2013 (12) TMI 1158 - HC - Income Tax

Whether conversion of deposit is income - Held that - Following CIT v. Shri Bhogawati Sahakari Sakhar Karkhana Ltd. 2005 (8) TMI 66 - BOMBAY High Court - Conversion of deposits is not income of the trust. Whether interest paid on deposits is allowable - Held that - Following CIT v. Shri Bhogawati Sahakari Sakhar Karkhana Ltd. 2005 (8) TMI 66 - BOMBAY High Court - Interest payable on refundable and nonrefundable deposits is also an expenditure of the society and is liable to be deducted from income taking into consideration the Maharashtra Cooperative Societies Act, bylaws and the Government directives - Decided in favour of assessee.

Summary

Issues involved:
1. Challenge to the order of the Income Tax Appellate Tribunal for Assessment Year 1990-91 under Section 260A of the Income Tax Act, 1961.
2. Interpretation of whether interest payable on deposits is allowable as expenditure.

Analysis:
1. The appeal before the Bombay High Court challenged the Income Tax Appellate Tribunal's order for Assessment Year 1990-91. The substantial questions of law raised included whether amounts of nonrefundable and refundable deposits converted into share capital or repaid should be treated as income, and whether interest paid on such deposits should be disallowed and treated as income. The Court noted that the issue regarding the treatment of such deposits as income had been settled in favor of the assessee by previous decisions of the Apex Court and the High Court.

2. Regarding the second question on the allowance of interest payable on deposits as expenditure, the counsel for the assessee argued that such interest should be deductible as expenditure based on previous court decisions. The revenue's counsel contended that the Supreme Court decision cited did not address the specific issue of deducting interest payable on deposits as an expenditure. The revenue argued that unless it is shown that the deposit amount was used for the society's business purposes during the relevant year, the interest paid on such deposits cannot be considered a business expense. However, the revenue's counsel could not confirm if the previous decision on this issue had been challenged in the Apex Court.

3. The Court, considering the precedent set by its earlier decision in a similar case, held that interest payable on deposits should be allowed as an expenditure and deducted from the society's income. The Court answered both questions in favor of the assessee and against the revenue, allowing the appeal accordingly. The decision was based on the interpretation of relevant laws, bylaws, and government directives governing such transactions.