2016 (7) TMI 516 - GUJARAT HIGH COURT

Revision u/s 263 - 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.