2008 (9) TMI 493 - HC - Income Tax

Interest on securities and bank deposits treated as income from other sources; not deductible under s.80P(2)(a)(i); s.147/ s.148 reopening upheld

HC upheld the ITAT's finding that interest from securities and bank deposits (other than co-operative banks) arose from surplus funds and constituted ... Special deduction u/s 80P(2)(a)(i) - co operative society - income received from investment in security and bank deposits - assessable as income from other sources - reopening of the assessment - initiation of the proceedings by issuing notice u/s 148 - HELD THAT:- The assessee is admittedly not doing any banking business. What is invested in security and term deposits with the bank is the surplus funds in the possession of the assessee and as the assessee is not doing ant- banking business, interest accrued from securities and deposits in banks other than co-operative societies were taken as relatable to profits and gains of the society as the said investment does not in any way affect the working capital is not a part of the circulating capital, but only out of the surplus funds available to the society and the assessee has not proved that there is no obligation on the part of the assessee to hold any securities as the part of the business and what is invested in securities and deposits is the surplus funds available with the assessee and it would not in any way affect the circulating capital of the society and, therefore, it is clear that the finding arrived at by the Income- tax Appellate Tribunal that the interest received from securities and deposit except deposits with the banks other than co-operative banks is not relatable to the business of the assessee in the present case and consequently, it is not qualified for deduction and consequently cannot qualify for computation of exemption under section 80P of the Act is justified. The income by way of interest arising on deposits on banks securities is a source of income apart from marketing activity of the assessee and since earning of interest is not a business activity of the assessee is assessable to income from other sources and moreover the source of investment in bank deposits, securities and bonds are attributable to own funds. There has been no charge by way of interest explained and accordingly, for the aforesaid reasons, we hold that the finding of the Income-tax Appellate Tribunal is justified and does not call for interference in this appeal and accordingly we answer substantial question No. 1. Reopening of Assessment - HELD THAT:- That the original records revealed that the previous permission of the Additional Commissioner had been obtained before issuing notice to the assessee. There is concurrent finding by both the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal on the said contention and on verification of the original records, we also find that the permission of the Additional Commissioner of Income-tax on May 31, 2001 and the same was communicated on June 8, 2001 Thus the proceedings for reopening of the assessment u/s 147 of the act were proper and notice issued u/s 148 of the act was valid. Accordingly, we dismiss the appeal. Issues Involved:1. Whether the interest received by the assessee from securities and bank deposits qualifies for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961.2. Whether the reopening of the assessment under section 147 of the Income-tax Act and the notice issued under section 148 were valid.Issue-wise Detailed Analysis:1. Exemption under Section 80P(2)(a)(i):The primary issue was whether the interest income from securities and bank deposits qualifies for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961. The assessee, a co-operative society, claimed that the income from such investments was attributable to the profits and gains of its business activities, which included providing credit facilities to its members and marketing agricultural produce.The Tribunal held that the interest income from securities and deposits in banks does not qualify for exemption under section 80P(2)(a)(i) because the assessee was not engaged in banking business. The Tribunal emphasized that the income from such investments is not attributable to the business activities of the assessee.The assessee's counsel argued that the term 'attributable' is broader than 'derived from' and that the interest income should be considered part of the business income. However, the Tribunal referred to the Supreme Court's decision in CIT v. Producin Pvt. Ltd., which clarified that interest from surplus funds invested in FDRs is not attributable to business profits and gains.The Tribunal further noted that the assessee was not required to make statutory deposits like a banking company and that the investments in securities and deposits were from surplus funds, not related to the business activities. Therefore, the interest income was assessable as 'income from other sources' and did not qualify for exemption under section 80P(2)(a)(i).2. Validity of Reopening of Assessment and Notice under Section 148:The second issue was the validity of the reopening of the assessment under section 147 and the notice issued under section 148. The assessee contended that the notice was issued without obtaining prior approval from the Additional Commissioner of Income-tax, as required under section 151.The Tribunal found that the approval from the Additional Commissioner was obtained on May 31, 2001, and the communication of the approval was received on June 8, 2001. The Tribunal verified the original records and concluded that the notice was issued after obtaining the necessary approval, thus complying with section 151.The Tribunal's findings were supported by concurrent findings from the Commissioner of Income-tax (Appeals). The Tribunal rejected the assessee's contention that the notice was issued without proper approval, affirming the validity of the reopening of the assessment.Conclusion:The Tribunal concluded that the interest income from securities and bank deposits did not qualify for exemption under section 80P(2)(a)(i) as it was not attributable to the business activities of the assessee. Additionally, the reopening of the assessment and the issuance of the notice under section 148 were found to be valid, as the necessary approval was obtained. Consequently, the appeal was dismissed, and the order of the Income-tax Appellate Tribunal was confirmed.