2012 (9) TMI 1250 - HC - Income Tax

Tax Exemption Denied: Cooperative Society's Interest Income from Bank Deposits Not Eligible for Deduction Under Section 80-P

SC ruled that interest income from surplus funds invested in post office and commercial banks by a cooperative society does not qualify for deduction ... Deduction u/s 80-P (2) (d) Issues:1. Interpretation of Section 80-P (2) (d) of the Income Tax Act for deductions on interest earned from surplus funds.2. Tax treatment of interest income arising from investments made in post office and commercial banks by a cooperative society.Analysis:Issue 1: The first issue revolves around the interpretation of Section 80-P (2) (d) of the Income Tax Act regarding the eligibility of deductions on interest earned from surplus funds. The Income Tax Appellate Tribunal upheld the deductions of interest earned from post office/banks under Section 80-P (2) (d) of the Act based on a previous decision by the Allahabad High Court. However, the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd v. Income Tax Officer clarified that interest income arising on surplus investments in short-term deposits and securities, not required for immediate business purposes, should be taxed as 'Income from other sources' under Section 56 of the Act. The court emphasized that such interest income does not fall under the category of 'profits and gains of business' as defined in Section 80-P (2) of the Act.Issue 2: The second issue pertains to the tax treatment of interest income derived from investments made in post office and commercial banks by a cooperative society. The respondent-assessee argued that the interest earned on surplus funds invested in post office/banks aligns with the society's objective of providing loans to members and arranging funds for activities, making it eligible for deduction under Section 80-P. However, the court differentiated this case from Totgar's Cooperative Sale Society Ltd, highlighting that the investment in securities was not a primary objective of the cooperative cane development union. Consequently, the interest earned from such investments was categorized as income from other sources and deemed chargeable to tax under Section 56 of the Act.In conclusion, the Income Tax Appeal was allowed, deciding the substantial questions of law in favor of the revenue department and against the respondent-assessee. The judgment clarified the tax treatment of interest income from surplus investments and emphasized the distinction between income derived from business activities and other sources, providing a comprehensive analysis of the application of relevant provisions under the Income Tax Act.