2016 (7) TMI 516 - HC - Income Tax

Revision under section 263 upheld; interest on SBI deposits not deductible under section 80P(2)(a)(i) for society

HC upheld the Commissioner's invocation of revisionary powers under section 263, confirming that interest earned by the assessee-cooperative credit ... Revision u/s 263 - interest income on deposits - nature of activities - nexus between the interest earned on deposits made with SBI - differential rate of amount of deposits received from the members and the amount of loans given to the members​​​​​​​ - whether the appellant is entitled to claim deduction under section 80P(2)(a)(i) in respect of the interest earned on the deposits placed with the State Bank of India? - Held that:- In case of a credit society like the present one, the business of the society is limited to providing credit to its members and the income that is earned from providing such credit facilities to its members is deductible under section 80P(2)(a)(i) of the Act. However, investing its surplus funds with the State Bank of India is no part of the business of the appellant of providing credit to its members and hence, it cannot be said that the interest income derived from depositing surplus funds with the State Bank of India is profits and gains of business attributable to the activities of the appellant society. The character of the interest is different from the income attributable to the business of the society of providing credit facilities to its members. The interest income derived from investing surplus funds with the State Bank of India must be closely linked with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. In the present case there is no obligation upon the appellant to invest its surplus funds with the State Bank of India. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India not being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a) (i) of the Act. If the appellant wants to avail of the benefit of deduction of such interest income, it is always open for it to deposit the surplus funds with a co-operative bank and avail of deduction under section 80P(2)(d) of the Act. It is one of the activities of the Society engaged in carrying on the business of banking or providing credit facilities to its members as provided in section 80P(2)(a) of the Act and gains of business attributable to such activity is exempt from taxable income and that based on the above, interest income of fixed deposits with S.B.I. has been treated as business income of the Society engaged in the business of banking or providing credit facilities to its members and accordingly income derived from this activity has been claimed exempt under section 80P(1) and 80P(2)(a). Having regard to the stand adopted by the appellant in response to the notice under section 263 of the Act, this court is of the view that it cannot, in any manner, be said that the Commissioner of Income-tax has travelled beyond the scope of the notice under section 263 of the Act, inasmuch as, he has only dealt with the contention raised by the appellant. The contention that the Commissioner of Income Tax has not held that interest income derived from parking the funds with the State Bank of India is income from other sources, in the opinion of this court, does not merit consideration for the reason that it is for the Assessing Officer, pursuant to the order under section 263 of the Act to examine the nature of the income and tax it accordingly. Insofar as the order under section 263 of the Act is concerned, in the light of the above discussion, it is not possible to state that the same suffers from any legal infirmity. The Tribunal was, therefore, wholly justified in upholding the same. ITAT was justified in upholding invocation of powers under section 263 by the Commissioner of Income Tax and holding that interest income on deposits placed with State Bank of India was not exempt under section 80P(2)(a)(i) - Decided against assessee. Issues Involved:1. Justification of invocation of powers under section 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax.2. Exemption of interest income on deposits placed with State Bank of India under section 80P(2)(a)(i) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Justification of Invocation of Powers under Section 263:The court examined whether the Income Tax Appellate Tribunal (ITAT) was justified in upholding the invocation of powers under section 263 by the Commissioner of Income Tax (CIT). The CIT invoked section 263 to revise the assessment orders for the years 2009-10 and 2010-11, arguing that the interest income earned from deposits with the State Bank of India was not exempt under section 80P(2)(d) of the Income Tax Act. The appellant contended that the interest income was business income and exempt under section 80P(2)(a)(i). The court noted that the CIT had issued the notice under section 263 on the ground that the appellant claimed deduction under section 80P(2)(d), but the appellant argued the exemption under section 80P(2)(a)(i). The court found that the CIT had appropriately invoked section 263 as the Assessing Officer had not applied his mind to the nature of the income, thereby making the assessment order erroneous and prejudicial to the interests of the revenue.2. Exemption of Interest Income under Section 80P(2)(a)(i):The court considered whether the interest income earned on deposits placed with the State Bank of India was exempt under section 80P(2)(a)(i). The appellant, a co-operative society, argued that the interest income was part of its business income as it was earned from surplus funds temporarily deposited with the bank. The court referred to the Supreme Court's decision in Totgars Co-operative Sales Society Ltd. v. Income Tax Officer, which held that interest income from surplus funds not immediately required for business purposes falls under 'income from other sources' and not 'profits and gains of business.' The court concluded that the interest income from deposits with the State Bank of India did not qualify for exemption under section 80P(2)(a)(i) as it was not attributable to the business of providing credit facilities to its members. The court emphasized that only interest earned from investments with co-operative societies is exempt under section 80P(2)(d), not from banks like the State Bank of India.Conclusion:The court upheld the ITAT's decision, affirming that the invocation of powers under section 263 by the CIT was justified and that the interest income on deposits with the State Bank of India was not exempt under section 80P(2)(a)(i). The appeals were dismissed, and the questions were answered in favor of the revenue and against the assessee.