2010 (2) TMI 185 - HC - Income Tax

Co-operative Society- Revenue filed appeal against the order of Tribunal upholding the order of the Commissioner (Appeals) by reaching the conclusion that the assessee, which is a cooperative apex bank cannot be subjected to income tax in respect of the interest received by it on the refund of excess income tax paid. It has further been found that the assessee Would be entitled to deduction under section 80P(2)(a)(i) of the Act. Held that- the assessee was entitled to special deduction under section 80P on the interest on refund of excess of Income Tax. Once the income tax paid was derived from business income then interest income would partake of the character of the Principal amount because the interest paid to the assessee is compensation on account of deprivation of the use of money.

Summary

Issues:
Interpretation of section 80P(2)(a)(i) of the Income-tax Act, 1961 regarding taxation of interest received by a cooperative apex bank on the refund of excess income-tax paid.

Analysis:
The High Court examined the appeal by the Revenue challenging the Tribunal's order regarding the taxation of interest received by a cooperative apex bank on excess income-tax paid. The Tribunal had ruled in favor of the assessee, stating that the bank cannot be subjected to income-tax on such interest and is entitled to deduction under section 80P(2)(a)(i) of the Act. The High Court noted that the bank was engaged in banking business and providing credit facilities to its members. It rejected the argument that interest on the refund of excess income-tax was not related to banking business income, emphasizing that such interest is compensation for the deprivation of the use of money derived from business income.

The Court found no merit in the Revenue's appeal, stating that the Tribunal's order was legally sound and did not require intervention. It concluded that the interest income received by the cooperative apex bank was part of the principal amount derived from business income, thus falling within the scope of section 80P(2)(a)(i) of the Act. Consequently, the High Court dismissed the appeal, upholding the Tribunal's decision and affirming the bank's entitlement to deduction under the relevant tax provision.