2014 (1) TMI 21 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) of the Act Held that - In case of a co-operative society the whole of the amount of profit and gains of business attributable to anyone or more of such activities is eligible for deduction under this section - The Legislature employed the words the whole of the amount of profit and gains of business attributable to anyone or more of such activities - Rule of ejusdem generis or noscitur a sociis would come into operation for interpreting the words any such activities - the words any such activities employed by the Legislature have to be in connection with the business of the taxpayer - An activity which is not connected with banking operation cannot come or fall within the phrase any such activities - Thus, any profit or gain of the taxpayer which is attributable to banking business or which has nexus with the banking business is eligible for deduction under section 80P(2)(a)(i) of the Act. Nexus between interest on income-tax refund with the business of banking Held that - Following Totgar s Co-operative Sales Society Ltd. 2010 (2) TMI 3 - SUPREME COURT - interest on income-tax refund cannot be considered to be operational income. The interest on such refund of income-tax has to be assessed under the head Income from other sources - Payment of income-tax has nothing to do with any business/activity - Payment of income-tax comes much after the completion of the entire transaction/activity - Total income would include all incomes irrespective of the source from which it was derived - However, deduction under section 80P(2)(a)(i) is only on the operational income from banking activity - Payment of income tax is a statutory liability on the total income irrespective of the source from which it was earned - The payment of income-tax is an application of income after it was earned to discharge the statutory liability under the Income-tax Act - The interest on income-tax refund has to be classified as income from other sources and it cannot be considered as operational income from banking activity decided against Assessee.

Summary

Issues Involved:
1. Eligibility for deduction under section 80P(2)(a)(i) of the Income-tax Act in respect of interest on income-tax refund.
2. Classification of interest on income-tax refund as "income from other sources" or "operational income."

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):

The taxpayer argued that the interest on income-tax refund should be considered as attributable to the profits and gains of banking business, thereby qualifying for deduction under section 80P(2)(a)(i). The taxpayer's representative cited the decision of the Mumbai Special Bench in Maharashtra State Co-operative Bank Ltd. v. Asst. CIT, which found a commercial connection between interest on income-tax refunds and banking business, interpreting the term "attributable to" in a broader sense.

Conversely, the Departmental representative contended that interest on income-tax refunds lacks a nexus with the taxpayer's banking business and should be classified as "income from other sources," thus not eligible for deduction under section 80P(2)(a)(i). The representative emphasized that the Mumbai Special Bench did not consider the Supreme Court's ruling in Totgar's Co-operative Sales Society Ltd., which restricted the deduction to operational income only.

2. Classification of Interest on Income-tax Refund:

The Tribunal examined whether interest on income-tax refunds could be considered "operational income" or should be classified under "income from other sources." The Tribunal noted that the Mumbai Special Bench's decision did not account for the Supreme Court's judgments in Totgar's Co-operative Sales Society Ltd. and Tuticorin Alkali Chemicals and Fertilizers Ltd., which emphasized that only operational income is eligible for deduction under section 80P(2)(a)(i).

The Tribunal referred to the Supreme Court's interpretation in Totgar's Co-operative Sales Society Ltd., which stated that the phrase "the whole of the amount of profits and gains of business" implies that the income must constitute operational income, not other income. The Supreme Court clarified that interest on funds not required for business purposes at a given time falls under "other income."

The Tribunal also reviewed the Andhra Pradesh High Court's decision in Andhra Pradesh State Co-operative Bank Ltd., which found that interest on investments made from voluntary reserves was operational income from banking activity. However, the Tribunal distinguished this case, noting that investment in voluntary reserves is an activity of banking, unlike the payment of income-tax, which occurs after the completion of business transactions and is unrelated to banking operations.

Conclusion:

The Tribunal concluded that interest on income-tax refunds does not have a nexus with banking operations and should be classified as "income from other sources." Following the Supreme Court's rulings in Totgar's Co-operative Sales Society Ltd. and Tuticorin Alkali Chemicals and Fertilizers Ltd., the Tribunal held that the taxpayer is not eligible for deduction under section 80P(2)(a)(i) for interest on income-tax refunds. The Tribunal confirmed the order of the Administrative Commissioner and dismissed the taxpayer's appeal.