2014 (9) TMI 833 - HC - Income Tax

Exemption u/s 80P(2)(a)(i) - Interest income from FDRs Held that - The present case is of surplus funds, which were not required for carrying on business of providing credit facilities to members. Half of the funds mobilised/collected from the members could be used for providing credit to the members. The balance amount had to be retained and used for specified purpose, other than providing credit facilities to members. This amount was deposited in FDRs for an average period of 500 days. Bye-laws of the appellant cooperative society prescribed that 50% of the amount mobilised/collected would not be given on credit to the members. These constituted surplus funds as has been held by the Assessing Officer and by the Tribunal. It is on these funds that the interest was earned. The interest earned from the aforesaid funds as held by the Supreme Court in Totgars Cooperative Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT , would fall under Section 56 and would be taxable under the head income from other sources . With regard to the claim for deduction under Section 80P(2)(i), we find that there was no discussion or finding by the Commissioner of Income Tax (Appeals) , though this ground/issue was raised. This has happened because the Commissioner of Income Tax (Appeals), as noted above, had granted exemption to the entire income earned by the appellant-assessee under Section 80P(2)(i)(a). Learned counsel for the respondent-Revenue submits that this issue could be examined by the Commissioner of Income Tax (Appeals) on merits.

Issues Involved:
1. Whether interest income from fixed deposits qualifies for exemption under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Applicability of Sections 11 to 13 in determining exemption under Section 80P.
3. Taxability of interest income under "income from business" or "income from other sources".
4. Interpretation of the term "income" under Section 2(24) of the Act.
5. Applicability of the principle of mutuality.
6. Allowability of expenditure under Section 57(3) having nexus with earning the income.
7. Claim for deduction under Section 80P(2)(i).

Detailed Analysis:

1. Exemption under Section 80P(2)(a)(i):
The core issue is whether the interest income earned by the appellant-assessee, a cooperative thrift and credit society, from fixed deposits qualifies for exemption under Section 80P(2)(a)(i). The court held that the interest income from surplus funds invested in fixed deposits does not qualify for exemption. The Supreme Court's decision in Totgars' Co-operative Sale Society Ltd. Vs. Income Tax Officer was cited, where it was determined that interest on surplus funds invested in short-term deposits and securities is not exempt under Section 80P(2)(a)(i) as it is assessable under "income from other sources".

2. Applicability of Sections 11 to 13:
The court clarified that Sections 11 to 13 of the Act have no application in determining exemption under Section 80P. The distinction between corpus or non-corpus funds is not relevant for determining the head of income under Section 80P.

3. Taxability of Interest Income:
The court affirmed that the interest income earned from the surplus funds invested in fixed deposits is taxable under the head "income from other sources". This conclusion was based on the Supreme Court's interpretation in Totgars' Co-operative Sale Society Ltd., which held that such interest income does not fall within the ambit of "profits and gains of business" attributable to providing credit facilities to members.

4. Interpretation of "Income" under Section 2(24):
The term "income" as defined in Section 2(24) of the Act includes profits and gains of business. The court noted that the definition is broad and inclusive, encompassing the interest income earned by the appellant-assessee from fixed deposits.

5. Principle of Mutuality:
The principle of mutuality was deemed inapplicable in this case. The court referred to the Supreme Court's decision in Bangalore Club Vs. CIT, which held that interest earned on fixed deposits with banks does not fall under the principle of mutuality as the transactions are between the assessee and a third party, not between contributors and beneficiaries.

6. Allowability of Expenditure under Section 57(3):
The appellant-assessee raised an alternative contention regarding the allowability of expenditure under Section 57(3) that has a nexus with earning the interest income. Since the Commissioner of Income Tax (Appeals) had not examined this issue, the court remitted this question back to the Commissioner for decision.

7. Claim for Deduction under Section 80P(2)(i):
The court found that there was no discussion or finding by the Commissioner of Income Tax (Appeals) regarding the claim for deduction under Section 80P(2)(i). This issue was also remitted to the Commissioner of Income Tax (Appeals) for examination on merits.

Conclusion:
The appeal was disposed of with directions to the Commissioner of Income Tax (Appeals) to examine the issues related to the allowability of expenditure under Section 57(3) and the claim for deduction under Section 80P(2)(i). No costs were awarded.

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