2015 (2) TMI 995 - HC - Income Tax

Deduction in respect of income of co-operative societies - Interest earned on short- term deposits - whether were only investment in the course of activity of providing credit facilities to members and that the same cannot be considered as investment made for the purpose of earning interest income - Held that - In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of COMMISSIONER OF INCOME -TAX III, HYDERABAD VS . ANDHRA PRADESH STATE COOPERATIVE BANK LTD ., reported in (2011 (6) TMI 215 - ANDHRA PRADESH HIGH COURT). In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. - Decided in favour of assessee.

Summary

Issues:
- Interpretation of Section 80P of the Income Tax Act, 1961 regarding deduction for co-operative societies.
- Whether interest earned on short-term deposits by a Cooperative Society providing credit facilities to its members is attributable to business profits.

Issue 1: Interpretation of Section 80P of the Income Tax Act, 1961 regarding deduction for co-operative societies:
The case involved an appeal challenging an order passed by the Tribunal regarding the interpretation of Section 80P of the Income Tax Act, 1961. The assessee, a Cooperative Society registered under the Karnataka Co-operative Societies Act, 1959, was engaged in providing credit facilities to its members. The dispute arose when the assessing authority refused to extend the benefit of deduction under Section 80P(2)(i) due to the insertion of Section 80P(4) of the Act. The appellate authority, however, held that the benefit of deduction cannot be denied as the assessee's activity did not fall under the nature of banking. The Tribunal dismissed the appeal based on a Supreme Court judgment. The High Court analyzed the provisions of Section 80P(2)(a)(i) which allows deduction for co-operative societies engaged in providing credit facilities to members.

Issue 2: Whether interest earned on short-term deposits by a Cooperative Society providing credit facilities to its members is attributable to business profits:
The key contention revolved around whether the interest earned by the assessee from short-term deposits made in a nationalized bank was attributable to the business of providing credit facilities to its members. The assessee argued that the interest amount was part of the profits and gains of the business and should be eligible for deduction under Section 80P. The Revenue, on the other hand, relied on a Supreme Court judgment to support its position that the interest income was taxable. The High Court delved into the meaning of "attributable to" as used in the relevant provisions and cited a previous Supreme Court case to highlight the broader interpretation of the term. The court emphasized that the interest income earned by the Cooperative Society in this case was indeed attributable to the business of providing credit facilities to members and should be deductible under Section 80P.

The judgment concluded by allowing the appeal, setting aside the impugned order, and ruling in favor of the assessee. The court held that the interest income earned on short-term deposits by the Cooperative Society providing credit facilities to its members was attributable to the business profits and thus eligible for deduction under Section 80P of the Income Tax Act, 1961.