2020 (3) TMI 1136 - AT - Income Tax

Tribunal upholds income tax deduction disallowance, directs re-examination of cooperative society's eligibility.

The Tribunal dismissed the assessee's appeal challenging the disallowance of deduction u/s 80P(2) of the Income Tax Act for interest income, upholding the ... Deduction u/s 80P - CIT(A) rejected the objections raised by the assessee and passed orders u/s 154 disallowing the claim of the assessee u/s 80P(2) - HELD THAT:- CIT(A) had initially allowed the appeals of the assessee and granted deduction u/s 80P(2) of the I.T.Act. Subsequently, the CIT(A) passed orders u/s 154 wherein the claim of deduction u/s 80P was denied, by relying on the judgment of The Mavilayi Service Co-operative Bank Ltd. v. CIT [2019 (3) TMI 1580 - KERALA HIGH COURT] The CIT(A) ought not to have rejected the claim of deduction u/s 80P(2) of the I.T.Act without examining the activities of the assesseesociety. The Full Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT (supra) had held that the A.O. has to conduct an inquiry into the factual situation as to the activities of the assessee society to determine the eligibility of deduction u/s 80P of the I.T.Act. In view of the dictum laid we restore the issue of deduction u/s 80P(2) to the files of the Assessing Officer to examine the activities of the assessee and determine whether the activities are in compliance with the activities of a co-operative society functioning under the Kerala Co-operative Societies Act, 1969 and accordingly grant deduction u/s 80P(2) of the I.T.Act. Interest on the investments with Co-operative Banks and other Banks - Tribunal in the case of Kizhathadiyoor Service Co-operative Bank Limited [2016 (7) TMI 1405 - ITAT COCHIN] had held that interest income earned from investments with treasuries and banks is part of banking activity of the assessee, and therefore, the said interest income was eligible to be assessed as `income from business’ instead of `income from other sources’. However, as regards the grant of deduction u/s 80P of the I.T.Act on such interest income, the Assessing Officer shall follow the law laid down by the Larger Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT (supra) and examine the activities of the assessee-society before granting deduction u/s 80P of the I.T.Act on such interest income. Appeals filed by the assessee are partly. Issues involved:1. Disallowance of deduction u/s 80P of the Income Tax Act.2. Rectification of order u/s 154 of the Income Tax Act.3. Eligibility of deduction u/s 80P(2) of the Income Tax Act for interest income received from investments.Issue 1: Disallowance of deduction u/s 80P of the Income Tax Act:The assessee, a cooperative society, filed for deduction u/s 80P for the assessment year 2011-12, which was disallowed by the Assessing Officer citing the business of banking. The CIT(A) allowed the deduction based on a judgment of the jurisdictional High Court. However, a subsequent judgment by the Full Bench of the High Court led to the CIT(A) issuing a notice u/s 154 proposing to rectify the order, which was objected by the assessee. The CIT(A) ultimately disallowed the claim of deduction u/s 80P(2) of the Income Tax Act. The Tribunal dismissed the grounds raised by the assessee, upholding the CIT(A)'s decision based on the new interpretation of the law by the Full Bench of the High Court.Issue 2: Rectification of order u/s 154 of the Income Tax Act:The CIT(A) issued a notice u/s 154 to rectify the order after a subsequent judgment by the Full Bench of the High Court, which reversed the previous decision. The assessee objected to this rectification, arguing that the CIT(A) should not have relied on the new judgment as it involved a change of opinion rather than a mistake of law. However, the Tribunal upheld the rectification, stating that the CIT(A) rightly recalled the earlier order granting deduction u/s 80P(2) of the Income Tax Act based on the new interpretation of the law.Issue 3: Eligibility of deduction u/s 80P(2) of the Income Tax Act for interest income received from investments:Regarding interest income received from investments with Cooperative Banks and other Banks, a previous Tribunal order had classified it as 'income from business' instead of 'income from other sources.' However, the eligibility for deduction u/s 80P of the Income Tax Act on such interest income was subject to examination by the Assessing Officer based on the activities of the assessee-society. The Tribunal directed the Assessing Officer to follow the law laid down by the Full Bench of the High Court and assess the activities of the assessee-society before granting deduction u/s 80P of the Income Tax Act on the interest income.In conclusion, the Tribunal allowed the appeal filed by the assessee for statistical purposes, directing a re-examination of the eligibility for deductions u/s 80P of the Income Tax Act based on the activities of the cooperative society and the recent interpretations of the law by the High Court.