INDIAN BANK EMPLOYEES CO-OPERATIVE THRIFT & CREDIT SOCIETY,NEW DELHI vs. ITO, NEW DELHI

The only issue raised in this appeal is against denial of deduction under section 80P of the Income-tax Act, 1961 (hereinafter also called `the Act’) on the amount of interest earned from banks to the tune of Rs.16,07,096/-.

Briefly stated the facts of the case are that the assessee is a registered co-operative society created, inter alia, to lend money to its members. A return declaring an income of Rs.6,950/- was filed. During the course of assessment proceedings, the Assessing Officer observed that the assessee earned interest of Rs.96,671/- on saving bank and Rs.15,10,425/- on FDRs, which was claimed as deductible under section 80P. He held that the assessee invested its `surplus funds’ on which such interest income was earned and hence the same was not eligible for deduction under section 80P of the Act. The assessee argued before the leaned CIT(A) that the funds were temporarily parked in banks for short period and were withdrawn as and when demands from loan came from its members. The learned CIT(A) relied on the judgment of the Hon'ble Supreme Court in the case of The Totgars Cooperative Sale Society Limited vs. ITO (2010)322 ITR 283 (SC) and that of the Hon'ble jurisdictional High Court in Mantola Co-operative Thrift and Credit Society Limited vs. CIT (2014) 110 DTR 89 (Del) to deny the assessee’s claim by holding that the assessee deposited its surplus funds and hence deduction was not permissible.

I have heard the rival submissions and perused the relevant material on record. The Hon’ble Summit Court in The Totgars Cooperative Sale Society Limited (supra) has held that interest income earned by a co-operative society, engaged in providing credit facilities to its members and marketing the agricultural produce of the members, from investing its surplus funds in short-term deposits and Government securities, falls under the head "Income from other sources" taxable under s. 56, and the same does not qualify for deduction under s. 80P(2)(a)(i) of the Act.

Dr. Gupta, the learned AR, has also fairly conceded that interest income arising from surplus funds is not eligible for deduction u/s 80P. He, however, maintained that the interest income earned by the assessee in the given facts and circumstances is `Business income’ and does not fall under the head `Income from other sources’. He submitted that the deposits made in the banks do not represent parking of surplus funds. To substantiate such a contention, he sought to rely on certain additional evidence filed under rule 29 of the Income-tax Appellate Tribunal Rules 1963. To drive home the benefit of deduction u/s 80P in such circumstances, he relied on certain Tribunal orders in which it has been held that interest earned from bank deposits made under business exigency having character of `Business income’, which is distinct from interest from deposit of surplus funds chargeable under the head `Income from other sources’, is eligible for the deduction. He submitted that the additional evidence filed by him would show that the interest income has the character of `Business income’.

In my considered view, the mere fact that an assessee has deposited its operational funds in short term deposits, would not necessarily give the resultant interest income a colour of `Business income’. If a part of the operational funds is not required for the time being and the same is deposited in a bank and such deposit is not as a result of any business exigency or in other words, such deposit has no live link with the carrying on of business for which an assessee is set up, the character of `Business income’ on such an interest income is lost.

In view of the fact that the additional evidence has been filed by the assessee under rule 29, which may have some bearing on arriving at the conclusion as to whether it was a case of deposit of surplus funds or a business necessity, I set aside the impugned order and remit the matter to the file of the Assessing Officer for considering the additional evidence filed by the assessee and then arrive at a positive conclusion as to whether it was a case of parking of surplus funds in the banks or not. In case the Assessing Officer comes to the conclusion that the business exigency required the assessee to deposit the money in the bank account, then deduction under section 80P would be allowed. In the otherwise scenario, if the Assessing Officer comes to the conclusion that it was a case of mere parking of surplus funds in the banks for the time being, then no deduction under section 80P can be allowed on such interest income. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.

In the result, appeal is allowed for statistical purposes.