to tax the full amount of interest and not its part, becomes automatically unsustainable. We, therefore, vacate the impugned order. Issues:Appeal against order u/s.263 of the Income-tax Act, 1961 for AY 2011-12 - Eligibility for deduction u/s.80P on interest income from FDRs - Whether interest income earned on Fixed Deposits with Nationalized banks qualifies for deduction u/s.80P - Whether entire interest amount should be taxed or only the net interest income after deductions.Analysis:The appeal was filed against the order passed by the Principal Commissioner u/s.263 of the Income-tax Act, 1961 for the assessment year 2011-12. The assessee, a Co-operative Society, had filed a return of income declaring total income at Nil. The assessment was completed u/s.143(3) computing total income at a positive amount after certain deductions. The Principal Commissioner held the assessment order to be erroneous and prejudicial to the interest of the Revenue, stating that the interest received from the bank should have been taxed without any reduction for interest paid to members. The main issue was the eligibility of the assessee for deduction u/s.80P on the interest income from Fixed Deposits with Nationalized banks.The Tribunal analyzed the legal position and various precedents regarding the deduction u/s.80P on interest income. Referring to judgments from different High Courts and the Supreme Court, the Tribunal held that interest income earned on Fixed Deposits with Nationalized banks qualifies for deduction u/s.80P of the Act. The Tribunal relied on the decision of the Pune Bench in a similar case and other orders supporting the view in favor of the assessee. It was noted that in the absence of a direct judgment from the jurisdictional High Court, the Tribunal preferred to follow the view in favor of the assessee.Regarding the specific case, the Tribunal observed that the assessee had requested the Assessing Officer to finalize the assessment by including the net interest income earned from bank Fixed Deposits after certain deductions. The Principal Commissioner directed the AO to tax the full amount of interest received from the bank, contrary to the deductions claimed by the assessee. The Tribunal held that once it is established that the entire interest amount is eligible for deduction u/s.80P, the order to tax the full interest amount becomes unsustainable. Therefore, the Tribunal vacated the impugned order.The Tribunal dismissed the contention for imposing costs on the Revenue in the circumstances of the case. Ultimately, the appeal was allowed on merits, and the impugned order was set aside.