ITAT Allows Section 80P(2)(a)(i) Deduction on Interest Earned from Statutory Deposits with Co-operative Banks:

Shree Vijayalaxmi Souharda Sahakari Niyamita is a co-operative credit society registered under the Karnataka Souharda Sahakari Act, 1997. It is engaged in accepting deposits from its members and providing credit facilities to them. For Assessment Year 2020-21, the assessee filed its return of income on 19 October 2020, declaring nil income after claiming a deduction of Rs 2,11,52,262 under Section 80P(2)(a)(i) and Rs 6,577 under Section 80P(2)(c) of the Income Tax Act.

During scrutiny proceedings, the AO noticed that the assessee had investments amounting to approximately Rs 27.91 crore as on 31 March 2020 and had credited interest income of Rs 2,22,33,375 to its Profit and Loss Account. The AO, through assessment order dated 30 August 2022, passed under Section 143(3) read with Section 144B of the Act, held that the interest was earned from the investment of idle funds and was not attributable to the business of providing credit facilities to members. The CIT(A), after considering the submissions and judicial precedents, partly allowed the assessee's appeal.

The Tribunal first noted that the Revenue's grounds were confined to the relief granted by the CIT(A) under Section 80P. The assessee's claim relating to interest earned from surplus funds and deduction under Section 80P(2)(d) had already been rejected by the CIT(A) and was not the subject matter of the present appeal. The Tribunal observed that under Section 18 of the Karnataka Souharda Sahakari Act, read with the applicable circular, the assessee was required to maintain at least 20% of its total deposits in liquid form with co-operative or scheduled banks.

Further, Section 10(xxi) of the Act, read with Circular No. 2/2007-08, required the society to maintain statutory reserves with co-operative and scheduled banks before distributing profits. As per the computation submitted before the CIT(A), the total statutory reserves required to be maintained amounted to Rs 19,41,38,417, whereas the actual deposits maintained were approximately Rs 27.91 crore. The assessee had attributed interest income of Rs 1,53,98,538 out of the total interest income of Rs 2,21,37,060 to such statutory deposits.

The Tribunal held that interest earned on deposits maintained with co-operative banks under statutory compulsion is attributable to the business of providing credit facilities to members and is therefore eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Tribunal upheld the CIT(A)'s direction to allow deduction only to the extent of deposits required under the relevant statutory provisions, subject to verification. Finding no reason to interfere with the order, the Tribunal dismissed all the grounds raised by the Revenue.