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2015 (7) TMI 874 - KARNATAKA HIGH COURT

2015 (7) TMI 874 - KARNATAKA HIGH COURT - [2015] 377 ITR 464 (Kar) - Entitlement for deduction under Section 80P(2)(a)(i) - Whether the Tribunal failed in law to appreciate that the interest earned on short-term deposits in banks were only investment in the course of activity of providing credit facilities to members and that the same cannot be considered as investment made for the purpose of earning interest income and consequently passed a perverse order denying the deduction under Section 80P .....

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carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of Commissioner of Income Tax-III, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., reported in (2011 (6) TMI 215 - ANDHRA PRADESH HIGH COURT).

In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustaina .....

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This appeal is admitted to consider the following substantial questions of law:- i) Whether the Tribunal failed in law to appreciate that the interest earned on short-term deposits in banks were only investment in the course of activity of providing credit facilities to members and that the same cannot be considered as investment made for the purpose of earning interest income and consequently passed a perverse order? ii) Whether the Tribunal is correct in law in holding that the interest earned .....

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cing the expenditure incurred to earn such interest income would be liable to tax on the facts and circumstances of the case? 3. The assessee is a Cooperative Society registered under the provisions of Section 7 of the Karnataka Cooperative Societies Act, 1959. It is engaged in the activity of carrying on the business of providing credit facilities to its members. It is governed by the provisions of the Karnataka Co-operative Societies Act, 1959, and the Karnataka Co-operative Societies Rules, 1 .....

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, taking note of the insertion of Section 80P(4) of the Act, declined to extend the benefit of deduction under Section 80P(2)(i) and passed an order of assessment, determining a total income of Rs.,85,95,028/-, as against the declared income of Rs.NIL. Aggrieved by the said order, assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The appellate authority held that assessee's activity is not in the nature of banking and consequently it is entitled to deduction under Sec .....

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. Aggrieved by the said order, this appeal is preferred by the assessee. 5. Learned counsel for the assessee assailing the impugned order contended that the interest accrued from the deposits made by the assessee in a nationalized bank out of the amounts which was used by the assessee for providing credit facilities to its members and therefore the said interest amount is attributable to the credit facilities provided by the assessee and forms part of profits and gains of business and therefore .....

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e is made out. 7. From the aforesaid facts and rival contentions, the undisputed facts which emerge are, certain sums of interest were earned from short-term deposits and from savings bank account. The assessee is a Co-operative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whe .....

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s of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: (a) in the case of co-operative society engaged in - (i) carrying on the business of banking or providing credit facilities to its members, or (ii) xxx (iii) xxx (iv) xxx (v) xxx (vi) xxx (vii) xxx the whole of the amount of profits and gains of business attributable to any one or more of such activities." 9. The .....

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ng in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived f .....

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xpression "derived from", as, for instance, in section 80J. In our view, since the expression of wider import, namely, "attributable to", has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." 10. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a res .....

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rived or the capital, if not immediately required to be lent to the members, the society cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activit .....

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, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such .....

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