Income Tax Deduction u/s 80 P allowable for Interest Earned on Surplus Lending Funds to Banking Business: Calcutta HC [Read Order]

The West Bengal State Co-Operative Agriculture & Rural Development Bank Ltd. , the assessee filed appeal under Section 260A of the Income Tax Act, 1961 (the Act) is directed against order dated 3rd September, 2024 passed by the Income Tax Appellate Tribunal, “C” Bench, Kolkata (the Tribunal).

Affective Ways Of Tax Planning for HUF, Partnership Firm and Will - CLICK HERE

The assessee is a cooperative society carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing long term credit facilities to its members. The assessee being the apex cooperative society of the land mortgage bank in the State of West Bengal, funds were received from NABARD during the relevant financial year and it is stated that the funds were received in two installments and the funds are in turn lent to the members in 100 of installments and as the assessee does borrow in a wholesale manner and lend on retail basis, there is always some floating fund.

The floating fund has a cost that is interest payable to NABARD and the same is invested in short term deposits which yields income to the assessee and partly compensates the cost, namely interest payable to NABARD. The assessee’s case was that these activities are integral to their business of lending and the interest earning on the deposits is attributable to their lending business. Further, the assessee contended that they received repayment from borrowers in several installments and they have to in turn repay to NABARD which has to be done only twice a year i.e., 31st January and 31st July of each year as per the Schedule fixed by NABARD.

The assessee has to accumulate the fund to pay the installment on the scheduled dates and the interest income so derived if not immediately required to be lent to the members and/or installment will be falling due after some period, the assessee cannot keep the said amount idle and they deposited the amount in bank so as to earn interest and such interest earned is attributable to the profits and gains of business of providing credit facilities to its members.

Further, the assessee contended that the society is not carrying on any separate business for earning such interest income and the income so derived is the amount of profits and gains attributable to the activities of carrying in the business of banking or providing credit facilities to its members by a cooperative society and the same is liable to be deducted from the gross total income under Section 80P of the Act.

The Assessing Officer who completed the assessment under Section 143(3) of the Act by order dated 30.3.2016. Apart from that, the assessee also contended that they are eligible for deduction under Section 80P in respect of the interest on personal loans amounting to Rs.21,98,448/- as well as interest on House Building Loan to staff to the tune of Rs.1,76,490/- and these should be treated as income attributable to the banking business carried on by the assessee.

The Assessing Officer held neither of these interest incomes is eligible for deduction under Section 80P(2)(d) and, therefore, needs to be segregated and the incomes are outside the loan of business of the assessee and should be charged to tax under the head “income from other source’. Aggrieved by such order, the assessee preferred appeal before the learned Commissioner of Income Tax (Appeals)-9, Kolkata, [CIT(A)].

With regard to interest on personal loan to members and interest on house building loan to staff, it was contended that the personal loans given were to the members of the society and the house building loan was given to the staff against mortgage of property and some of them were also members of the society and, therefore, deduction is permissible under section 80P(1)(2)(a)(i) of the Act.

The CIT(A) dismissed the appeal by an order dated 1.11.2023 and on perusal of the order, the CIT(A) has extracted the findings recorded by the Assessing Officer and held that the Assessing Officer was justified in concluding as arrived at by him in the assessment year dated 30.3.2016.

In terms of the above decision, the expression ‘attributable to’ being a wider in 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. The facts in the said case were more or less identical to the facts before us. As the interest income so derived or the capital, if not immediately required to be lent to the members, the society/assessee cannot keep the said amount idle and 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 facts of the case of the assessee before us is entirely different as the amount which was deposited in the bank was not an amount due to the members and it was not the liability of the society to the members and, therefore, the interest earned from such deposits in the bank should be held to be eligible for deduction under section 80P(2)(a)(i) of the Act.

How to Audit Public Charitable Trusts under the Income Tax Act Click Here

As the interest on house building loan to staff is concerned, the division bench of Chief Justice T.S Sivagnanam and Justice Chaitali Chatterjee (Das) accepted the view taken by the Assessing Officer as confirmed by the CIT(A) as well as the Tribunal. Therefore, to that extent the substantial question of law has to be answered against the appellant/assessee. The other component which arises in substantial question (4) is with regard to the interest on personal loan given to the members.

It is not in dispute that the assessee is registered under the provisions of the West Bengal Co-operative Societies Act and it has got four categories of members, (i) Class A - members are State Government, (ii) Class B are 24 primary Agricultural Rural Development Banks, (iii) Class-C are 450 Cooperative Societies and (iv) Class-D are individuals above 18 years of age who are given loan through branches. As the assessee has earned interest on the personal loans extended to one class of members namely, members in Class D, the said amount would be eligible for deduction under section 80P of the Act.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates