2017 (4) TMI 663 - HC - Income Tax

Benefit of deduction u/s 80P(2)(a) - interest income receipt - Held that - When a Co-operative Society engaged in anyone of the activities stipulated in sub- Clauses (i) to (vii) of clause (a) makes profits and gains out of business attributable to anyone of those activities, the case would fall under Clause (a). The moment the income derived from one of those activities is invested in another Co- operative Society and an interest or dividend is derived therefrom, the case would be covered by Clause (e). In case the profits and gains of business arising out of the activities listed in sub-Clauses (i) to (vii) of Clause (a) is invested in immovable properties, such as, godowns or warehouses and an income is derived therefrom, the case would be covered by Clause (e) of Section 80P (2). As rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other Co-operative Societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under Clause (d) or (e), as the case may be. The original source of the investments made by the petitioners in nationalised Banks is admittedly the income that the petitioners derived from the activities listed in sub- Clauses (i) to (vii) of Clause (a). The character of such income may not be lost, especially when the statute uses the expression attributable to and not anyone of the two expressions, namely, derived from or directly attributable to. Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the Writ Petitions are allowed, and the order of the Assessing Officer, insofar as it relates to treating the interest income as something not allowable as a deduction under Section 80P (2) (a), is set aside. - Decided in favour of assessee.

Issues Involved:
1. Denial of benefit of deductions under Section 80P(2)(a) of the Income Tax Act, 1961.
2. Jurisdiction of the Assessing Officer in denying deductions.
3. Treatment of interest income from fixed deposits as profits and gains of business.

Issue-Wise Detailed Analysis:

1. Denial of Benefit of Deductions under Section 80P(2)(a):
The petitioners, Vavveru Co-operative Rural Bank Limited and Buchireddi Palem Co-operative Rural Bank Limited, challenged the assessment orders for the Assessment Years 2010-11, 2013-14, and 2014-15. They claimed that the denial of deductions under Section 80P(2)(a) by the Assessing Officer was contrary to statutory provisions. The court noted that Section 80P(2)(a) allows certain co-operative societies to deduct specified sums from their gross total income. The petitioners argued that they were Primary Agricultural Co-operative Credit Societies, not Co-operative Banks, and thus eligible for deductions under Section 80P(2)(a).

2. Jurisdiction of the Assessing Officer:
The court examined whether the denial of deductions by the Assessing Officer was within their jurisdiction. The petitioners bypassed the alternative remedy of appeal to the Commissioner of Income Tax (Appeals) on the grounds that the denial was fundamentally contrary to statutory provisions. The court acknowledged that the issue went to the root of the question of jurisdiction, thus justifying the writ petitions.

3. Treatment of Interest Income from Fixed Deposits:
The core controversy was whether the interest income from fixed deposits in nationalized banks should be treated as profits and gains of business attributable to the activities listed in Section 80P(2)(a). The petitioners contended that the interest income was attributable to their business activities and thus eligible for deduction. They relied on the broader interpretation of the term "attributable to" as opposed to "derived from." The court analyzed various precedents, including the Supreme Court's decision in Totgars Co-operative Sale Society Ltd. v. Income-tax Officer, which held that interest income from surplus funds invested in banks was not attributable to the society's business activities.

The court distinguished the present case from Totgars, noting that the investments made by the petitioners were from their own funds, not retained sale proceeds payable to members. The court emphasized that the statutory expression "attributable to" was broader in scope than "derived from," allowing a wider interpretation. The court concluded that the interest income retained its character as part of the business profits attributable to the activities listed in Section 80P(2)(a).

Conclusion:
The court allowed the writ petitions, setting aside the Assessing Officer's orders that treated the interest income as not eligible for deduction under Section 80P(2)(a). The court held that the petitioners were entitled to the deductions claimed, as the interest income was attributable to their business activities. The miscellaneous petitions, if any, pending in these writ petitions were closed, with no costs awarded.

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