The Kerala High Court has held that income tax deduction is allowable on interest income received on deposits of surplus profits earned by society.
The bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that income received by the respondent Society by way of interest, on deposits of surplus profits earned by it, would qualify for the deduction contemplated under Section 80P(2)(a) of the Income Tax Act, for profits and gains of business attributable to its activity of providing credit facilities to its members.
The respondent/assessee is a Co-operative Society engaged in the provision of credit facilities to its members. It is a Multi-State Co-operative Society registered under the Multi-State Co-operative Societies Act, 2002, the provisions of which Statute regulate its functioning. The issue that arises for consideration in the instant case is with regard to its entitlement to deduction in respect of the interest that it earned from deposits that it had made in compliance with the statutory requirements under the Multi- State Co-operative Societies Act. It is not in dispute that the amount of profits and gains of business attributable to its business of providing credit facilities to its members is eligible for the benefit of deduction under Section 80P(2).
The issue raised was whether, on deposit by the respondent/assessee of the amounts that are found to be eligible for deduction under Section 80P(2), with a bank or other permitted institutions, the interest earned by the assessee on deposits would also be entitled to the benefit of deduction under Section 80P(2) of the Income Tax Act.
The department stated that while the assessee was entitled to the deduction in relation to the principal income by way of interest earned through the provision of credit facility to its members, the interest income earned through deposit of the principal income with banks and other permitted financial institutions would attract tax under the head of “Income from other sources” since they would cease to have the character of profits and gains of business or profession.
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The assessee contended that the provisions of Sections 63 and 64 of the Multi-State Co-operative Societies Act, 2002 mandate that the assessee Society shall, out of its net profits in any year, transfer an amount not less than 25% to the reserve fund and subject to such conditions as may be prescribed, the balance of the net profits may be utilised for all or any of the purposes stipulated in sub clause (2) of Section 63. Similarly, the assessee Society is also permitted to invest or deposit its funds in any of the modes specified in Section 64 of the Multi-State Co-operative Societies Act.
The department contended that the interest earned on deposits and investments made, of the principal income which was entitled for the deduction under Section 80P(2) of the Income Tax Act, would attract the levy of tax under the head of “Income from other sources”. This was because wherever the Legislature intended such interest income to also enjoy the benefit of deduction, it was expressly provided in Section 80P(2)(d) and the assessee in the instant case has not satisfied the requirements for getting the benefit of deduction under the said provision. The express provision for deduction of interest on deposits conferred by Section 80P(2)(d) excludes, by implication, the deduction in relation to similar interest income under Section 80P(2)(a) of the Income Tax Act.
The court court dismissed the appeal filed by the department and held that the nature and character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the Income Tax Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.
Case Title: PCIT Versus Sahyadri Co-Operative Credit Society Ltd.
Case No.: I.T.A. No. 68 Of 2017
Date: 04/09/2024
Counsel For Petitioner: A. Kumar
Counsel For Respondent: G. Mini
