Cooperative society exempt from tax on bank interest income under section 80P(2)

The Tribunal held that interest income earned by the cooperative society from fixed deposits with nationalized banks qualifies for exemption under section 80P(2) of the Income Tax Act. The assessee's appeal was partly allowed, directing the Assessing Officer to grant exemption for the remaining interest income amount not already offered for taxation.

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Issues Involved:
Denial of exemption under section 80P(2) on the interest income earned from fixed deposits with nationalized banks.

Detailed Analysis:

1. Background of the Case:
The assessee, a cooperative society engaged in supplying fertilizers, agriculture implements, and providing credit facilities to its members, filed its return of income for the Assessment Year 2007-08, declaring a total income of Rs. 48,300/-. The assessee reported total interest income of Rs. 2,48,563/- from fixed deposits with nationalized banks. After deducting interest expenses and prorated overheads, the net interest income offered was Rs. 98,015/-. The Assessing Officer (AO) disallowed the entire claim for exemption under section 80P(2) of the Income Tax Act, 1961, on the grounds that the interest income from nationalized banks did not qualify for exemption.

2. Appeal to CIT(A):
The assessee appealed against the AO's decision to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's order, maintaining that the interest income from fixed deposits with nationalized banks was not eligible for exemption under section 80P(2).

3. Tribunal's Analysis:
The Tribunal, with the assistance of the representatives, examined the records and the relevant legal precedents. It referenced the judgment of the Karnataka High Court in the case of Guttigedarara Credit Co-op. Society Ltd. v. ITO, where it was held that interest accrued from deposits made in nationalized banks out of amounts used for providing credit facilities to members is attributable to the business of providing credit facilities and thus qualifies for exemption under section 80P(2).

4. Legal Precedents:
The Tribunal discussed the interpretation of the term "attributable to" as used in section 80P(2). The Karnataka High Court and the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT emphasized that "attributable to" is broader in scope than "derived from," indicating that income from sources other than the direct conduct of business activities can be considered for exemption if it is related to the business.

5. Distinguishing Factors:
The Tribunal distinguished the present case from the Supreme Court's decision in Totgars Co-operative Sale Society's case, where the interest income was derived from surplus funds retained from marketing agricultural produce, which was not immediately required for business purposes. In contrast, the interest income in the present case was from operational funds not immediately needed for lending to members.

6. ITAT Ahmedabad Bench Precedents:
The Tribunal also cited similar cases decided by the ITAT Ahmedabad Bench, such as Dhanlaxmi Credit Co-op. Society and Jafari Momin Vikas Coop. Credit Society Ltd., where it was held that interest income from deposits made to maintain liquidity for business purposes qualifies for exemption under section 80P(2).

7. Conclusion:
The Tribunal concluded that the total interest income received by the assessee from fixed deposits in nationalized banks qualifies for exemption under section 80P(2)(a)(i). However, since the assessee had already offered Rs. 98,015/- for taxation and did not challenge this inclusion, the Tribunal directed the AO to grant exemption for the remaining amount of Rs. 1,50,548/- out of the total interest income of Rs. 2,48,563/-.

8. Final Order:
The appeal of the assessee was partly allowed, and the AO was directed to grant the specified exemption under section 80P(2).

Order Pronounced:
The order was pronounced in the Court on 13th January 2016 at Ahmedabad.

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