Cooperative society wins appeal for Section 80P deduction on interest from reserve fund deposits with bank

ITAT Visakhapatnam allowed the cooperative society's appeal regarding deduction under section 80P for interest earned on reserve fund deposits with DCC Bank. The AO had denied the deduction citing SC precedent in Totgars case, but the Tribunal distinguished the facts and followed coordinate bench decision in Kakateeya case and AP HC ruling in Vavveru case. The Tribunal held that interest income from surplus funds invested as per section 80P(2)(a) activities qualifies for deduction under section 80P(2)(a)(i), upholding CIT(A)'s deletion of the addition.

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Issues Involved:
1. Eligibility for deduction under Section 80P of the Income Tax Act on interest earned from deposits in cooperative banks.
2. Interpretation of Section 80P(2)(a) and 80P(2)(d) regarding business income and income from other sources.

Summary:

Issue 1: Eligibility for Deduction under Section 80P
The assessee, an agricultural cooperative society, filed its return for A.Y. 2017-18, claiming a deduction under Section 80P of Rs. 70,73,619/-. The Assessing Officer (AO) disallowed the deduction, citing the Supreme Court's decision in M/s Totgars Co-operative Sale Society Ltd., which held that interest on deposits not immediately required for business is not business income but income from other sources. The AO concluded that interest on Reserve Fund deposits is not eligible for deduction under Section 80P.

Issue 2: Interpretation of Section 80P(2)(a) and 80P(2)(d)
The CIT(A) upheld the AO's decision, relying on the Supreme Court's rulings in Mavilayi Service Co-Operative Bank Ltd. and Totgars Co-operative Sale Society Ltd., affirming that interest income from fixed deposits in cooperative banks is not eligible for deduction under Section 80P(2)(a) and 80P(2)(d).

Appellant's Argument:
The assessee argued that the deposits were made in the regular course of business without the intention to gain extra benefits, thus qualifying for deduction under Section 80P. They contended that the facts in Totgars were different and should not apply to their case.

Respondent's Argument:
The Department argued that the CIT(A) correctly upheld the AO's addition, asserting that the interest income is not eligible for deduction under Section 80P.

Tribunal's Decision:
The Tribunal examined whether the assessee is eligible for deduction under Section 80P on interest earned from deposits in cooperative banks. It distinguished the facts from the Totgars case, noting that the original source of investments was the income derived from activities listed in Section 80P(2)(a). The Tribunal cited the Andhra Pradesh High Court's decision in Vavveru Cooperative Rural Bank Ltd., which allowed similar deductions, and the coordinate bench's decision in Kakateeya Mutually Aided Thrift and Credit Co-op Society Limited, which supported the assessee's claim.

Conclusion:
Respecting the Andhra Pradesh High Court's ruling and the Tribunal's previous decisions, the Tribunal quashed the CIT(A)'s order and allowed the assessee's appeal, granting the deduction under Section 80P.

Result:
The appeal of the assessee is allowed.

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