Income Tax Appellate Tribunal

Vanam Mahila Sangam Limited vs Income Tax Officer

MANU/IH/0004/2021

06.01.2021

Direct Taxation

Interest income earned on deposits in the Bank is also in the nature of business income eligible for deduction under Section 80P(2) of IT Act

The assessee is a Co-Operative Credit Society and carries on its activities of in providing loans to its members and earns interest income and also accepts thrift deposits from its members. The assessee filed its return of income for the Assessment Year (A.Y.) 2016-17 on 13.03.2018 admitting total income at 'nil' after claiming deduction under Section 80P of Income Tax Act, 1961 (IT Act). Pursuant to selection of the return of income for scrutiny under CASS, notices under Section 143(2) and 142(1) of IT Act were issued to assessee, in response to which the assessee submitted the information called for by Assessing Officer (AO). During assessment proceedings, the AO observed that, the assessee has made deposits with Kotak Mahindra Bank and has earned interest income therefrom. AO held that such interest income cannot be treated as "business income" but has to be treated as "income from other sources", and, accordingly, deduction under Section 80 P of the IT Act is not to be allowed. A Show Cause Notice was accordingly issued to assessee.

AO observed that, in case of Totgar's Co-Operative Sale Society Ltd. vs. Income Tax Officer for the AYs 1991-92 to 1999-2000, the Supreme Court has held the issue against the assessee. He also relied on the decision of Karnataka High Court in the case of Tumkur Merchants Co-operative and Credit Society and held that, interest earned on deposits held with bank out of surplus funds of Society is taxable under the provisions of Section 56 of the Act. Accordingly, AO brought the sum of Rs.11,48,437 to tax. Aggrieved, assessee preferred an appeal before the Commissioner of Income Tax, Appeal [CIT(A)], who confirmed the order of AO and the assessee is in second appeal before the Tribunal.

The assessee submitted that, the amount deposited by the assessee into the S.B. account and the interest income earned has been offered to tax by assessee as business income. He prayed that, since it has been accepted as business income, it has to be allowed as deduction under Section 80 P of the IT Act. The only issue before the Tribunal is whether the interest income earned by the assessee firm from the deposits in the Savings Bank is eligible for deduction under Section 80P(2) of the IT Act.

The AO and the CIT (A) have relied upon the decision of the Hon'ble Supreme Court in the case of Totgar's Co-Operative Sale Society Ltd to deny the deduction. However, present Tribunal finds that, the said decision is distinguishable on facts and is not applicable to the facts of the case before this Tribunal.

In the case of Totgar's Co-Operative Sale Society Ltd, the interest income was earned on short term bank deposits and securities which were made out of the surplus funds of the members retained by the society and were not immediately necessary for the business of the assessee therein. But in the case before present Tribunal, the assessee society had to make the deposits into the Savings Bank Account held with Kotak Mahindra Bank as a business requirement. Since the assessee's funds were available in the Savings Bank Account, the assessee has earned certain interest income thereon. Thus, it can be seen that, the interest income earned is not on fixed deposits, but it is on the funds which are available and which are required for the business purpose of the assessee. Therefore, the decision of the Hon'ble Supreme Court in the case of Totgar's Co-Operative Sale Society Ltd is clearly not applicable to the case before the Tribunal.

The Hon'ble Andhra Pradesh High Court in the case of CIT vs. Andhra Pradesh State Coop. Bank Ltd. has clearly held that, the interest income earned on deposits in the Bank is also in the nature of business income which is eligible as deduction under Section 80P(2) of the IT Act. In view of Supreme Court’s decision in the case of CIT vs. Andhra Pradesh State Coop. Bank Ltd, present Tribunal held that, the reliance of the AO and the CIT (A) on the decision of the Supreme Court is misplaced and the assessee is eligible for deduction under Section 80P(2) of the IT Act on the interest income earned from the Savings Bank Account held with the Kotak Mahindra Bank. Assessee's appeal is allowed.

Tags : Assessment Deduction Eligibility

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