Case Note & Summary
The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961 before the Bombay High Court challenging the order of the Income Tax Appellate Tribunal for the assessment year 1994-95, which had allowed the respondent co-operative spinning mill a deduction under Section 36(1)(iii) for interest paid on non-refundable deposits. The Revenue contended that such interest was not allowable, relying on the Supreme Court's decision in Bazpur Co-operative Sugar Factory Ltd. (177 ITR 469), which had held that interest on non-refundable deposits is not a deductible business expenditure. The assessee, however, placed reliance on the Supreme Court's subsequent ruling in Commissioner of Income Tax v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. (2004) 270 ITR 1, where the Court had examined the rules applicable to co-operative sugar factories in Maharashtra and distinguished the Bazpur case. The Supreme Court in Chhatrapati Sakhar Karkhana clarified that under the Maharashtra rules, non-refundable deposits are not trading receipts in the hands of a co-operative society; rather, they are deposits belonging to the members. Consequently, any interest paid on such deposits is liable to be deducted from the income as a business expenditure. The High Court noted that this position had already been followed in a similar appeal (Income Tax Appeal No. 9 of 1999) decided by it. In light of the authoritative pronouncement of the Supreme Court in Chhatrapati Sakhar Karkhana, which directly covered the issue, the court held that the substantial question of law had to be answered in favour of the assessee and against the Revenue. The appeal was accordingly dismissed.
Headnote
A) Taxation - Income Tax - Deductions - Section 36(1)(iii) of the Income Tax Act, 1961 - Interest on non-refundable deposits paid by a co-operative society is allowable as a business expenditure because such deposits are not trading receipts but belong to members. The Supreme Court in Commissioner of Income Tax v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. (2004) 270 ITR 1 distinguished the earlier decision in Bazpur Co-operative Sugar Factory Ltd. based on the specific rules applicable in Maharashtra and held in favour of the assessee. Following that ruling, the High Court answered the substantial question of law in the affirmative in favour of the assessee and dismissed the Revenue's appeal. (Paras 2-4)
Issue of Consideration
Whether interest on non refundable deposits is allowable deduction under section 36(1)(iii) of the Income Tax Act, 1961?
Final Decision
The High Court answered the substantial question of law in the affirmative, i.e., in favour of the assessee and against the Revenue, and dismissed the appeal.
Law Points
- Interest on non-refundable deposits is allowable deduction under section 36(1)(iii) of the Income Tax Act
- 1961
- Non-refundable deposits are not trading receipts but deposits belonging to members
- Interest on Non-refundable Deposits is liable to be deducted from income
Case Details
2005 LawText (BOM) (07) 121
Income Tax Appeal No.20 of 1999
S. Radhakrishnan, J.H. Bhatia
A.S. Rao for the Appellant, None for the Respondent
The Commissioner of Income Tax, Kolhapur
The Deccan Co-operative Spinning Mills Ltd., Ichalkaranji
Subscribe to unlock Case Details (Citation, Judge, Date & more)
Subscribe Now
Nature of Litigation
Appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal allowing deduction of interest on non-refundable deposits.
Remedy Sought
The Revenue sought reversal of the Tribunal's order and disallowance of the deduction claimed by the assessee.
Filing Reason
The Revenue contended that interest on non-refundable deposits was not allowable deduction under section 36(1)(iii) based on the Supreme Court's decision in Bazpur Co-operative Sugar Factory Ltd.
Previous Decisions
The Income Tax Appellate Tribunal had allowed the deduction in favour of the assessee. The High Court had earlier disposed of a similar appeal in Income Tax Appeal No.9 of 1999 following the Supreme Court decision in Shri Chhatrapati Sahakari Sakhar Karkhana Ltd.
Issues
Whether interest on non refundable deposits is allowable deduction under section 36(1)(iii) of the Income Tax Act, 1961?
Submissions/Arguments
Revenue relied on the Supreme Court's decision in Bazpur Co-operative Sugar Factory Ltd. to contend that interest on non-refundable deposits is not an allowable deduction.
Assessee placed reliance on the Supreme Court's later decision in CIT v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. which distinguished the earlier ruling based on Maharashtra rules.
Ratio Decidendi
Interest paid on non-refundable deposits by a co-operative society is an allowable deduction under section 36(1)(iii) of the Income Tax Act, 1961, because such deposits are not trading receipts but belong to the members, as held by the Supreme Court in CIT v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd., distinguishing the earlier Bazpur case.
Judgment Excerpts
Admittedly, the Supreme Court has distinguished the rules pertaining to the Co-operative Sugar Factories in Uttar Pradesh applicable in Bazpur Co-operative Sugar Factory and the provisions of law obtained in Maharashtra in Commissioner of Income Tax v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd.(2004) 270 ITR 1.
In view of the rules in Maharashtra, the Supreme Court has clearly held that Non-refundable deposits are not the trading receipts in the hands of the Co-operative Societies and they are only deposits belonging to the member of the Society. Interest on Non-refundable Deposits is also liable to be deducted from the income.
we answer the question in affirmative, that is, in favour of the assessee and against the Revenue.
Procedural History
The Income Tax Appellate Tribunal (ITAT) allowed the assessee's claim for deduction of interest on non-refundable deposits in ITA No.1017/PN/1997 for AY 1994-95. The Revenue filed the present appeal under Section 260A before the High Court. The High Court, following a previous decision in ITA No.9/1999 and the Supreme Court ruling in Shri Chhatrapati Sahakari Sakhar Karkhana Ltd., dismissed the appeal.
Acts & Sections
- Income Tax Act, 1961: 260A, 36(1)(iii)
