2023 (12) TMI 1455 - AT - Income Tax

Interest Income on Co-Op Bank Deposits Eligible for Deduction Under Section 80P(2)(a)(i)

ITAT Jaipur allowed the assessee's appeal, holding that interest income earned on short-term deposits with a co-operative bank is eligible for deduction ... Deduction of interest receipt from banks u/s 80P(2)(a)(i) - HELD THAT:- As decided in Royal Credit Co-operative Society Ltd. [2023 (6) TMI 1026 - ITAT JAIPUR] as in the case of the assessee before us the surplus funds parked by way of short-term deposit with the co-operative bank, viz. Malavia Urban Co-operative Bank Limited are inextricably interlinked, or in fact interwoven with its business of providing credit facilities to its members, therefore, the same as claimed by the Ld. AR, and rightly so, would duly be eligible for deduction u/s. 80P(2)(a)(i) of the Act. We, thus, in terms of our aforesaid observations, direct the Assessing Officer to allow deduction u/s. 80P(2)(a)(i) of the Act on the interest income earned by the assessee society on its deposits with the co-operative bank. Appeal of the assessee is allowed. ISSUES: Whether interest income earned by a cooperative society from term deposits with banks is eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.Whether such interest income is 'income from business' attributable to the business of providing credit facilities to members or income from other sources.Interpretation of the phrase 'attributable to' in section 80P(2)(a)(i) regarding profits and gains of business.Whether a cooperative society providing credit facilities to members can be treated as carrying on the business of banking under section 80P(2)(a)(i). RULINGS / HOLDINGS: The interest income earned on term deposits with banks by the cooperative society is eligible for deduction under section 80P(2)(a)(i) as it is 'income attributable to the profits and gains of business of providing credit facilities to its members.'The phrase 'attributable to' in section 80P(2)(a)(i) has a 'wider meaning' than 'derived from,' and includes income from sources interlinked or interwoven with the business activity of providing credit facilities.Funds deposited as term deposits are not idle but are used as security for overdraft facilities, thus forming part of the business operation, making the interest income earned thereon eligible for deduction under section 80P(2)(a)(i).A cooperative society providing credit facilities to its members is not necessarily a 'bank' under the Banking Regulation Act, and such societies are entitled to exemption under section 80P(2) of the Income Tax Act.The decision of the Supreme Court in the case of Totgars Cooperative Sale Society Ltd. is confined to its facts and does not lay down a general principle excluding interest income on deposits from deduction under section 80P(2)(a)(i) where the deposits are liabilities payable to members. RATIONALE: The court applied the statutory framework of section 80P of the Income Tax Act, 1961, which provides deduction for income of cooperative societies engaged in banking or providing credit facilities to members.Judicial precedents, including decisions by various ITAT benches and High Courts, were relied upon to interpret 'attributable to' as broader than 'derived from,' allowing inclusion of interest income on term deposits linked to the business activity.The court distinguished the facts from the Supreme Court's decision in Totgars Cooperative Sale Society Ltd., emphasizing that in that case, the deposits were liabilities shown on the balance sheet, unlike the surplus funds in the present case.Recent apex court rulings confirmed that credit societies providing loans to members are not banks under the Banking Regulation Act and are entitled to exemption under section 80P(2), reinforcing the cooperative society's entitlement to deduction.The court recognized that depositing surplus funds as term deposits to earn interest is an integral part of managing the business of providing credit facilities, thus interest income from such deposits is 'inextricably interlinked' with the business and qualifies for deduction.