Tribunal Upholds Disallowance of Interest Deduction, Remands Depreciation Issue for Verification

The Tribunal upheld the disallowance of the deduction under Section 80P(2)(a)(i) for interest received on loans to employees, citing a High Court decision. The Tribunal remanded the issue of depreciation on the building fund back to the Assessing Officer for verification and potential allowance of depreciation as per statutory provisions. The appeal was partly allowed for statistical purposes, emphasizing adherence to judicial precedents and proper claim verification.

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Issues Involved:
1. Disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, in respect of interest received on loans and advances to employees.
2. Depreciation on addition to the building account.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(a)(i):
Background:
The assessee, a cooperative society, claimed a deduction under Section 80P(2)(a)(i) for interest income amounting to Rs. 5,66,036 received from loans and advances to employees. The Assessing Officer (A.O.) disallowed this deduction, considering the interest income as not arising from business activities with members of the cooperative society.

Arguments by Assessee:
The assessee argued that it is eligible for deduction under Section 80P since it is not a licensed bank but a cooperative society. It cited previous favorable decisions by the CIT(A) for A.Y. 2010-11 and 2012-13, which were not challenged by the department, thus attaining finality. The assessee also referenced the Supreme Court's decision in Citizen Co-operative Society Ltd. Vs ACIT, emphasizing the benevolent nature of Section 80P.

Arguments by Revenue:
The Revenue contended that the interest income was not from regular business activities but from loans to employees who are not members of the cooperative society. The CIT(A) had relied on the jurisdictional High Court's decision in CIT Vs S.B.V. Bank Ltd., which held that interest from loans to employees is not eligible for deduction under Section 80P(2)(a)(i).

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, emphasizing the binding nature of the jurisdictional High Court's ruling in CIT Vs S.B.V. Bank Ltd. Despite the Supreme Court admitting an SLP against this High Court decision, no stay was granted, making the High Court's ruling binding. Consequently, the Tribunal found no error in the CIT(A)'s order and dismissed the assessee's ground of appeal.

2. Depreciation on Addition to Building Account:
Background:
The assessee claimed Rs. 5.00 lacs as a provision for a building fund, which the A.O. disallowed as it was a capital expenditure. On appeal, the assessee alternatively claimed depreciation on the building, citing Section 32 r.w. Explanation (5) of the Income Tax Act.

Arguments by Assessee:
The assessee argued that the A.O. is duty-bound to allow depreciation even if not claimed in the return of income, as per Explanation (5) to Section 32. The assessee supported this with references to the balance sheet and audit report showing the building as a fixed asset.

Arguments by Revenue:
The Revenue maintained that the claim for depreciation was a fresh claim not made during assessment proceedings and supported the disallowance of the provision for the building fund as capital expenditure.

Tribunal's Decision:
The Tribunal acknowledged that the A.O. should consider depreciation on eligible assets as per Section 32, irrespective of the initial claim. The Tribunal set aside this issue to the A.O. for verification of the asset's eligibility and compliance with Section 32 conditions, directing the A.O. to allow depreciation after due verification.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal upheld the disallowance of the deduction under Section 80P(2)(a)(i) but remanded the issue of depreciation on the building to the A.O. for reconsideration. The Tribunal emphasized adherence to binding judicial precedents and proper verification of claims as per statutory provisions.

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