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Income Tax Appellate Tribunal, BENGALURU BENCH B, BENGALURU
Before: SHRI. A. K. GARODIA & SHRI. LALIET KUMAR
O R D E R PER LALIET KUMAR, JUDICIAL MEMBER : These are two appeals filed by the assessee, against the separate orders of the CIT (A)-7, Bengaluru, dt.04.09.2017, for the assessment years 2013-14 and 2014-15 respectively.
ITA.1233 & 1234/Bang/2018 Page - 2 Grounds of appeal for A. Y. 2013-14 are as under :
ITA.1233 & 1234/Bang/2018 Page - 3 Grounds of appeal for A. Y. 2014-15 are as under :
1. The Honourable CIT has erred in denying our claim for deduction u/s.80P for interest on FD of Rs.8,85,695/-.
ITA.1233 & 1234/Bang/2018 Page - 4 Grounds 2, 3, 4 and 6 are common to both the assessment years.
Brief facts are that the AO had treated the interest income received by it from the bank, as income from other sources and has denied the benefit of 80P of an amount of Rs.9,59,014/- for AY 2013-14 and Rs.8,85,695/- for AY 2014-15. For the purpose of arriving at this finding the AO relied upon the judgment of the Hon’ble Supreme Court in the matter of Totgar’s Co-operative Sales Society Ltd v ITO [322 ITR 283] and also of the Hon’ble jurisdictional High Court in 395 ITR 611. In both the judgments it was held by the Hon’ble Courts that the character / nature of income would not change irrespective of the fact that it is received or earned from the schedule bank or cooperative bank. The assessee filed appeals before the CIT (A).
ITA.1233 & 1234/Bang/2018 Page - 5
The CIT (A) has recorded in para 6.1 that the Agarbathi industry is a cottage industry and is classified as handicrafts. Since the cottage industry is entitled to claim deduction u/s.80P(2)(a)(ii), therefore the claim of the assessee was found to be correct. However with respect to the surplus funds amounting to Rs.9,59,014/- and Rs.8,85,695/- for the two assessment years respectively, which are earned on account of interest from deposits made in the bank, the CIT (A) has held that these are income falling under income from other sources, by relying on the judgment of the Hon’ble Supreme Court in Totgar’s Co-operative Sales Society Ltd (supra), wherein both the Hon’ble Supreme Court and jurisdictional High Court have decided the issue against the assessee. Now the assessee is in appeals before us.
It was submitted by the Ld. AR that the assessee is a 100% exempt industry being a cottage industry as per Section 80P(2)(a)(ii) and therefore assessee being 100% exempt unit u/s.80P(2)(a)(ii) is entitle to relief and prayed that interest income should also be treated eligible for deduction u/s.80P of the Act.
Per contra, the Ld. DR relies upon the judgment of the Hon’ble Supreme Court and jurisdictional High Court in the matter of Totgar’s Co-operative Sales Society Ltd (supra).
We have heard the rival contentions and perused the material on record. The CIT (A)’s observation in para 6.1 and 6.2 reads as under :
ITA.1233 & 1234/Bang/2018 Page - 6 6.1 As regards the claim of the appellant that 80(2)(A)(ii) is applicable in its case Agarbathi industry being a cottage industry, a copy of letter of the Office of Development Commissioner (Handicrafts) dated 07-07- 1999 to the President, All India Agarbathi Manufacturer Association was submitted which mentions that Agarbathies has been classified as handicrafts. Thus, the appellant submitted that being classified as handicrafts, Agarbathies industry is coming under cottage industry and hence, the society is entitled to claim deduction u/s 80P(2)(a)(11) of the Act. In the return of Income filed by the society, the nature of business is shown as '0203- wholesale'. The P&L account filed for AY 2014-15 shows trading (purchase and sale) in the raw materials for manufacture of Agarbathies. In view of this, the claim of the appellant as regards the application of the section 80P (2) (a) (ii) to its activities is found to be correct. 6.2 However, admittedly the appellant has earned interest during the year on deposits with banks for its surplus funds amounting to Rs 9,59,014. As regards the taxability of the same the appellant has submitted that ' the deposits with banks are only for compliance of Cooperative Societies Act and to meet the business requirement of opening letter of credit by giving deposits as collateral securities.' The submission of the appellant has been considered. The deduction under section 80P(2)(a)(ii) is admissible to the Societies being cottage industry for their business income. Hence, deduction under section 80P(2)(a)(ii) is applicable to income earned from business only. However, the deduction under section 80P(2)(a)(ii) is not admissible to the income assessable under the Head "Other Sources'. As the interest earned on the deposits kept in Nationalized Banks and other Banks are taxable under the head other sources, the deduction under section 80P(2)(a)(ii) is not admissible in respect of the interest earned on FDs kept in Scheduled Banks. The CIT (A) in para 6.1 and 6.2 has recorded the submission of the assessee and has concluded that the case of the assessee falls within the category of Section 80P(2)(a)(ii) of the Act and has further recorded that the activity of the assessee falls under the said ITA.1233 & 1234/Bang/2018 Page - 7 provision and held that the assessee is entitled to the deduction for the business income derived from such activities. However with respect to earning of the interest by the assessee by depositing the amount in the bank, the CIT (A) after relying upon the decision of the Hon’ble Supreme Court in Totgar’s Co-operative Sales Society Ltd (188 taxman 282) and the Hon’ble jurisdictional High Court in the same case (82 taxmann.com 140) had disallowed the claim of the assessee for interest income.
The CIT (A) has mentioned in para 6.2 that the assessee has earned interests from the deposits in banks are entitled to deduction being a cottage industry u/s.80P(2)(a)(ii) of the Act only on the income earned by it out of the business carried on by it. Further CIT (A) had mentioned that income earned by the assessee by way of earning interest on deposits made by it from its surplus fund would be an income falling under the head ‘income from other sources’. The decision of the CIT (A) on this aspect is without any basis and he has simply jumped to the conclusion that the interest income is taxable under the head other sources. The CIT (A) has not even considered the request of the assessee that some part of the deposits were made in the banks for obtaining the LC from the bank for import of raw-material in relation to cottage industry. In our considered opinion the CIT (A) could have decided the issue by examining the factual matrix and submissions of the assessee in this regard. The amount of interest income on the FDs was necessary for doing the business of cottage industry, which is having a direct nexus with the business of the assessee, should be considered as ITA.1233 & 1234/Bang/2018 Page - 8 business income, however remaining interest income accrued on account of surplus deposit, which was not required for obtaining LC, should be considered as income from other sources is liable to be disallowed. In the light of the above, we restore the matter back to the file of the CIT (A) for fresh adjudication, after giving due opportunity of being heard to the assessee.
In the result, appeals of the assessee are allowed for statistical purpose.