2023 (9) TMI 377 - AT - Income Tax

Disallowance of deduction claimed u/s. 80P - towards interest income treated as income from other sources - HELD THAT - We note that assessee is engaged in the business of providing credit facilities to its members for which it accepts deposits from and lend the same to its members. While accepting deposits, assessee promises to pay interest at a specified rate. When money is lent to the members, interest is recovered which is also at a specified rate. Difference between the two rates is the income of the assessee. However, there are periods when entire deposit received from the members cannot be lent owing to demand for loan not there from the members. In such a situation, whether the money is lent or not, assessee continues to be liable for payment of interest to its members who have made deposit with it. To cover up this liability for payment of interest, these funds are invested with banks in fixed deposit/term deposit which earned certain interest income to be set off against the interest payable to the member/depositors. Parking of funds by the assessee with banks in the form of fixed deposits to earn interest income is part and parcel of the business of providing credit facilities to its members. Assessee has received the deposits from its members only which are subjected to interest charge. In the case of Totgars Co-operative Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT an important fact which has been noted is that assessee had invested the fund on short term basis since they were not required immediately for business purposes. In the present case, the funds available are for the business purpose of providing credit facilities to its members. It is only because in a given point of time, there is no demand for loan that they have been parked with the banks as fixed deposit. The only fund available with the assesses are out of deposits from its members and there is no surplus funds as such. This fund of the assessee is the operational fund. By taking into consideration the revisionary proceedings in the assessee s own case for the immediately preceding assessment year on identical set of facts whereby Ld. PCIT has accepted the distinguishing features pointed out by the assessee vis-a-vis decision of Hon ble Supreme Court in Totgars Co-operative Sale Society Ltd. (supra) and the same being dropped which suggests the acceptance of the submissions made by the assessee as to non-applicability of the decision of Totgars Co-operative Sale Society Ltd. (supra) by the department. While dropping the revisionary proceeding, ld. PCIT has given a categorical finding as extracted above that decision of Hon ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) is not applicable in the facts of the case of assessee. Assessee is entitled for deduction of interest income earned from deposits made by it with banks which has arisen out of deposits received from its members pursuant to conduct of business of providing credit facilities to its members. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 80P of the Income-tax Act, 1961.
2. Classification of interest income as "income from other sources."

Summary:

Disallowance of Deduction Claimed under Section 80P:
The assessee, an Employees Credit Co-operative Society, claimed a deduction of Rs. 48,29,721/- under Section 80P of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed this deduction, treating the interest income from investments/deposits with nationalized banks as "income from other sources" rather than operational business income. The AO relied on the Supreme Court decision in Totgars Co-operative Sale Society Ltd. Vs. ITO and other High Court decisions. The assessee's appeal to the CIT(A) was dismissed, leading to the present appeal before the Tribunal.

Classification of Interest Income as "Income from Other Sources":
The AO argued that the interest income was not part of the operational business income but rather "income from other sources," thus not deductible under Section 80P. The CIT(A) upheld this view, stating that the interest income was earned on funds not required for business purposes at the time. The assessee contended that the funds were operational and invested temporarily due to a lack of immediate demand for loans from members. The assessee distinguished its case from Totgars Co-operative Sale Society Ltd., emphasizing that it only provided credit facilities to its members and did not engage in any other business activities.

Tribunal's Decision:
The Tribunal found merit in the assessee's arguments, noting that the funds were operational and invested temporarily to cover interest liabilities to depositors. The Tribunal highlighted that in the assessee's case, unlike Totgars, there were no surplus funds; the funds were operational and part of the business of providing credit facilities. The Tribunal also considered the revisionary proceedings for the preceding assessment year, where the PCIT had accepted the assessee's distinction from Totgars and dropped the proceedings.

Conclusion:
The Tribunal concluded that the assessee is entitled to the deduction of interest income earned from bank deposits under Section 80P(2)(a)(i) of the Act. The appeal was allowed in favor of the assessee. The order was pronounced on 28th August 2023.