2016 (4) TMI 908 - AT - Income Tax

Interest income from fixed deposits by credit cooperative societies qualifies for deduction under Section 80P(2)

The Tribunal held that interest income earned by a credit cooperative society on fixed deposits with nationalized banks qualifies for deduction under ... Deduction under Section 80P(2)(a)(i) - interest on deposits as profits and gains of business - income from other sources taxed under Section 56 - attributable (wider than 'derived from') - distinguishing Totgars Co-operative Sale Society Ltd. on factsDeduction under Section 80P(2)(a)(i) - interest on deposits as profits and gains of business - income from other sources taxed under Section 56 - distinguishing Totgars Co-operative Sale Society Ltd. on facts - attributable (wider than 'derived from') - Whether interest earned by a co-operative credit society on fixed deposits with commercial/nationalised banks is deductible as profits and gains of business under Section 80P(2)(a)(i) or taxable as income from other sources under Section 56 - HELD THAT: - The Tribunal followed earlier coordinate-bench decisions holding that interest earned on short-term bank deposits by a co-operative credit society is attributable to its business of providing credit facilities and thereby falls within the deduction afforded by Section 80P(2)(a)(i). The reasoning adopts the wider import of the word 'attributable' (as opposed to 'derived from') and distinguishes the decision in Totgars Co-operative Sale Society Ltd. on its facts: in Totgars the invested amounts were retained sale proceeds shown as liabilities (funds due to members) and thus constituted surplus not required for business, leading the Supreme Court to confine its conclusion to those facts and to tax the interest under Section 56. By contrast, where the society does not have such surplus funds, the deposits represent operational or liquid funds maintained in the ordinary course of the money-lending business and the interest thereon is properly treated as profits and gains of business eligible for deduction under Section 80P. Applying these principles to the facts before it and relying on consistent Tribunal and High Court authorities, the Tribunal upheld the CIT(A)'s allowance of the exemption and rejected the Assessing Officer's view that the interest was taxable under Section 56. [Paras 2, 3, 4]The CIT(A)'s decision to allow the interest income as eligible for deduction under Section 80P(2)(a)(i) is upheld and the Assessing Officer's ground seeking to tax it under Section 56 is rejected.Final Conclusion: Appeal dismissed; the order of the CIT(A) granting deduction of interest on fixed deposits to the co-operative credit society under Section 80P(2)(a)(i) is upheld and the Assessing Officer is directed to allow the exemption. Issues Involved:1. Taxability of interest received from fixed deposits with commercial banks.2. Eligibility for deduction under Section 80P of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Interest Received from Fixed Deposits with Commercial Banks:The primary issue in this appeal is whether the interest income earned from fixed deposits with commercial banks by a cooperative society should be taxed as 'profits and gains of business' eligible for deduction under Section 80P, or as 'income from other sources' not eligible for such deduction. The Assessing Officer (AO) argued that the interest income should be taxed under 'income from other sources' based on the Supreme Court's decision in Totgars Co-operative Sale Society Ltd., which held that interest earned on surplus funds invested in short-term deposits is not eligible for deduction under Section 80P(2)(a)(i).2. Eligibility for Deduction under Section 80P:The learned CIT(A) directed that the interest income from fixed deposits should be taxed as 'profits and gains of business' eligible for deduction under Section 80P, contrary to the AO's position. The Tribunal's decision in Anant Sahakari Sharafi Mandli Limited vs. ITO was cited, where it was observed that interest income attributable to the business of providing credit facilities to members should be eligible for deduction under Section 80P.The Tribunal referenced the Karnataka High Court's decision in the case of Guttigedarara Credit Co-op. Society Ltd., which emphasized that the word 'attributable' in Section 80P(2)(a)(i) is broader than 'derived from,' thus covering receipts from sources other than the direct conduct of business. The Court noted that interest income from deposits made from funds not immediately required for lending to members is attributable to the business of providing credit facilities and thus eligible for deduction under Section 80P.The Tribunal also referenced the Andhra Pradesh High Court's decision in CIT v. Andhra Pradesh State Co-operative Bank Ltd., which supported the view that interest income from deposits made from surplus funds is attributable to the business of providing credit facilities and eligible for deduction under Section 80P.Separate Judgments Delivered:The Tribunal consistently held that interest income earned by a credit cooperative society on fixed deposits with nationalized banks qualifies for deduction under Section 80P(2). The Tribunal upheld the CIT(A)'s decision, rejecting the AO's grounds and allowing the assessee's appeal, directing the AO to grant the exemption under Section 80P.Conclusion:Respecting the Tribunal's decision and the precedents set by higher courts, the appeal by the AO was dismissed, affirming that the interest income earned from fixed deposits by cooperative societies is eligible for deduction under Section 80P(2)(a)(i) as it is attributable to the business of providing credit facilities to its members.