2024 (11) TMI 1449 - AT - Income Tax

Cooperative Society Wins Tax Deduction Battle: Interest Income from Bank Deposits Qualifies Under Section 80P(2)(a)(i)

The SC/Tribunal ruled that interest income earned by a cooperative society from surplus funds deposited in fixed deposits with nationalized and ... Deduction u/s 80P(2)(a)(i) - interest earned by the cooperative society on surplus funds invested in deposits with bank and Govt. securities - HELD THAT:- In the decision of Gunja Samabay Krishi Unnayan Samity Ltd. [2023 (1) TMI 783 - CALCUTTA HIGH COURT] held that interest earned by the cooperative society on surplus funds deposited in bank and Govt. securities is qualified for deduction u/s 80P(2)(a)(i) of the Act. Similarly, in the case of ITO vs. Yendagandhi Large Sized Co-operative Society Ltd [2023 (12) TMI 61 - ITAT VISAKHAPATNAM] allowed the deduction for interest income from deposits with the cooperative society and nationalised banks. Following above we hold that interest income earned by the assessee from its surplus funds deposited with Banks are held to be qualified for deduction u/s 80P(2)(a)(i). Appeal of assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Tribunal was whether the interest income earned by a cooperative society from its surplus funds deposited in fixed deposits with banks and cooperative banks qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act. Specifically, the issues were:Whether interest income from fixed deposits with nationalized banks and cooperative banks is eligible for deduction under section 80P(2)(a)(i) of the Act.The correctness of the Assessing Officer's treatment of such interest income as 'income from other sources' and consequent disallowance of deduction claimed under section 80P(2)(a)(i).The validity of the appellate order of the Commissioner of Income Tax (Appeals) which upheld the disallowance.2. ISSUE-WISE DETAILED ANALYSISIssue: Eligibility of interest income from fixed deposits for deduction under section 80P(2)(a)(i)Relevant legal framework and precedents: Section 80P(2)(a)(i) of the Income Tax Act provides deduction to cooperative societies in respect of income by way of interest on money borrowed and used for the purpose of its business. The legal question revolves around whether interest earned on surplus funds invested in fixed deposits with banks and cooperative banks falls within the ambit of income qualifying for deduction under this provision.Judicial precedents play a pivotal role in interpreting this provision. The jurisdictional Calcutta High Court in PCIT vs. Gunja Samabay Krishi Unnayan Samity Ltd. [2023] 147 taxmann.com 518 (Cal) held that interest earned by a cooperative society on surplus funds invested in bank deposits and government securities qualifies for deduction under section 80P(2)(a)(i). Similarly, the Coordinate Bench of the Tribunal at Visakhapatnam in ITO vs. Yendagandhi Large Sized Co-operative Society Ltd. [2023] 156 taxmann.com 669 (Visakhapatnam-Trib.) allowed deduction for interest earned from deposits with cooperative banks and nationalized banks.Court's interpretation and reasoning: The Tribunal relied on the above authoritative decisions to interpret the scope of section 80P(2)(a)(i) broadly to include interest income earned from surplus funds deposited in banks and cooperative banks. The Court reasoned that the interest income arises from the cooperative society's business activity of managing its funds and therefore qualifies for deduction.Key evidence and findings: The assessee declared interest income from fixed deposits with Allahabad Bank (Rs. 36,07,639), Punjab National Bank (Rs. 37,87,226), and Tamluk Ghatal Central Cooperative Bank Ltd. (Rs. 44,86,679), totaling Rs. 1,18,81,544. The Assessing Officer treated this as income from other sources and disallowed the deduction claimed under section 80P(2)(a)(i).Application of law to facts: Applying the legal principles established by the High Court and Tribunal precedents, the interest income from these deposits was held to be eligible for deduction under section 80P(2)(a)(i). The Tribunal found no valid reason to deviate from the binding judicial precedents and thus allowed the deduction.Treatment of competing arguments: The Revenue's argument was that the interest income did not qualify for deduction and was rightly treated as income from other sources. However, the Tribunal rejected this contention based on the authoritative judicial pronouncements favoring the assessee's claim. The Tribunal emphasized adherence to binding precedent over the Revenue's contrary view.Conclusions: The Tribunal concluded that the interest income earned by the cooperative society from surplus funds deposited with the specified banks qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act. Consequently, the disallowance by the Assessing Officer and the CIT(A) was set aside.Issue: Applicability of the above finding to assessment year 2014-15The facts and issues in the appeal relating to assessment year 2014-15 were identical to those in 2018-19. The Tribunal held that the reasoning and conclusions applicable to the latter would apply mutatis mutandis to the former. Accordingly, the appeal for assessment year 2014-15 was also allowed on the same grounds.3. SIGNIFICANT HOLDINGSThe Tribunal held:'The interest income earned by the assessee from its surplus funds deposited with Allahabad Bank of Rs. 36,07,639/-, Punjab National bank of Rs. 37,87,226/- and Tamluk Ghatal Central Cooperative Bank Ltd. of Rs. 44,86,679/- are held to be qualified for deduction u/s 80P(2)(a)(i) of the Act.'Core principles established include:Interest income earned by cooperative societies on surplus funds invested in fixed deposits with nationalized banks and cooperative banks qualifies for deduction under section 80P(2)(a)(i).Binding judicial precedents from the jurisdictional High Court and coordinate Tribunal benches must be followed in assessing such claims.Revenue's contrary view treating such interest income as income from other sources and denying deduction is unsustainable in light of settled law.Final determinations:The disallowance of deduction under section 80P(2)(a)(i) on interest income from fixed deposits was set aside.Both appeals for assessment years 2018-19 and 2014-15 were allowed.