2015 (7) TMI 874 - HC - Income Tax

Entitlement for deduction under Section 80P(2)(a)(i) - Whether the Tribunal failed in law to appreciate that the interest earned on short-term deposits in banks 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 and consequently passed a perverse order denying the deduction under Section 80P(2)(a)(i)? - 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 its 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. The substantial questions of law are answered in favour of the assessee

Summary

Issues:
1. Interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961 regarding interest earned on short-term deposits in banks by a Cooperative Society.
2. Eligibility of the interest earned on deposits in banks for deduction under Section 80P(2)(a)(i) of the Act.
3. Tax liability on interest earned from deposits with scheduled banks by a Cooperative Society providing credit facilities to members.

Issue 1: Interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961
The case involves the interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961, focusing on whether interest earned on short-term deposits in banks by a Cooperative Society providing credit facilities to members qualifies as profits and gains attributable to the business of providing credit facilities. The court emphasized the significance of the term "attributable" in the provision, highlighting that it has a broader meaning than "derived from." The judgment referenced a previous case to explain that the legislature intended to cover receipts from sources beyond the direct conduct of the business. It was established that interest income earned by a Cooperative Society from deposits made out of funds used for providing credit facilities to members is indeed attributable to the business activity and qualifies for deduction under Section 80P(2)(a)(i).

Issue 2: Eligibility for Deduction under Section 80P(2)(a)(i)
The court deliberated on whether the interest earned on deposits in banks by the Cooperative Society could be considered for deduction under Section 80P(2)(a)(i) of the Act. The appellant argued that the interest accrued from deposits made for providing credit facilities to members should be treated as part of the business profits. The court agreed with the appellant's stance, emphasizing that the interest income derived from such deposits is directly linked to the business activity of providing credit facilities and therefore qualifies for deduction under the specified section of the Act. The court rejected the Revenue's reliance on a previous judgment, asserting that the facts of the present case align with the legislative intent behind Section 80P(2)(a)(i).

Issue 3: Tax Liability on Interest Earned from Deposits
The court addressed the question of tax liability on interest earned from deposits with scheduled banks by the Cooperative Society providing credit facilities to its members. It was clarified that the interest income, arising from funds not immediately required for lending to members and deposited in banks to earn interest, is attributable to the business of providing credit facilities. The court distinguished the facts of the present case from a previous judgment where interest income was not related to the specified business activities. Ultimately, the court held that the interest income in question is liable to be deducted under Section 80P(1) of the Act. The judgment favored the assessee, setting aside the appellate authorities' decision and ruling in favor of allowing the appeal.

In conclusion, the judgment by the Karnataka High Court clarified the application of Section 80P(2)(a)(i) of the Income Tax Act, 1961 concerning interest earned on deposits by a Cooperative Society engaged in providing credit facilities to members. The court's detailed analysis emphasized the direct link between the interest income and the business activity, leading to a favorable decision for the assessee regarding the deduction eligibility and tax liability on the interest income.