2024 (9) TMI 1278 - HC - Income Tax

Deduction u/s 80P(2)(a) - profits and gains of business attributable to its activity of providing credit facilities to its members - HELD THAT - The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co-operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members - if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income profits earned by the assessee from its lending activity does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee. We also find force in the submission of the learned Senior counsel, distinguishing the decision of the Supreme Court in M/s. The Totgars' Cooperative Sale Society Limited 2010 (2) TMI 3 - SUPREME COURT on the ground that the Court in that case had found that the Society concerned had appropriated amounts forming part of surplus receipts which were due to its members, and invested the same to earn interest during the period when the surplus receipts were in its hands. The facts in the instant cases are entirely different and the investment concerned was of amounts that had already attained the character of surplus profits in the hands of the assessee. On this issue, therefore, we find ourselves in agreement with the view taken in The Vavveru Co-operative Rural Bank Ltd. 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT and Tumkur Merchants Souharda Credit Co-operative Limited 2015 (2) TMI 995 - KARNATAKA HIGH COURT . As for the argument of Revenue, with reference to the provisions of Section 80P(2)(d) of the I.T. Act, we might only observe that, while it may be a fact that interest income of the nature specified therein is specifically allowed as a deduction in the case of Co-operative Societies in general, in the light of our discussion above as regards the nature of the interest income earned by the assessee Society in the instant cases, it would follow that the interest income dealt with by us in the instant cases is not akin to the one contemplated u/s 80P(2)(d). We are of the view that the latter provision deals with interest income other than what can be attributable to the main business of the Society. Decided in favour of the assessee.

Summary

Issues Involved:
1. Whether the interest from surplus funds is "Income from business" or "Income from other sources".
2. Entitlement to deduction under Section 80P(2)(a) of the Income Tax Act for interest earned on deposits of surplus profits.

Detailed Analysis:

Issue 1: Whether the interest from surplus funds is "Income from business" or "Income from other sources"

The core issue addressed is whether the interest income earned by the respondent Society from deposits of surplus profits should be classified as "Income from business" or "Income from other sources". The respondent/assessee is a Co-operative Society engaged in providing credit facilities to its members. The Revenue contended that while the principal income earned through the provision of credit facilities to its members is eligible for deduction under Section 80P(2)(a) of the Income Tax Act, the interest income from depositing the surplus profits should be taxed under "Income from other sources" as it loses its character of business income.

The respondent argued that the interest earned on these deposits should retain its character as business income since the investments were made in compliance with statutory requirements under the Multi-State Co-operative Societies Act. Sections 63 and 64 of this Act mandate the transfer of a portion of net profits to reserve funds and permit the investment of these funds in specified modes. The respondent cited various High Court decisions to support their argument that such interest income should be considered as part of the profits attributable to their primary business activity.

Issue 2: Entitlement to deduction under Section 80P(2)(a) of the Income Tax Act for interest earned on deposits of surplus profits

The Court examined whether the interest income from deposits made by the respondent Society qualifies for the deduction under Section 80P(2)(a) of the Income Tax Act. The Court noted that the permissible deduction under this section is for the whole amount of profits and gains attributable to the specified activities of a Co-operative Society. The question was whether depositing surplus profits in a permitted bank or financial institution changes the nature of the income.

The Court concluded that the interest earned on these deposits does not lose its character as business income. The deposits were made in compliance with statutory requirements and were a prudent financial management decision. The Court distinguished this case from the Supreme Court's decision in M/s. The Totgars' Cooperative Sale Society Limited, where the interest income was deemed to be income from other sources because it was earned on amounts that should have accrued to the members.

The Court found that the interest income in this case was attributable to the main business of the Society and did not change its nature simply because it was deposited in a bank. Therefore, the interest income qualifies for the deduction under Section 80P(2)(a) of the Income Tax Act.

Conclusion:

The Court dismissed the I.T. Appeals preferred by the Revenue, holding that the interest income from deposits of surplus profits earned by the respondent Society qualifies for the deduction under Section 80P(2)(a) of the Income Tax Act. The question was answered against the Revenue and in favor of the assessee, affirming that the interest income retains its character as business income attributable to the Society's primary activity of providing credit facilities to its members.