2010 (2) TMI 3 - SC - Income Tax

Copoerative socicity deduction u/s 80P(2)(a)(i) - Assessee(s) is a cooperative credit society. During the relevant assessment years in question it had surplus funds which the assessee(s) invested in short-term deposits with the Banks and in Government securities. On such investments interests accrued to the assessee(s). Assessee(s) provides credit facilities to its members and also markets the agricultural produce of its members. The substantial question of law which arises in this batch of civil appeals is - Whether such interest income would qualify for deduction as business income under Section 80P(2)(a)(i) of the Income Tax Act 1961 held that - Therefore to that extent such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or in Section 80P(2)(a)(iii) of the Act. Therefore looking to the facts and circumstances of this case we are of the view that the Assessing Officer was right in taxing the interest income indicated above under Section 56 of the Act. - To say that the source of income is not relevant for deciding the applicability of Section 80P of the Act would not be correct

Summary

Issues Involved:
1. Whether interest income from surplus funds invested in short-term deposits and securities qualifies for deduction as business income under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Validity of the reopening of assessments under Section 148 of the Income Tax Act.
3. Applicability of Section 56 and Section 57 of the Income Tax Act concerning deductions for cost of funds and proportionate administrative expenses.

Detailed Analysis:

1. Deduction of Interest Income under Section 80P(2)(a)(i):
The core issue was whether the interest income from surplus funds invested in short-term deposits and securities qualifies for deduction as business income under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The assessee, a cooperative credit society, argued that such interest income should be considered as business income attributable to its activities of providing credit facilities to its members and marketing agricultural produce. The assessee contended that under Section 80P(2), the entire amount of business profits from eligible activities is entitled to deduction, irrespective of the source or head of income.

The court, however, upheld the decision of the Assessing Officer, the Tribunal, and the High Court, which classified the interest income under the head "Income from other sources" under Section 56, not under Section 28 (business income). The court reasoned that the interest income from surplus funds invested in short-term deposits and securities, which were not immediately required for business purposes, does not fall within the meaning of "profits and gains of business" and is not attributable to the society's primary activities. Therefore, such interest income is taxable under Section 56 and not eligible for deduction under Section 80P(2)(a)(i).

2. Validity of Reopening Assessments under Section 148:
The assessee challenged the reopening of assessments, arguing that the Assessing Officer issued the notice under Section 148 without obtaining the prior approval of the Joint Commissioner of Income Tax, as required. The assessee claimed that the proposal for reopening was made on 31st May 2001, and the approval was given on 8th June 2001, after the notice was served.

The court found no merit in this argument, stating that the Tribunal, as the final fact-finding authority, had determined that there was detailed correspondence between the concerned officers before 31st May 2001. The Tribunal concluded that the sanction for reopening assessments existed before 31st May 2001, although the written communication of the sanction was received later. The court saw no reason to interfere with this finding of fact.

3. Applicability of Section 56 and Section 57:
The assessee raised an additional question regarding whether the interest income chargeable under Section 56 should allow deductions for the cost of funds and proportionate administrative and other expenses under Section 57. This question involves the interpretation of Sections 56 and 57 and their applicability to the facts of the case.

The court acknowledged that this question had not been addressed by the authorities below and remitted it to the High Court for consideration in accordance with the law.

Conclusion:
The Supreme Court dismissed the civil appeals filed by the assessee, holding that the interest income from surplus funds invested in short-term deposits and securities is taxable under Section 56 as "Income from other sources" and not eligible for deduction under Section 80P(2)(a)(i). The court also upheld the validity of the reopening of assessments under Section 148 and remitted the question of deductions under Section 57 to the High Court.