2022 (10) TMI 1266 - AT - Income Tax

Disallowance of interest received from banks other than Co-operative banks as per section 80P(2)(a)(i) - interest earned from investments in nationalized banks since it is earned from non-members and from the banks other than the co-operative banks or societies - HELD THAT - Hon ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT allowing deduction u/s 80P(2)(a)(i) of the Act on interest income in the identical facts and circumstances. Thus on interpretation of the word profits and gains of business attributable to the activities of the assessee in a way that it has been considered when the assessee is in the business of providing credit facilities and earning interest from its members, the basic premise of that fund arises from the said business activity of the assessee society only. In the absence of that business, there would not have been any question of having surplus fund. Once that surplus fund is accumulated, those are given on investment for short term basis in nationalized banks and interest earned therefrom. This activity is, therefore, held as not alien or foreign to the primary business activity of the assessee society. Set aside the order of ld. NFAC and direct the AO to grant deduction to the assessee u/s 80P(2)(a)(i) - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue in this judgment revolves around whether the interest income earned by a credit co-operative society from investments in nationalized banks qualifies for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961. Specifically, the question is whether such income can be considered as "profits and gains of business" attributable to the society's primary business activities, thereby making it eligible for the deduction.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The legal framework centers on Section 80P(2)(a)(i) of the Income-tax Act, which provides for deductions on the income of co-operative societies engaged in providing credit facilities to their members. The interpretation of what constitutes "profits and gains of business" attributable to such activities is crucial. The Tribunal considered various precedents, including decisions from the Karnataka High Court and other High Courts, which have provided differing interpretations on similar issues.

Court's Interpretation and Reasoning:

The Tribunal analyzed the provision of Section 80P(2)(a)(i) and considered the nature of the income in question. It emphasized the connection between the surplus funds generated from the society's primary business activities and the interest income earned from investing these funds in nationalized banks. The Tribunal followed the reasoning of the Karnataka High Court, which had previously allowed such deductions, arguing that the interest income is indeed attributable to the society's business activities.

Key Evidence and Findings:

The evidence primarily consisted of the nature of the transactions and the source of the funds. The Tribunal noted that the funds invested in nationalized banks were surplus funds arising from the society's primary business of providing credit facilities to its members. This connection was pivotal in determining that the interest income was not foreign to the society's business activities.

Application of Law to Facts:

The Tribunal applied the legal principles from relevant precedents to the facts of the case, concluding that the interest income earned from nationalized banks should be considered as arising out of the society's business activities. The Tribunal reasoned that without the primary business of providing credit facilities, there would be no surplus funds to invest, thus establishing a direct link between the business activities and the interest income.

Treatment of Competing Arguments:

The Tribunal considered the Revenue's argument that the income should be classified as "income from other sources" since it was earned from non-members. However, it rejected this view, aligning with the assessee's argument that the income was an extension of its business activities. The Tribunal preferred the interpretation that favored the assessee, consistent with the Karnataka High Court's judgment.

Conclusions:

The Tribunal concluded that the interest income earned on surplus funds invested in nationalized banks is attributable to the business activities of the co-operative society. Therefore, it qualifies for deduction under Section 80P(2)(a)(i) of the Act.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

The Tribunal stated, "Therefore, these decisions clearly have extended the scope and ambit and interpretation of the word 'profits and gains of business' attributable to the activities of the assessee in a way that it has been considered when the assessee is in the business of providing credit facilities and earning interest from its members, the basic premise of that fund arises from the said business activity of the assessee society only."

Core Principles Established:

The judgment reinforces the principle that income earned from surplus funds, when directly linked to the primary business activities of a co-operative society, can be considered as "profits and gains of business" attributable to those activities. This interpretation supports the allowance of deductions under Section 80P(2)(a)(i).

Final Determinations on Each Issue:

The Tribunal set aside the order of the NFAC and directed the Assessing Officer to grant the deduction to the assessee for the interest income of Rs. 1,98,659/-, affirming that it falls within the purview of Section 80P(2)(a)(i) of the Act.