2015 (8) TMI 15 - HC - Income Tax

Exemption under Section 80P(2)(a)(i) - interest received from investments of its surplus funds made with the members of the Society - whether the interest income received by the appellant from investments/deposits of its surplus fund with the Member Company is exempt from tax on the Principle of Mutuality? - Held that - As decided TUMKUR MERCHANTS SOUHARDA CREDIT COOPERATIVE LIMITED case 2015 (2) TMI 995 - KARNATAKA HIGH COURT in 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. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961 regarding deduction eligibility.
2. Application of the Principle of Mutuality to interest income from surplus fund investments with members of a society.

Analysis:
1. The appellant claimed deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961 for the interest earned on investments in Bilagi Sugar Mills Ltd. and Bilagi Pattana Sahakari Bank. However, the Assessing Officer disallowed the interest income, stating it was not related to the business of the appellant company. This decision was based on a previous judgment and was upheld by the Commissioner of Income Tax (Appeals) and the Appellate Tribunal. The appellant appealed this decision, questioning the eligibility for the deduction.

2. The High Court admitted the appeal to consider two substantial questions of law. The first issue was whether the appellant was entitled to exemption under Section 80P(2)(a)(i) for interest received from investments of surplus funds with society members. The second issue was whether the interest income from investments/deposits of surplus funds with a Member Company was exempt from tax based on the Principle of Mutuality.

3. The High Court determined that the second substantial question of law was not relevant, focusing the appeal solely on the first substantial question regarding exemption under Section 80P(2)(a)(i).

4. The Court referred to a previous judgment where it was held that interest income from investments made to earn interest was attributable to carrying on the business of banking and thus eligible for deduction under Section 80P(1) of the Act. The Court emphasized that the interest income was not a liability to any members but was deposited in the bank to earn interest, making it attributable to the business of banking.

5. Based on the similarity of facts between the previous judgment and the present case, the Court concluded that the decision in the earlier case should be followed. Therefore, the substantial question of law was answered in favor of the appellant, allowing the deduction and ruling against the revenue authority.