2015 (4) TMI 829 - HC - Income Tax

Disallowance to deduct the cost and expenditure incurred in earning income under the head income from other sources - Held that - Interest income earned by the appellant falls within the category of other income what falls for reconsideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deductions in respect of proportionate costs incurred as permissible under Section 57. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as other income falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from other sources , the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. Answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits. Appeals are allowed in part. Matter is remanded to the adjudicating authority for quantification of the cost incurred by the appellant and deduction thereof under Section 57(3) of the Act and to pass orders in accordance with law.

Summary

Issues: Challenge to disallowance of deduction under Section 80P(2)(a)(i) for interest income earned by a Co-operative Society in the business of marketing agricultural produce and providing credit facilities to its members for assessment years 1991-92 to 1999-2000.

Analysis:
1. The appellant challenged the disallowance of the deduction under Section 80P(2)(a)(i) for interest income earned on deposits kept with banks, bonds, and securities. The appellant contended that the interest income should not be considered as "other income" but as operational income, thus eligible for the deduction.

2. The Commissioner of Income Tax (Appeals) allowed the appellant's claim for deduction under Section 80P(2)(a)(i) for interest income. However, the objection regarding the validity of the notice under Section 148 of the Income Tax Act was rejected. The Revenue appealed to the Income Tax Appellate Tribunal against the allowance of the claim under Section 80P(2)(a)(i).

3. The Tribunal held that the interest income was not liable for deduction under Section 80P(2)(a)(i) and dismissed the appellant's cross-objections. The appellant contended that the Tribunal erred in not allowing deductions under Section 57 for proportionate costs and administrative expenses incurred in earning the interest income.

4. The appellant cited a Supreme Court judgment emphasizing that income for which deduction is sought must constitute operational income, not other income accruing to the society. The Supreme Court held that interest income earned on funds not required for business purposes falls under "other income" and is taxable under Section 56 of the Act.

5. The appellant argued that the Assessing Officer wrongly categorized the interest income as "income from other sources" and disallowed the exemption under Section 80P(1)(i). The appellant asserted that deductions under Section 57 should be allowed for costs and expenses incurred in mobilizing the funds.

6. The High Court held that the interest earned by the appellant should be considered operational income, and deductions under Section 57 for costs and administrative expenses should be allowed. The matter was remanded to the adjudicating authority for quantification of costs incurred by the appellant and to pass orders accordingly.

This detailed analysis covers the appellant's challenge, the lower authorities' decisions, the Supreme Court judgment cited, arguments presented, and the High Court's final ruling remanding the matter for quantification of costs and deductions under Section 57 of the Income Tax Act.