Bihar State Housing Co-operative Federation Ltd. vs Commissioner of Income Tax

Chandramauli Kr. Prasad, Actg. C.J.

The Patna Bench of the Income Appellate Tribunal, at the instance of the assessee after drawing the statement of the case has referred the following questions for our answer:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 15,98,590 received by way of interest on bank deposit is not ancillary and incidental to carrying on of the business of providing credit facility to its members and as such, exempt u/s 80P(2)(a)(i) of the Income Tax Act, 1961?

Whether, on the facts and circumstances of the case, the Tribunal was correct in remitting the case back to the Income Tax Officer for fresh computation of income in spite of the fact that its income is exempt from tax?

Whether, on the facts and circumstances of the assessee''s case, the Tribunal is correct in holding that the sum of Rs. 15,98,592 being interest on bank deposits is taxable without deducting therefrom the interest paid to LIC on loans raised on which interest has been earned?

The assessee, the Bihar State Housing Co-operative Federation Ltd. is an apex housing co-operative society and its business is to provide credit facilities to its members, which are primary co-operative societies. The assessee apart from the share capital of more than Rs. 2 crores has raised loan from the Life Insurance Corporation of India for advancing loans to its primary societies. In the course of its business of providing credit facility to its members it had some surplus funds on which it has earned bank interest amounting to Rs. 15,98,590 and at that time it had also paid interest to the Life Insurance Corporation of India as per audited balance-sheet amounting to Rs. 21,45,566. It has also paid interest of Rs. 1,13,320 on overdraft from State Co-operative Bank. The Assessing Officer has assessed the assessee on total income of Rs. 7,81,460 being receipt on account of interest on loans, interest on bank deposits and group insurance paid. The Assessing Officer was of the view that the assessee shall not be eligible for deduction of the following items u/s 80P(2)(a)(i) of the Income Tax Act, hereinafter referred to as the Act.

(i) Rs. 15,98,591 - Interest on deposits made with the bank,

(ii) Rs. 1,00,000 - Managerial subsidy received from the State Government,

(iii) Rs. 1,46,600 - Group insurance premium received.

The Assessing Officer proceeded on the basis of the net profit as per the profit and loss account shown by the assessee at Rs. 5,08,290 and after making certain additions assessed it on total income of Rs. 7,81,460.

The assessee aggrieved by the order of the Assessing Officer preferred an appeal before the Commissioner of Income Tax (Appeals), who held that the income of the assessee is exempt u/s 80P(2)(a)(i) of the Act. However, he did not adjudicate the alternative plea put forth by the assessee that its income was also exempt on the principle of mutuality.

The Revenue then preferred an appeal before the Patna Bench of the Income Tax Appellate Tribunal, hereinafter referred to as "the Tribunal". The Tribunal on consideration of the materials placed before it came to the conclusion that the sum of Rs. 15,98,592 being interest received by the assessee on deposit with bank was not eligible for deduction u/s 80P(2)(a)(i) of the Act. However, the Tribunal remitted the issue raised by the assessee of income being exempt on the principle of mutuality.

Drawing up of the aforesaid statement of the case, the Tribunal at the instance of the assessee has referred the aforesaid questions of law for our answer.

Mr. Ajay Kumar Rastogi, appearing on behalf of the assessee, submits that Section 80P(2)(a)(1) of Act besides being applicable to the business of banking also applies to the business of providing credit facility to its members. He points out that the assessee was depositing the surplus funds available with it in banks and thus earned interest thereon. The deposit of such money, according to the Mr. Rastogi, was done in the course of the assessee''s business and, therefore, entitled to deduction u/s 80P(2)(a)(i) of the Act.

Mr. Prakash Sahay, appearing on behalf of the Revenue, however, contends that the provisions of Section 80P(2)(a)(i) of the Act should be strictly construed and the deductions admissible under the aforesaid provision shall be available only to the income arising out of one or more activities specified in that section. It has been pointed out that the deductions under the aforesaid provisions shall be admissible only when there is direct or proximate nexus between the income on the one hand and the activity specified on the other hand.

Having considered the rival submissions, I am of the opinion that the interest earned on the deposits made, does not arise out of one or more of the activities specified in Section 80P(2)(a)(1) of the Act but the interest received by the assessee on the bank deposit is ancillary and incidental to carrying on the business of providing credit facility to its members and, as such, exempt under the aforesaid provisions. It may be stated herein that the assessee deposits surplus funds available with it in banks and earns interest thereon. The nature of activity in which the assessee is involved clearly creates a situation when surplus fund is available to it which it deposits in bank and earns interest thereon. The placement of such fund being incidental and ancillary to carrying on of the business of providing credit facility to its members by reason of Section 80P(2)(a)(i) of the Act, same is exempt under the aforesaid provisions.

The view which I have taken finds support from the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. KARNATAKA STATE CO-OPERATIVE APEX BANK, in which it has been held as follows (page 196):

The question is whether we agree with the reasoning in M.P. Cooperative Bank Ltd., Jabalpur Vs. Addl. Commissioner of Income Tax, M.P. Bhopal, There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of Section 80P(2)(a)(i), to pay Income Tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee''s business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Cooperative Bank Ltd., Jabalpur Vs. Addl. Commissioner of Income Tax, M.P. Bhopal, that only income derived from circulating or working capital would fall within Section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital. In the premises, we take the view that the decision of this Court in the case of M.P. Cooperative Bank Ltd., Jabalpur Vs. Addl. Commissioner of Income Tax, M.P. Bhopal, does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee.

In view of aforesaid, my answer to the first question referred to above, is in the negative, against the Revenue and in favour of the assessee and it is held that a sum of Rs. 15,98,592 received by way of interest on bank deposit is ancillary and incidental to carrying out the business of providing credit facility to its members, and, as such, exempt u/s 80P(2)(a)(i) of the Act.

In view of answer to the aforesaid question in the manner indicated above, the second question sent for our opinion has to be answered in the negative, against the Revenue and in favour of the assessee as in my view the Tribunal was not correct in remitting the case back to the Assessing Officer for fresh computation of income in the face of the income of the assessee being exempt from tax.

In view of the opinion aforesaid, the opinion on question No. 3 becomes academic. The opinion aforesaid be transmitted to the Income Tax Tribunal, Patna Bench, Patna.

Mihar Kumar Jha, J.

I agree.