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Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer Word-V, Tumkur
Judgment Summary — N. Kumar, J.
Factual and Procedural Background
The assessee is a cooperative society registered under the provisions of Section 7 of the Karnataka Co‑operative Societies Act, 1959, engaged in providing credit facilities to its members. The assessee filed its return of income for the assessment year 2009‑10 on 30/09/2008 declaring a total income of Rs. NIL after claiming a deduction of Rs. 42,02,079 under Section 80P of the Income Tax Act, 1961. The case was selected for scrutiny and a notice under Section 143(2) was issued.
The assessing officer, noting the insertion of Section 80P(4), refused to allow the claimed deduction under Section 80P(2)(i) and assessed a total income of Rs. 42,02,079. The assessee appealed to the Commissioner of Income Tax (Appeals) who held that the assessee's activity was not in the nature of banking and that the benefit of Section 80P could not be denied generally; however, the CIT(A) held that interest earned from short‑term deposits with Allahabad Bank (Rs. 1,55,300) and a savings account with Axis Bank (Rs. 22,005), totaling Rs. 1,77,305, was taxable in view of the Supreme Court's decision in Totgars' Cooperative Sale Society Limited v. ITO. The Tribunal dismissed the assessee's appeal following the Totgars' decision. The assessee challenged that portion of the order before this Court, posing the substantial question of law reproduced in the next section.
Legal Issues Presented
- Whether the Tribunal failed in law to appreciate that the interest earned on short‑term deposits were only investment in the course of the 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?
Arguments of the Parties
Assessee's Arguments
- The interest of Rs. 1,77,305 was earned on deposits made out of funds that were part of the amounts used to provide credit facilities to members; therefore the interest is attributable to the business of providing credit facilities and forms part of the profits and gains of that business.
- Accordingly, the interest income should be eligible for deduction under Section 80P(2)(a)(i) (or Section 80P generally) when computing total income.
- The assessee relied on several judgments and submitted that the Supreme Court in the Totgars' case had not laid down any general legal principle that would govern the present facts.
Revenue's Arguments
- The Revenue relied strongly on the Supreme Court's judgment in Totgars' Cooperative Sale Society Limited v. Income Tax Officer, Karnataka and submitted that the present case is covered by that decision and there is no case for interference.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Totgars' Cooperative Sale Society Limited v. Income Tax Officer, Karnataka [2010] 322 ITR 283 / 188 Taxman 282 (SC) | The Supreme Court dealt with a cooperative society that, in addition to providing credit, was in the business of marketing agricultural produce; amounts retained (payable to members) were invested in short‑term deposits. | The court noted that in Totgars the retained amounts were liabilities shown on the liability side of the balance sheet; accordingly the interest on such retained amounts was held not to be attributable to the specified activities under Section 80P and was taxed under Section 56. The present Court distinguished Totgars on its facts and recorded that the Supreme Court had confined that judgment to its facts and was not laying down a general rule. |
| Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) | Interpretation of the word "attributable" (used in tax statutes) as being wider in import than "derived from", intended to cover receipts from sources other than the actual conduct of the particular business. | The court relied on this authority to hold that "attributable to" in Section 80P is wide enough to include interest earned on temporary deposits of funds that arise in the course of the cooperative society's credit business, and therefore such interest can be regarded as profits and gains attributable to that activity. |
| CIT v. Andhra Pradesh State Co‑operative Bank Ltd. [2011] 200 Taxman 220 / 12 taxmann.com 66 (APHC) | Applied the relevant provisions of law to hold that interest on temporary bank deposits (arising in course of credit operations) could be regarded as attributable to the business activity for purposes of Section 80P. | The Court noted that a similar view was taken by the Andhra Pradesh High Court, and treated that decision as supportive of allowing the deduction of interest income under Section 80P in the present factual matrix. |
Court's Reasoning and Analysis
The Court proceeded from undisputed facts: the Rs. 1,77,305 represented interest earned from short‑term deposits and savings account balances; the assessee's sole business was providing credit facilities to members; sums arising as interest from lending operations were placed in bank deposits for short durations because they were not immediately required for lending (there were no takers).
The Court focused on the statutory language of Section 80P(2)(a)(i), particularly the use of the word "attributable", and applied the interpretation laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT that "attributable to" is wider than "derived from" and is intended to include receipts from sources other than the immediate conduct of the specified business. Using that reasoning, the Court found that interest earned on temporary deposits of funds arising from the credit business is properly regarded as profits and gains attributable to the activity of providing credit facilities.
The Court distinguished Totgars' case: in Totgars the invested sums were amounts retained that constituted liabilities (payable to members) and were shown on the liability side of the balance sheet—therefore the Supreme Court held such interest not to be attributable to the activities listed in Section 80P and taxed it under Section 56. The present case, by contrast, involved funds that were neither amounts due to members nor liabilities; they were surplus profits/gains that were legitimately invested temporarily and thus the interest earned thereon is attributable to the assessee's credit business.
The Court also observed that the Supreme Court in Totgars had expressly confined its conclusion to the facts of that case and was not laying down a general law; this supported distinguishing Totgars on its facts. The Andhra Pradesh High Court decision in CIT v. Andhra Pradesh State Co‑operative Bank Ltd. was noted as taking a similar view to that reached by the Court in the present matter.
Holding and Implications
APPEAL ALLOWED; ORDER SET ASIDE
Holding: The Court held that the interest amount of Rs. 1,77,305 earned on short‑term deposits and a savings bank account was attributable to the business of providing credit facilities to members and is therefore eligible for deduction under Section 80P in computing the assessee's total income. The appellate orders denying this benefit were set aside. The substantial question of law was answered in favour of the assessee and against the Revenue.
Implications: The direct consequence is that the assessed taxability of Rs. 1,77,305 as held by the appellate authorities is reversed and that interest is to be regarded as profits and gains attributable to the assessee's credit business for the purposes of Section 80P. The Court distinguished the Supreme Court's decision in Totgars on its facts and recorded that Totgars had been confined to its facts rather than laying down a universal rule; the Court also noted the supportive view of the Andhra Pradesh High Court. The judgment resolves the specific dispute between the parties in favour of the assessee; the opinion does not purport to extend or construe broader law beyond the facts and authorities cited.
JUDGMENT
N. Kumar, J - The assessee has filed the appeal challenging the order passed by the Tribunal.
2. This appeal is admitted to consider the following substantial question of law:
'"Whether the Tribunal failed in law to appreciate that the interest earned on short-term deposits 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?"
3. The assessee is a Cooperative Society registered under the provisions of Section 7 of the Karnataka Co-operative 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, 1960. The assessee filed its return of income for the assessment year 2009-10 on 30/09/2008 under the provisions of Section 139(1) of the Income Tax Act, 1961 (for short hereinafter referred to as the 'Act'), declaring a total income of Rs. NIL after claiming a deduction of Rs.42,02,079/- under the provisions of Section 80P of the Act. The assessee's case was selected for scrutiny and statutory notice under the provisions of Section 143(2) was issued. The assessee produced all the information to substantiate its claim. The assessing authority, 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.42,02,079/-, as against the declared income of Rs.NIL. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals)-II. The appellate authority held that assessee's activity is not in the nature of banking and consequently the benefit of deduction under Section 80P of the Act cannot be denied. However, insofar as the income of the assessee consisting of interest earned from short-term deposits with M/s. Allahabad Bank of Rs. 1,55,300/- and savings bank account with M/s. Axis Bank of Rs.22,005/-, totalling to Rs. 1,77,305/- was held to be liable to, income tax in view of the judgment of the Apex Court in the case of Totgars' Cooperative Sale Society Limited v. Income Tax Officer, Karnataka [2010] 322 ITR 283/188 Taxman 282 (SC) . Aggrieved by that portion of the order, assessee preferred an appeal to the Tribunal which has dismissed the appeal following the judgment of the Apex Court in the aforesaid case. Aggrieved by the said order, this appeal is preferred by the assessee.
4. The learned counsel for the assessee assailing the impugned order contended, the interest accrued in a sum of Rs. 1,77,305/- is 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 he submits the appellate authorities were not justified in denying the said benefit in terms of Sub-sec.(2) of Section 80P of the Act. In support of his contentions, he relied on several judgments and pointed out that the Apex Court in the aforesaid judgment has not laid down any law.
5. Per contra, learned counsel for the Revenue strongly relied on the said judgment of the Supreme Court and submitted, the case is covered by that judgment of the Apex Court and no case for interference is made out.
6. From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1,77,305/- represents the interest earned from short-term deposits and from savings bank account. The assessee is a Cooperative 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, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i):
"Deduction in respect of income of co-operative societies:
80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions 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:
| (ii) to (vii) | xx | xx | xx |
the whole of the amount of profits and gains of business attributable to any one or more of such activities."
7. The word 'attributable' used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word 'attributable' as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v. Cit [1978] 113 ITR 84 (SC) as under:
'As regards the aspect emerging from the expression "attributable to" occurring 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 from". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression ''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.'
8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they 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 activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.
9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, 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 interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to 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 CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66 . In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order:
ranjan
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