ITAT Allows Section 80P Deduction on Interest Earned from Co-operative Banks by Sugar Federation

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the appeals filed by the National Federation of Cooperative Sugar Factories Limited, holding that interest earned on fixed deposits with co-operative banks is eligible for deduction under Section 80P(2)(d) of the Income-tax Act, 1961.

The assessee, a co-operative society, had claimed deduction under Section 80P(2)(d) in respect of interest income of Rs 95.93 lakh earned during Assessment Year 2017-18 from fixed deposits maintained with Delhi State Cooperative Bank Ltd. and Saraswati Cooperative Bank Ltd., along with a small amount of interest received from employees. Similar issues also arose for Assessment Years 2018-19 and 2020-21.

During assessment, the Assessing Officer disallowed the deduction on the ground that the interest had been earned by investing surplus funds with banks and therefore constituted “Income from Other Sources” rather than income from the assessee’s business activities. The Commissioner (Appeals)/NFAC upheld the disallowance.

Before the Tribunal, the assessee relied upon several judicial precedents, including the Gujarat High Court’s decisions in PCIT v. Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. and PCIT v. Ashwinkumar Arban Co-operative Society Ltd., as well as earlier decisions of the Delhi and Pune Benches of the Tribunal. It was also pointed out that similar deductions had been accepted in subsequent assessment years while processing returns under Section 143(1).

The Revenue relied upon the Supreme Court’s decision in Totgar’s Co-operative Sale Society Ltd. v. ITO, contending that interest earned on surplus funds is taxable as income from other sources and is therefore not eligible for deduction under Section 80P.

The Tribunal observed that the interest income in the present case had been earned from deposits with co-operative banks, which are themselves co-operative societies. Referring to its earlier decisions, particularly The Janta Adarsh Cooperative Thrift & Credit Society Ltd. and Deoband Cooperative Cane Development Union Ltd., the Tribunal reiterated that a co-operative bank continues to be a co-operative society for the purposes of Section 80P(2)(d). Consequently, interest received from such co-operative banks qualifies for deduction.

The Tribunal further held that the Supreme Court’s ruling in Totgar’s Co-operative Sale Society Ltd. was distinguishable because that case dealt with surplus funds invested with commercial banks, whereas the present case involved deposits with co-operative banks.

Following the consistent judicial view, the Tribunal directed that the assessee be allowed deduction under Section 80P(2)(d). Since the facts in Assessment Years 2018-19 and 2020-21 were identical except for the quantum involved, the Tribunal applied the same reasoning and allowed all three appeals.

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