THE issue before the Bench is - Whether if sum invested in bank to earn interest is not due to any Member of Society, such income is attributable to business of banking and is eligible for Sec 80P(1) benefits. YES is the verdict.
Facts of the case
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 had filed its return of income for AY 2010-11 under the provisions of Section 139(1), declaring a total income of Rs. NIL after claiming a deduction of Rs.85,67,640/- under the provisions of Section 80P(2)(a)(i). Assessee produced all the information to substantiate its claim. The AO declined to extend the benefit of deduction u/s 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. On appeal, CIT(A) held that assessee's activity was not in the nature of banking and consequently it was entitled to deduction u/s 80P(2)(a)(i). However, insofar as the amount of interest was concerned, it was held that assessee was liable to income tax in view of the judgment of SC in the case of M/s. Totgars Co-operative Sale Society Limited Vs. ITO 2010-TIOL-11-SC-IT. On appeal, CIT(A) dismissed the appeal following the judgment of SC in the aforesaid case.
++ the word 'attributable' used in the said Section is of great importance. The SC 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., Vs. Commissioner of Income Tax, Gujarat-II, 2002-TIOL-76-SC-IT. 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 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 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. A Co-operative 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, 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 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;
++ in this context when we look at the judgment of SC in M/s. Totgars Co-operative Sale Society's Case, on which reliance is placed, the Supreme Court was dealing with a case where the assessee/Co-operative 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) or u/s 80P(2)(a)(iii). Therefore in the facts of the said case, SC held the AO was right in taxing the interest income indicated above u/s 56. 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. 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 its 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). In fact similar view is taken by the AP High Court in the case of Commissioner of Income Tax-III, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., 2011-TIOL-550-HC-AP-IT. 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 questions of law are answered in favour of the assessee and against the revenue.