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Facts
The assessee, a co-operative society, claimed deduction on interest income earned from deposits in banks. The AO treated this income as 'income from other sources' and disallowed the deduction, while the assessee argued it was business income eligible for deduction under Section 80P(2)(a)(i) or 80P(2)(d).
Held
The Tribunal held that interest income from statutory deposits made by the assessee is eligible for deduction under Section 80P(2)(a)(i), affirming the CIT(A)'s direction to quantify it. However, interest income from other surplus deposits was not considered business income and was assessed under Section 56, with proportionate deductions allowed under Section 57.
Key Issues
Whether interest income earned by a co-operative society from bank deposits is business income eligible for deduction under Section 80P, or income from other sources. Also, the eligibility of deduction for interest income from statutory deposits versus surplus deposits.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 56, 57, 234A, 234B, 234C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 21/08/2024 in respect of the A.Y. 2020-21 and raised the following grounds: “1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
The learned CIT[A] ought to have appreciated that the interest income earned by the appellant on deposits in banks was part of the business of providing credit facilities to the members of the appellant and hence, the said interest was liable for assessment under the head "Business" and not under the head "Other Sources" and therefore, the deduction claimed by the appellant u/s 80P[2][a][i] of the Act of Rs. 2,11,58,839/- ought to have been allowed under the facts and in the circumstances of the appellant’s case.
Without prejudice to the above, the learned CIT[A] is not justified in denying the claim of alternate deduction u/s. 80P[2][d] of the Act, in as much as the entire interest income earned was from investments made in other co- operative banks and societies under the facts and circumstances of the case.
4. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-A, 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.” 2. The assessee is a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997. The main activity of the assessee is that of accepting deposits from members and providing credit facilities to its members. During the A.Y., the assessee had claimed a deduction of Rs. 2,11,58,839/-. The AO selected the case of the assessee for complete scrutiny and the assessee also filed replies to the various notices issued and from the said reply, the AO had arrived an amount of Rs. 2,22,33,375/- as interest income. The AO had disallowed the said claim of interest on the ground that the assessee had received the interest amount by depositing their income in the various co-operative banks and therefore the said income cannot be attributable to the business of the assessee. The AO had treated the said interest income as income from other sources and subjected the said income to tax u/s. 56 of the Act. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and contended that the interest income earned by the assessee by way of deposits in banks are part of the business of providing credit facilities to its members and therefore the deduction has to be allowed u/s. 80P(2)(a)(i) of the Act. Alternatively, the assessee also contended that the said income is eligible for deduction u/s. 80P(2)(d) of the Act since the income was earned from the co-operative banks and societies. At the time of hearing before the Ld.CIT(A), the assessee also filed a detailed written submissions and explained that most part of the deposits are made pursuant to the statutory provisions contained in the Acts. The Ld.CIT(A) had accepted the contentions raised by the assessee insofar as the statutory deposits are concerned and remitted the same to the AO for identifying and allowing the income arising to the assessee from the investments made by it under statutory compulsions. Insofar as the balance income received by the assessee from the banks, the Ld.CIT(A) had not accepted the claim made u/s. 80P(2)(a)(i) or 80P(2)(d) of the Act but only directed the AO to allow the proportionate deduction u/s. 57 by following the direction given in the decision dated 08/02/2022 reported in (2022) 137 taxmann.com 121 in the case of Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd. vs. PCIT. Insofar as the claim made u/s. 80P(2)(c) of the Act, the Ld.CIT(A) had directed the AO to consider the claim of deduction and allow the same after due verification.
3. As against the said order of the Ld.CIT(A), the present appeal has been filed by the assessee.
At the time of hearing, the Ld.AR submitted that the deposits made into the banks are part of the business of providing credit facilities to its members and hence the interest received was liable for assessment under the head business and not under the head other sources and consequently the interest income is eligible for deduction u/s 80P(2)(a)(i) of the Act. The assessee also filed a paperbook enclosing the various notices and the replies in support of their contention.
The Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal.
We have heard the arguments of both sides and perused the materials available on record.
From the perusal of the assessment order, we understand that the AO had disallowed the entire interest income earned by the assessee on the ground that the interest income received from co-operative banks are not eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.CIT(A) had considered the grounds raised by the assessee and also the written submissions made by them and satisfied himself that the interest income received from the statutory deposits in the co-operative banks are eligible for deduction u/s. 80P(2)(a)(i) of the Act but in order to quantify the exact interest amount earned from the deposits made pursuant to the statutory provisions, the Ld.CIT(A) had remitted the issue to the AO. Insofar as the balance interest income earned from the deposits, apart from the statutory deposits, the Ld.CIT(A) had directed the AO to consider the order of the Coordinate Bench of this Tribunal in case of Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd. vs. PCIT cited supra in which it was held that the AO should allow deduction on proportionate cost, administration and other expenses when the said income was assessed u/s. 56 of the Act. In order to arrive the correct income from the interest and for granting proportionate deduction u/s. 57 of the Act, the Ld.CIT(A) had directed the AO to verify the facts and pass appropriate orders as per the directions given in its order.
Insofar as the claim made u/s. 80P(2)(d) of the Act are concerned, the Ld.CIT(A) had not accepted the said claim and dismissed the appeal.
From the above said findings given by the Ld.CIT(A), it is clear that the Ld.CIT(A) had accepted the contention of the assessee that the statutory deposits made by the assessee and the interest earned through the said deposits are eligible for deduction u/s. 80P(2)(a)(i) of the Act. Even though the assessee had submitted a statement showing the statutory deposits and the interest income earned through the said deposits, the Ld.CIT(A) had remitted the issue to the AO for quantifying the exact amount which was made pursuant to the statutory provisions and thereafter grant the benefit of deduction u/s. 80P(2)(a)(i) of the Act. Therefore, in principle, the Ld.CIT(A) had accepted the claim made by the assessee insofar as the interest income earned from the statutory deposits are concerned but only to arrive correct quantum of income, the Ld.CIT(A) had remitted the issue to the file of the AO.
The said view taken by the Ld.CIT(A) is in accordance with the judgment of the Hon’ble Supreme Court reported in 251 ITR 194 in the case of CIT vs. Karnataka State Co-operative Apex Bank wherein it was held as under: “Interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. The placement of such funds being imperative for the purpose of carrying on banking business the income there-from would be income from the assessee’s business.”
Respectfully following the above judgment of the Hon’ble Supreme Court, we affirm the findings given by the Ld.CIT(A) insofar as the interest income received from the deposits made pursuant to the statutory provisions and dismissed the ground raised by the assessee.
Insofar as the other interest income received by the assessee from the deposits of the excess amounts lying with it, the Ld.CIT(A) had not accepted the claim that the said income is also a business income and attributable to the activities of its business activities and directed the AO to quantify the said income and assess the same u/s. 56 of the Act after granting the necessary deductions u/s. 57 of the Act. We do not find any error in the order passed by the Ld.CIT(A) since the assessee had parked their excess income in the banks who have got licence from the RBI to conduct the banking business and therefore we affirm the finding of the Ld.CIT(A) and dismiss the ground raised by the assessee insofar as the interest income earned from the surplus amounts deposited in co-operative banks / other banks.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open court on 30th June, 2025.