2025 (1) TMI 1724 - AT - Income Tax

Co-operative credit society's interest from treasury and bank deposits treated as business income, allowing s.80P(2)(d) deduction

The dominant issue was whether interest earned by a co-operative credit society from deposits with a treasury and scheduled banks qualifies for deduction ... Deduction u/s. 80P - interest income received from Treasury, Scheduled Banks, etc - HELD THAT:- This issue is no longer res integra, as it is covered by the judgement of Sahyadri Co-operative Credit Society Ltd. [2024 (9) TMI 1278 - KERALA HIGH COURT] as held if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income [profits earned by the assessee from its lending activity) does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee. Thus, we hold that the assessee is entitled for deduction u/s 80P(2)(d) of the Act on account of interest received from scheduled bank and Treasury. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether interest earned by a primary agricultural credit co-operative society on deposits placed with scheduled banks and the Treasury retains the character of profits/gains attributable to its business of providing credit facilities to members, and is therefore eligible for deduction under section 80P(2)(d) of the Income-tax Act, 1961. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Deductibility under section 80P(2)(d) of interest earned from scheduled banks and Treasury deposits Legal framework: The Court considered the availability of deduction under section 80P(2)(d) in respect of interest income earned on deposits with scheduled banks and the Treasury. Interpretation and reasoning: The Court treated the controversy as settled by the jurisdictional High Court, which had held that merely because a co-operative credit society deposits its surplus/profits in permitted banking or financial channels and earns interest, such interest does not cease to be profits/gains attributable to its business of providing credit facilities to its members. The Court accepted the principle that placing surplus in deposits, instead of holding cash, is prudent financial conduct and does not alter the character of the income, since the deposits represent deployment of business surplus in a manner envisaged/legitimised by the regulatory framework governing such societies. Therefore, the interest earned is viewed as an enhancement of profits linked to the principal business activity rather than income from an unrelated investment activity. Conclusions: Following the binding jurisdictional precedent, the Court held that the assessee is entitled to deduction under section 80P(2)(d) on interest received from deposits with scheduled banks and the Treasury. Consequently, the addition made by treating such interest as 'miscellaneous income' was not sustained, and the appeal was allowed.