Deduction claim for cooperative society interest income under 80P - revision withdrawn and appeal allowed.

Revisionary action challenged the disallowance of a cooperative society's deduction for interest on investments as not being attributable to its lending business. The tribunal found that interest earned on temporary bank deposits can be attributable to carrying on the business of banking when funds were surplus and not member liabilities, relying on favorable jurisdictional precedent; alternative contrary precedent exists but AO followed a bona fide view. Consequently the revisional order was unsustainable and the taxpayer's appeal was allowed.

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Issues: Whether interest income earned by a credit co-operative society from investments with cooperative banks (and certain banks) is deductible under Section 80P(2)(a)(i)/80P(2)(d) of the Income-tax Act, 1961 as income attributable to the business, or is taxable as income from other sources under Section 56; and whether the PCIT's revisionary order under Section 263 holding the assessment erroneous and prejudicial to the Revenue is sustainable.

Analysis: The assessing officer issued a show cause and examined the claim under Chapter VIA, allowing deduction under Section 80P for interest from cooperative banks while treating a small amount from a commercial bank as taxable under Section 56. The Principal Commissioner invoked Section 263 relying on a contrary decision of the jurisdictional High Court to hold the assessment erroneous and prejudicial. The Tribunal examined contrary decisions of the jurisdictional High Court (including Tumkur Merchants and Totagars) which hold that interest on short-term deposits of funds attributable to the business of providing credit to members is "attributable to" business profits and deductible under Section 80P. The Tribunal also applied the principle that where two reasonable views exist and the AO has adopted one view supported by judicial authority, the AO's order cannot be held erroneous and prejudicial to the revenue under Section 263 (as reflected in Max India precedent). The AO had followed one of the views available in law and granted deduction accordingly.

Conclusion: The Tribunal held that the PCIT's revisionary order under Section 263 is not sustainable; the assessing officer's allowance of deduction under Section 80P in respect of the interest income was permissible and the appeal is allowed in favour of the assessee.

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