2017 (7) TMI 1049 - HC - Income Tax

Entitled to 100% deduction under Section 80P(2)(d) - income by way of interest earned during the relevant Assessment Years from 2007-2008 to 2011-2012 on the deposits or investments made by it during these years with a Co-operative Bank, M/s.Kanara District Central Co-operative Bank Limited - Held that - Character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified Clauses of Section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under Section 80P(2) of the Act. The case in Udaipur Sahakari (2009 (7) TMI 11 - SUPREME COURT ) was that of Section 80P(2)(e) of the Act, whereas in the present case, it is under Section 80P(2)(d) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under Section 80P of the Act, as held by the Hon ble Supreme Court. Appeals filed by the Revenue deserve to be allowed and the appeals filed by the assessee deserve to be dismissed.

Issues Involved:
1. Entitlement of the assessee to 100% deduction under Section 80P(2)(d) of the Income Tax Act, 1961 for interest earned from deposits in a Co-operative Bank.
2. Applicability of the Supreme Court decision in Totgar’s Co-operative Sale Society Limited vs. Income Tax Officer to the present assessment years.
3. Interpretation of Section 80P(2)(d) and Section 80P(4) of the Income Tax Act.
4. Reassessment under Section 147/148 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Entitlement of the assessee to 100% deduction under Section 80P(2)(d) of the Income Tax Act, 1961 for interest earned from deposits in a Co-operative Bank:

The primary issue was whether the assessee, a co-operative society, was entitled to a 100% deduction under Section 80P(2)(d) of the Income Tax Act for interest income earned from deposits in a co-operative bank. The court noted that the character or nature of the income, i.e., interest on investments or deposits, does not change irrespective of whether it is earned from a scheduled bank or a co-operative bank. The court held that the interest income on surplus and idle funds not immediately required for business is not business income but "income from other sources" under Section 56 of the Act. Therefore, it is not eligible for 100% deduction under Section 80P(2)(d).

2. Applicability of the Supreme Court decision in Totgar’s Co-operative Sale Society Limited vs. Income Tax Officer to the present assessment years:

The court referred to the Supreme Court decision in Totgar’s Co-operative Sale Society Limited vs. Income Tax Officer, which held that interest income on surplus funds not immediately required for business purposes is taxable under Section 56 and not deductible under Section 80P(2)(a)(i). The court found that this decision was applicable to the present assessment years (2007-2008 to 2011-2012) and that the shift of deposits from scheduled banks to co-operative banks did not change the character of the income.

3. Interpretation of Section 80P(2)(d) and Section 80P(4) of the Income Tax Act:

The court analyzed Section 80P(2)(d), which allows deduction of income by way of interest or dividends derived from investments with any other co-operative society. It noted that the term "co-operative banks" is missing from this clause. Section 80P(4), introduced by the Finance Act 2006, excludes co-operative banks from the benefits of Section 80P, except for primary agricultural credit societies and primary co-operative agricultural and rural development banks. The court concluded that the exclusion of co-operative banks from Section 80P(4) indicates legislative intent to deny such deductions for interest income earned from co-operative banks.

4. Reassessment under Section 147/148 of the Income Tax Act:

The court held that the issue of reassessment under Section 147/148 becomes academic once it is determined that the deduction under Section 80P(2) is not available to the assessee for the relevant assessment years. Therefore, the reassessment issue was not addressed in detail.

Conclusion:

The court allowed the appeals filed by the Revenue and dismissed the appeals filed by the assessee, holding that the interest income earned by the assessee co-operative society during the assessment years 2007-2008 to 2011-2012 on investments made in the co-operative bank is not eligible for deductions under Section 80P(2)(d) of the Act. The substantial questions of law were answered in favor of the Revenue and against the assessee.

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