2020 (2) TMI 214 - HC - Income Tax

Entitlement to deduction under Section 80P - issue in regard to the classification and taxability of interest income has not been specifically raised in the affidavit filed in support of the Writ Petitions - HELD THAT - Though all petitioners have not replied identically to the notices issued by the officer, the above replies are illustrative of the stands adopted by the petitioners at the time of assessment and crystallize the arguments of the petitioners to the effect that (i) the investments in question do not comprise surplus funds (ii) that the investments constitute a statutory reserve as mandated by the TNCS Act (iii) the interest generated therefrom was eligible for deduction in the light of Nawanshahar 2005 (8) TMI 28 - SC ORDER (iv) at worst the interest received should be netted with interest paid. These arguments ought to have been at least, considered, by the Assessing Authority in deciding the issue but have unfortunately been brushed aside despite being noted in the order itself. This amounts to a fatal flaw as it renders the impugned order entirely non-speaking and passed without application of mind. If the affidavits of the petitioners are looked upon as mechanical and filed in haste and without application of mind, equally so are the impugned orders of assessment that simply rely on Totgars 2010 (2) TMI 3 - SUPREME COURT without discussing the arguments put forth by the petitioners. For this reason the arguments of the revenue based on the lack of pleadings in the affidavit is rejected. I am of the considered view that in a case such as the present, the petitioners should not suffer for lacunae in drafting particularly when the stand of the petitioners is very clear from the materials on record. Thus, to balance the convenience of both parties and in the interests of justice, this issue is set aside for denovo and fresh examination and conclusion by the respondent. Classification of interest generated from deposits made and held as statutory reserve for the grant of deduction under Section 80P of the I.T. Act, they are set aside. The petitioners are directed to appear before their respective Assessing Officers on 14.02.2020 at 10.30 a.m. without expecting any further notice and my directions in this regard as set out in paragraph No.21 will apply equally in these cases.

Issues Involved:
1. Eligibility for exemption under Section 80P of the Income Tax Act, 1961.
2. Classification of interest income from deposits/investments as operational income or income from other sources.
3. Application of the principle of mutuality for exemption claims.
4. Distinction between statutory reserves and surplus funds for tax purposes.

Detailed Analysis:

I. Eligibility for Exemption under Section 80P of the Income Tax Act, 1961

Summary:
The petitioners, Primary Agricultural Cooperative Credit Societies, claimed exemptions under Section 80P of the Income Tax Act. The Assessing Officer questioned the validity of these claims, particularly focusing on whether the interest income from deposits/investments should be classified as operational income or income from other sources.

Key Points:
- The petitioners argued that their deposits were statutory reserves, not surplus funds, and should be eligible for exemption.
- They relied on the Supreme Court judgment in Commissioner of Income Tax, Jalandhar V. Nawanshahar Central Cooperative Bank Limited, which held that income from statutory reserves is attributable to the business of banking and deductible under Section 80P.
- The Assessing Officer, however, relied on the Supreme Court judgment in Totgars' Cooperative Sale Society Limited V. ITO, which classified interest income from surplus funds as income from other sources, not eligible for exemption under Section 80P.

Outcome:
The High Court found that the Assessing Officer had not adequately considered the petitioners' arguments or the relevant Supreme Court judgments. The assessments were set aside for de novo consideration, directing the Assessing Officer to re-examine the issue with proper discussion and consideration of the petitioners' arguments and relevant case law.

II. Classification of Interest Income from Deposits/Investments

Summary:
A significant issue was whether the interest income from deposits/investments should be classified as operational income or income from other sources.

Key Points:
- The petitioners contended that the funds were statutory reserves required by law, not surplus funds, and thus the interest income should be considered operational and eligible for exemption.
- The Assessing Officer classified the interest income as income from other sources, relying on the Totgars' judgment, which dealt with surplus funds invested in short-term deposits.

Outcome:
The High Court directed a re-examination of this classification, emphasizing the need for the Assessing Officer to consider the statutory nature of the reserves and the relevant Supreme Court judgments.

III. Application of the Principle of Mutuality

Summary:
The petitioners claimed exemption based on the principle of mutuality, arguing that their transactions were confined to their members, thereby qualifying for exemption.

Key Points:
- The Assessing Officer distinguished between A class (shareholding) and B class (non-shareholding) members, concluding that the principle of mutuality did not apply due to the different rights and privileges of these classes.
- The petitioners argued that under the Tamil Nadu Cooperative Societies Act, associate members are considered members, thus maintaining mutuality.

Outcome:
The High Court referenced a Division Bench judgment that equated members and associate members under the Tamil Nadu Cooperative Societies Act, supporting the petitioners' claim. The court directed the petitioners to file statutory appeals and granted an interim stay on recovery of the demand until the appeals are disposed of.

IV. Distinction Between Statutory Reserves and Surplus Funds

Summary:
The petitioners argued that their funds were statutory reserves required by law, not surplus funds, and thus the interest income should be eligible for exemption.

Key Points:
- The petitioners relied on the Nawanshahar judgment, which held that income from statutory reserves is attributable to the business of banking and deductible under Section 80P.
- The Assessing Officer, however, applied the Totgars' judgment, which dealt with surplus funds and classified the interest income as income from other sources.

Outcome:
The High Court directed a re-examination of this distinction, emphasizing the need for a detailed and reasoned assessment considering the statutory nature of the reserves and the relevant case law.

Conclusion:
The High Court set aside the impugned assessments and remanded the matters for de novo consideration. The Assessing Officers were directed to re-examine the issues with proper discussion and consideration of the petitioners' arguments and relevant Supreme Court judgments. The petitioners were granted an interim stay on recovery of the demand until the appeals are disposed of.

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