2016 (9) TMI 814 - HC - Income Tax

Deduction u/s 80P - whether ITAT allowing deduction on income earned by the assessee from investment in banks and other financial institutions has rendered the provisions of Section 80P(2)(a)(i) nugatory as the said section of the Act allows deduction to a cooperative Society engaged in carrying on business of banking or providing credit facilities to its members ? - Held that - We are prepared to agree with Mr. Khaitan to the extent that the interest earned from out of the investments made under Section 64 read with Section 63 of the Multi State Co-operative Societies Act, 2002 is attributable to the business of providing credit facilities to its members. But we are not able to agree with Mr. Khaitan that the rest of the interest earned by the assessee from the investments is also attributable to the business of providing credit facilities to its members. We have not been impressed by the judgements cited by Mr. Khaitan. The question raised for decision is answered in the affirmative and in favour of the revenue to the extent as indicated above. The appeal is allowed. The matter is, however, remanded to the Assessing Officer (a) to work out the interest earned under Sections 63 and 64 of the Multi State Cooperative Societies Act, 2002 and to allow benefit under Section 80P and (b) to ascertain the interest paid to the members for the purpose of earning the sums of ₹ 99 lakhs and 1.2 crores on account of interest from investments. Such interest shall be deducted from the expenses of eligible business. Consequent increased amount of profits of eligible business as discussed above shall be the amount of deduction available to the assessee under Section 80P.

Issues Involved:
1. Deductibility of income earned from investments by a cooperative society under Section 80P(2)(a)(i) of the Income Tax Act.
2. Interpretation of the terms "attributable to" versus "derived from" in the context of Section 80P.
3. Compliance with statutory obligations under the Multi-State Cooperative Societies Act, 2002, particularly Sections 63 and 64.
4. Judicial precedents and their applicability to the case at hand.

Issue-wise Detailed Analysis:

1. Deductibility of Income Earned from Investments:
The core issue in this case was whether the income earned by the assessee from investments in banks and other financial institutions is deductible under Section 80P(2)(a)(i) of the Income Tax Act. The assessee argued that the income from such investments should be considered as "attributable to" the business of providing credit facilities to its members, thus qualifying for the deduction. The Tribunal had allowed this deduction, which was challenged by the revenue.

2. Interpretation of "Attributable to" vs. "Derived from":
The assessee's counsel emphasized the distinction between "attributable to" and "derived from," arguing that "attributable to" has a broader scope. The argument was that the surplus funds, when not immediately required for lending to members, were invested to mitigate losses from the interest payable on deposits. Therefore, the interest earned should be considered as part of the business of providing credit facilities.

3. Compliance with Statutory Obligations under the Multi-State Cooperative Societies Act, 2002:
The assessee also pointed to Sections 63 and 64 of the Multi-State Cooperative Societies Act, 2002, which mandate the transfer of profits to a reserve fund and the investment of such funds. The argument was that the income from these investments is a statutory obligation and should be considered as attributable to the business of providing credit facilities.

4. Judicial Precedents:
The assessee relied on judgments from the Karnataka High Court and the Patna High Court to support their argument. However, the High Court found these precedents not applicable or persuasive. The Supreme Court's decision in Totgars Co-operative Sale Society Limited vs. ITO was considered binding, which held that interest income from surplus funds invested in short-term deposits and securities should be categorized as "income from other sources" and not as business income.

Judgment:
The High Court agreed that the interest earned from investments made under Sections 63 and 64 of the Multi-State Cooperative Societies Act, 2002, is attributable to the business of providing credit facilities to members. However, it did not agree that all interest earned from other investments should be treated similarly. The court emphasized that only income falling under subsection (2) of Section 80P is deductible, and income from other sources, including surplus funds invested, does not qualify.

The court also noted that the assessee had not separately accounted for the expenditure incurred in earning the interest from investments, which led to an artificial enhancement of business expenses and a reduction in eligible business income. Therefore, the matter was remanded to the Assessing Officer to:
(a) Work out the interest earned under Sections 63 and 64 and allow the benefit under Section 80P.
(b) Ascertain the interest paid to members for earning the sums from investments and deduct this from the expenses of eligible business.

Conclusion:
The appeal was allowed in favor of the revenue to the extent indicated, and the matter was remanded to the Assessing Officer for further determination of the eligible deduction under Section 80P. The judgment underscores the importance of precise accounting and compliance with statutory provisions in claiming tax deductions.

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