2024 (12) TMI 563 - HC - Income Tax

Deduction u/s 80P - interest income earned on deposits with Nationalized banks - HELD THAT - As in the case of the Co-operative society engaged in carrying on the business of banking or providing credit facilities to its members the whole of the amount of profit and gains of business attributable to any one or more of such activities would be entitled to deduction u/s 80P(1) of the Act whereas sub clause d of sub-section 2 of Section 80P refers to any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society the whole of such income would be deducted. This Court was in the Case of State Bank of India 2016 (7) TMI 516 - GUJARAT HIGH COURT in similar facts irrespective of whether the income is surplus fund or operational fund has after referring to the decision of the Hon ble Apex Court in case of Totgar s Co-operative Saks Society Ltd. 2010 (2) TMI 3 - SUPREME COURT Interest earned on the investment made by the Credit Co-operative Society with the nationalized bank would not be entitled to deduction under Section 80P (2) (a) (i) of the Act. Therefore in our opinion the CIT (Appeals) as well the Tribunal on referring and relying upon the decision of the State Bank of India 2016 (7) TMI 516 - GUJARAT HIGH COURT cannot be said to have committed any error while not allowing the deduction qua the interest income earned by the Appellant-assessee on the investment u/s 80P (2) (a) (i) of the Act while allowing the deduction under Section 80P (2) (d) of the Act qua the interest income earned on the investment in fixed deposit made by the assessee with the Co-operative Bank.

Summary

Issues:
1. Interpretation of Section 80P of the Income Tax Act, 1961 regarding deduction of interest income earned by a Co-operative Society.
2. Whether interest income earned on deposits with Nationalized banks by the Appellant falls under the deduction under Section 80P (2) (a) (i) of the Act.

Detailed Analysis:
Issue 1: Interpretation of Section 80P of the Income Tax Act, 1961
The case involved a Co-operative Society engaged in providing credit facilities to its members. The Assessing Officer disallowed the deduction claimed under Section 80P (2) (a) (i) and 80P (2) (d) of the Act for interest income earned from deposits with nationalized banks. The Co-operative Society argued that the entire interest income was earned from operational funds, not surplus funds, and thus should be eligible for deduction under Section 80P of the Act. The Court referred to the provisions of Section 80P and emphasized that the income eligible for deduction must be operational income, not other income accruing to the society. The Court cited a Supreme Court decision regarding the interpretation of "profits and gains of business" under Section 80P, highlighting that interest income on funds not immediately required for business purposes does not qualify for deduction. The Court concluded that interest earned on investments made by the Co-operative Society with nationalized banks does not fall within the categories eligible for deduction under Section 80P (2) (a) (i) of the Act.

Issue 2: Deduction of interest income from Nationalized banks under Section 80P
The Co-operative Society appealed the Assessing Officer's decision disallowing the interest income earned from a nationalized bank. The CIT (Appeals) partially allowed the appeal, granting deduction for interest income earned from a Co-operative Bank but disallowing the deduction for interest income from the nationalized bank. The Co-operative Society further appealed to the Tribunal, challenging the disallowance of interest income from the nationalized bank. The Tribunal upheld the decision of the CIT (Appeals) based on the interpretation of Section 80P and relevant case law. The Co-operative Society argued that similar deductions were allowed in previous assessment years, but the Court held that interest earned on investments with nationalized banks does not qualify for deduction under Section 80P (2) (a) (i) of the Act. The Court dismissed the appeal, stating that no substantial questions of law arose from the impugned orders of the CIT (Appeals) and the Tribunal.

In conclusion, the judgment clarified the interpretation of Section 80P of the Income Tax Act, emphasizing that interest income earned on investments with nationalized banks by a Co-operative Society does not qualify for deduction under Section 80P (2) (a) (i) of the Act. The Court's decision was based on the distinction between operational income and surplus income, as well as relevant case law regarding the eligibility of certain types of income for deduction under Section 80P.