ITAT Holds Interest on Bank Deposits of Credit Co-operative Society Eligible for Section 80P(2)(a)(i) Deduction:

Vyavasaya Seva Sahakara Sanga Niyamitha is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 and was engaged in providing credit facilities to its members. For Assessment Year 2017-18, it filed its return declaring nil income after claiming deduction of Rs 16,69,540 under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

During scrutiny assessment, the AO noticed fixed deposits maintained with BDCC Bank and interest income of Rs 1,03,437. The AO treated the interest as income from other sources and denied deduction under Section 80P. Consequently, the AO allowed deduction of Rs 14,70,635 under Section 80P(2)(a)(i) and treated interest of Rs 1,03,437 along with other income of Rs 4,78,696, aggregating to Rs 5,82,133, as taxable income.

The assessee challenged the assessment before the CIT(A), however, dismissed the appeal Before the Tribunal, the assessee relied upon the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Cooperative Ltd. Vs ITO, arguing that interest earned on funds temporarily deposited with a bank, where such funds were not immediately required for lending to members, retained its character as business income. 

The Tribunal noted that the assessee had claimed deduction under Section 80P(2)(a)(i) and not under Section 80P(2)(d). Under Section 80P(2)(a)(i), a co-operative society engaged in banking or providing credit facilities to its members is entitled to deduction of the whole of the income attributable to such activity.

In the present case, however, the funds invested by the assessee were not amounts due to its members and were not shown as liabilities. They represented business funds that were temporarily not required for lending purposes. The Tribunal therefore found the principle in Tumkur Merchants applicable rather than the materially different facts considered in Totgars.

The Tribunal held that the assessee was entitled to deduction of its entire income under Section 80P(2)(a)(i) and that the interest and other income could not be assessed under the head “Income from Other Sources” where such income was attributable to the assessee’s business of providing credit facilities to its members. Accordingly, the Tribunal reversed the orders of the lower authorities and directed the AO to allow deduction of the entire income under Section 80P(2)(a)(i). The assessee’s appeal was allowed.