The High Court in Totgars Co-Operative Sale Society Ltd. vs. Income Tax Officer ruled that interest from banks on the deposits to be taxed on net basis after reducing admin expenses thereon.   

Facts:

The assessee being a Co-operative Society was engaged in business of marketing agricultural produce. In addition, credit facilities was extended to its members. The assessee filed the return and claimed deduction under Section 80P(2). Such deductions was in respect of the interest earned on deposits kept with Scheduled Banks, Indira Vikas Patra, National Savings Certificates etc. The AO while doing assessment proceedings added the interest amount to the income of the assessee. The said interest income was brought to tax under ‘Income from Other Source’ under section 56.

Assessee appealed to the Tribunal. Tribunal confirmed the order of AO. On this, appeal was filed to the High Court.

Held:

The Court noted that the interest income was declared under section 56 as Income from other source. The interest amount was claimed as deduction under section 80P (2). Now, the question arises that the deposits with the bank shall be taxable or the proportionate expenditure incurred be deducted.

On this, the Court highlighted that where taxes are recovered on any income then expense incurred for generating such income shall be allowed. Thus, in the present case, where revenue was permitted to assess and recover taxes from assessee under section 56 by treating the income earned by interest as income from ‘other sources’, assessee shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s.

Hence, net income i.e., income after deducting expense incurred relating to such income shall be taxed.

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