Heads of income — Business income or income from other sources — Interest on short-term deposits with bank of surplus fund — Income from other sources — No deduction u/s.80P is allowable as it is not a part of operational income.

The assessee, a co-operative credit society, which provides
credit facilities to its members and also markets the agricultural product of
its members, during the relevant assessment years in question, had surplus funds
which it invested in short-term deposits with banks and in Government
securities. Interest accrued to the assessee on such investments.

The Assessing Officer held that the interest income which the
assessee had disclosed under the head ‘Income from business’ was liable to be
taxed under the head ‘Income from other sources’. According to the Assessing
Officer the assessee-society had invested the surplus funds as and by way of
investment by an ordinary investor, hence, interest on such investment has got
to be taxed under the head ‘Income from other sources’. Before the Assessing
Officer, it was argued by the assesssee that it had invested the funds on
short-term basis as the funds were not required immediately for business
purposes and, consequently, such act of investment constituted a business
activity by a prudent businessman; therefore, such interest income was liable to
be taxed u/s.28 and not u/s.56 of the Act, and, consequently, the assessee was
entitled to deduction u/s.80P(2)(a)(i) of the Act. This argument was rejected by
the Assessing Officer as also by the Tribunal and the High Court, hence, the
civil appeal was filed by the assessee before the Supreme Court.

The Supreme Court held that the assessee-society regularly
invested funds not immediately required for business purposes. Interest on such
investments, therefore, could not fall within the meaning of the expression
‘profits and gains of business’. Such interest income cannot be said also to be
attributable to the activities of the society, namely, carrying on the business
of providing credit facilities to its members or marketing of the agricultural
produce of its members. The Supreme Court was of the view that such interest
income would come in the category of ‘Income from other sources’, hence, such
interest income would be taxed u/s.56 of the Act.

The Supreme Court further held that to say that the source of
income is not relevant for deciding the applicability of S. 80P of the Act would
not be correct because weightage need to be given to the words ‘the whole of the
amount of profits and gains of business’ attributable to one of the activities
specified in S. 80P(2)(a) of the Act. The words ‘the whole of the amount of
profits and gains of business’ emphasise that the income in respect of which
deduction is sought must constitute the operational income and not the other
income which accrues to the society. In this particular case, the evidence
showed that the assessee-society earned interest on funds which were not
required for business purposes at the given point of time. Therefore, on the
facts and circumstances of this case, the Supreme Court was of the view, such
interest income fell in the category of ‘Other Income’ which had been rightly
taxed by the Department u/s.56 of the Act.

[Totgar’s Co-operative Sale Society Ltd. v. ITO, (2010)
322 ITR 283 (SC)]