Cooperative society gets deduction under section 80P(2)(a)(i) for interest earned on reserve fund deposits with banks

ITAT Visakhapatnam allowed deduction u/s 80P(2)(a)(i) for interest earned on reserve fund deposits with cooperative and nationalized banks. The AO had denied the deduction claiming interest on reserve fund deposits was ineligible. Following coordinate bench precedents in similar cases, the Tribunal held that surplus funds invested from activities under section 80P(2)(a) qualify for deduction. The CIT(A) correctly deleted the AO's addition, ruling in favor of the assessee.

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Issues Involved:
1. Disallowance of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act.
2. Eligibility of interest income from deposits with cooperative and nationalized banks for deduction under section 80P.
3. Applicability of the Supreme Court's decision in the case of Totgars Cooperative Sale Society Ltd.

Summary:

Disallowance of Deduction Claimed under Section 80P(2)(a)(i):
The appeal filed by the revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which had allowed the assessee's claim for deduction under section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (AO) had disallowed the deduction for interest income received from various banks, arguing that these funds were surplus and not attributable to the assessee's primary activity of providing credit facilities to its members. The AO relied on the Supreme Court's decision in Totgars Cooperative Sale Society Ltd., which held that interest income from surplus funds is not eligible for deduction under section 80P.

Eligibility of Interest Income for Deduction:
The CIT(A) had allowed the deduction based on the Supreme Court's decision in The Mavilayi Service Cooperative Bank Ltd. & Ors. v. CIT, Calicut & Ors., which the revenue argued was distinguishable from the present case. The Tribunal examined whether the interest income earned from deposits with District Central Cooperative Bank (DCCB) and other nationalized banks was eligible for deduction under section 80P. The Tribunal noted that the facts in the Totgars case were different, as the funds in question were retained sale proceeds, whereas in the present case, the funds were part of the assessee's regular business activities.

Applicability of the Supreme Court's Decision in Totgars Cooperative Sale Society Ltd.:
The Tribunal distinguished the present case from the Totgars case, emphasizing that the original source of the investments made by the assessee in nationalized banks was income derived from its primary activities, which are eligible for deduction under section 80P(2)(a). The Tribunal cited the Andhra Pradesh High Court's decision in Vavveru Cooperative Rural Bank Ltd., which supported the view that interest income from investments made in the regular course of business is eligible for deduction under section 80P.

Conclusion:
The Tribunal upheld the CIT(A)'s order, allowing the deduction under section 80P for the interest income earned from deposits with cooperative and nationalized banks. The Tribunal dismissed the revenue's appeal and the cross objections filed by the assessee as infructuous. The decision was pronounced in the open court on 22nd November, 2023.

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