2012 (7) TMI 522 - HC - Income Tax

Tax Treatment of Interest Income from NSC, Post Office Deposits & Cooperative Societies

The judgment clarified that interest income from National Saving Certificates (NSC) and post office deposits is exempt under Section 80P (2) of the Income ... Claim of exemption u/s 80P (2) - interest earned on NSC & income from Bank interest - assessee is a Cooperative Society - Held that:- The investment is in NSC which is a government security. The income earned thereon can very well be eligible for exemption for the obvious reason that it has been done in compliance of Govt. direction and further that when the interest income earned in the deposits of the bank is allowed, on same analogy this interest income earned on NSCs can also be allowed as exemption - As decided in CIT Vs. Karnataka State Cooperative Apex Bank [2001 (8) TMI 9 - SUPREME COURT]that interest derived by a Cooperative Bank from investment of funds with RBI or SBI is exempt u/s 80P (a) (i) irrespective of the fact that investment is made out of the reserve funds or working capital. Interest earned on deposits in Post Office - Claim of exemption u/s 80P (2) - Held that:- The income earned on the leftover balances in the bank accounts of the society has a direct nexus with the main activity of the assessee for providing credit facilities to its member - income from post office is exempt under Section 10 (15)as also the CBDT Circular No.410 dated 12.2.1985, made it clear that the interest earned on saving account or CTD (Cumulative Time Deposit), the same would exempt from the income - income tax appeal is partly allowed. Issues:1. Whether interest income from Bank, post office, and NSC is exempt under Section 80P (2) of the Income Tax Act.2. Whether the interest income of a Cooperative Society should be taxed as income from other sources under Section 56 of the Income Tax Act.Analysis:1. The judgment dealt with the issue of whether interest income earned by a Cooperative Society from Bank, post office, and NSC is exempt under Section 80P (2) of the Income Tax Act. The respondent, a society registered under the Cooperative Societies Act, claimed deduction of income under Section 80P (2) (a) (i) on interest income earned from National Saving Certificate (NSC) and post office deposits for the assessment year 1985-86. The Assessing Officer initially denied the exemption, but the Income Tax Appellate Tribunal (ITAT) allowed the appeal in part. The ITAT held that interest earned on NSC is eligible for exemption as it is a government security, following the decision of the Supreme Court in CIT v. Karnataka State Cooperative Apex Bank. However, the interest earned from post office deposits was also exempt under Section 10 (15) of the IT Act and CBDT Circular No.410 dated 12.2.1985. The judgment clarified that the interest income from NSC and post office deposits was eligible for exemption under the respective provisions.2. The judgment also addressed the issue of whether the interest income of a Cooperative Society should be taxed as income from other sources under Section 56 of the Income Tax Act. The Supreme Court in Totgar Cooperative Sale Society Ltd. V. ITO, (2010) held that interest income arising to a Cooperative Society, which is not required immediately for business purposes, has to be taxed as income from other sources under Section 56 of the Income Tax Act. The interest income from surplus amounts retained by the society cannot be said to be attributable to the activities mentioned in Section 80P of the Act. The judgment emphasized the distinction between cooperative societies engaged in banking business and those providing credit facilities to members. It was concluded that interest income from surplus income deposited in NSC and SBI will be treated as income from other sources, not exempt under Section 80P (2) (a) (i) of the Act.In conclusion, the judgment clarified the exemption of interest income from NSC and post office deposits under specific provisions of the Income Tax Act while also addressing the taxation of surplus interest income of Cooperative Societies as income from other sources. The decision was based on precedents and legal interpretations, providing a comprehensive analysis of the issues raised in the case.