2023 (6) TMI 1483 - AT - Income Tax

Deduction u/s 80P - interest income earned from fixed deposits/investments with State Bank of India - HELD THAT - AO while framing the assessment with a view to bring into tax such SBI interest earned by the assessee as income from other sources rather than treating it as business income in the hands of assessee and by doing so he did not allow claim of the assessee u/s 80P(2)(ai) of the Act by treating interest income is not being business income. In the present case assessee has not generated any surplus fund which has been invested with SBI but such deposit are made only to adhere compliance issued by Registry of Co-operative Society Govt. of West Bengal. As per it assessee was required to deposit 70% of total deposits to be kept in NSC fixed deposit/certificate of bank and by doing so assessee earned interest income. Alleged interest income earned by the assessee is a business income and the ld. AO erred in treating it as income from other sources. Therefore the assessee is eligible for claiming deduction u/s 80P(2)(a)(i) of the Act. Decided in favour of assessee.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the interest income of Rs. 16,86,273/- earned by the assessee from fixed deposits/investments with the State Bank of India (SBI) qualifies as income derived from business under section 80P(2)(a)(i) of the Income Tax Act, 1961, and thus is eligible for deduction, or whether it is income from other sources and not eligible for such deduction.

2. Whether the mandatory deposit of funds in fixed deposits with SBI, as required under the West Bengal Cooperative Societies Act, 1940, and the resultant interest income, should be treated as income from business and profession for the purpose of claiming deduction under section 80P.

3. Whether the interest expenditure of Rs. 16,39,432/- attributable to earning the said interest income on fixed deposits is deductible, and if so, whether the differential amount of Rs. 46,841/- (excess of interest income over corresponding expenditure) is eligible for deduction under section 80P(2)(a)(i).

Issue-wise Detailed Analysis

1. Nature of Interest Income Earned from Fixed Deposits with SBI and Eligibility for Deduction under Section 80P(2)(a)(i)

Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) of the Income Tax Act, 1961, provides for deduction of income derived by a primary agricultural credit society or a co-operative society engaged in providing credit facilities to its members. The critical question is whether the interest income earned from fixed deposits qualifies as income derived from the business of the society or is to be treated as income from other sources, which is not eligible for deduction under this section.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee is a co-operative society functioning under the West Bengal Cooperative Societies Act, 1940, with the primary objective of providing credit facilities to its members. The interest income in question was earned from fixed deposits made with SBI pursuant to a mandatory requirement under the West Bengal Cooperative Societies Act, which directs the society to deposit 70% of its total deposits in specified securities or fixed deposits.

The Tribunal observed that the Assessing Officer (AO) erred in categorizing this interest income as income from other sources, thereby disallowing the deduction under section 80P. The Tribunal emphasized that the deposits were not surplus funds invested at the society's discretion but were made in compliance with statutory requirements to safeguard members' interests. Hence, the interest income is integrally connected to the business activity of the society.

Key Evidence and Findings: The assessee's compliance with the West Bengal Cooperative Societies Act's directive to deposit 70% of deposits in fixed deposits with SBI was established. The interest income arose directly from such deposits, which were part of the business operations and regulatory compliance.

Application of Law to Facts: Since the deposits and resultant interest income were mandated by law as part of the society's business operations, the Tribunal held that the income is derived from the business of the society. Consequently, the deduction under section 80P(2)(a)(i) is allowable.

Treatment of Competing Arguments: The AO and the CIT(A) had taken the view that the interest income was from other sources and thus not eligible for deduction. The assessee argued that the income is business income due to the mandatory nature of the deposits. The Tribunal sided with the assessee, finding the AO's and CIT(A)'s reasoning flawed.

Conclusions: The Tribunal set aside the findings of the CIT(A) and held that the interest income from fixed deposits with SBI is business income eligible for deduction under section 80P(2)(a)(i).

2. Deductibility of Interest Expenditure Attributable to Earning Interest Income and Treatment of Differential Amount

Relevant Legal Framework and Precedents: Generally, expenses incurred wholly and exclusively for the purpose of business are deductible under the Income Tax Act. The question here was whether the interest expenditure corresponding to the interest income earned from fixed deposits is deductible and whether the excess interest income over expenditure is eligible for deduction under section 80P.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee claimed interest expenditure of Rs. 16,39,432/- corresponding to the interest income of Rs. 16,86,273/- earned from the fixed deposits. The CIT(A) had not allowed this expenditure or the differential amount of Rs. 46,841/- as eligible for deduction under section 80P.

The Tribunal reasoned that since the interest income is business income, the corresponding interest expenditure incurred to earn such income is deductible. Further, the differential amount, being the net income, is also eligible for deduction under the said section.

Key Evidence and Findings: The evidence included the detailed accounts showing interest income and corresponding interest expenditure. The linkage between the expenditure and income was established.

Application of Law to Facts: Applying the principle that expenses incurred to earn business income are deductible, the Tribunal allowed the interest expenditure and the net differential amount as eligible for deduction under section 80P.

Treatment of Competing Arguments: The authorities below did not consider the interest expenditure or the differential amount for deduction. The assessee's submissions were accepted by the Tribunal on the basis of the business nature of the income.

Conclusions: The Tribunal allowed the deduction of the interest expenditure and the differential amount under section 80P(2)(a)(i).

Significant Holdings

"We find that alleged interest income earned by the assessee is a business income and the ld. AO erred in treating it as income from other sources. Therefore, the assessee is eligible for claiming deduction u/s 80P(2)(a)(i) of the Act."

The Tribunal established the principle that income earned from fixed deposits mandated by statutory provisions as part of a co-operative society's business operations constitutes business income eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act.

It further held that interest expenditure incurred to earn such interest income is deductible, and the net income after such expenditure is also eligible for deduction under the said section.

Final determinations on each issue are as follows:

- The interest income of Rs. 16,86,273/- earned from fixed deposits with SBI is business income and eligible for deduction under section 80P(2)(a)(i).

- The corresponding interest expenditure of Rs. 16,39,432/- is deductible.

- The differential amount of Rs. 46,841/- (excess of interest income over expenditure) is also eligible for deduction under section 80P(2)(a)(i).

Accordingly, the appeal of the assessee was allowed, and the disallowance of deduction under section 80P(2)(a)(i) was set aside.