2025 (6) TMI 2095 - AT - Income Tax

Deduction for cooperative society interest income from bank deposits upheld, directing allowance of tax deduction on such interest.

Interest earned by a cooperative society from deposits in permitted banks retains its character as cooperative society income and qualifies for deduction ... Deduction u/s 80P(2)(a) (i) and / or 80P(2)(d) - interest earned from coop banks - AO held that Assessee should be treated as Co-operative Bank which are not eligible for deduction u/s. 80P because the paid-up share capital and reserve of the Assessee are not less than One Lakh Rupees - As per AO Assessee’s primary object was profiteering. HELD THAT:- In the case of Sahyadri Co-operative Credit Society Limited, the Sahyadri Co-operative Credit Society had deposited excess funds in the Banks or Institutions permitted by the Co-operative Societies Act. In that context, the Hon’ble Kerala High Court in the case of Pr. CIT Vs. Sahyadri Co-operative Credit Society Ltd [2024 (9) TMI 1278 - KERALA HIGH COURT] held that character of income does not change. The Hon’ble Kerala High Court held that interest earned from deposits in permitted banks will be eligible for deduction u/s.80P of the Act. The Hon’ble Kerala High Court’s decision is dated 04.09.2024 means, after the decision of Hon’ble Supreme Court in the case of Totagar’s Co.operative Sales Society Ltd. Accordingly, we hold that assessee is eligible for deduction u/s. 80P of the Act, on the interest income earned by the assessee from Co-operative Banks and Nationalized Banks. Thus, we direct the AO to allow deduction u/sec. 80P(2)(a)(i) of the Act on the interest earned. Appeal of the assessee is allowed. Issues: (i) Whether interest income earned by a co-operative credit society from deposits with co-operative banks and nationalised banks is eligible for deduction under section 80P(2)(a) of the Income-tax Act, 1961.Analysis: The matter concerns whether the assessee is to be treated as a co-operative bank or as a co-operative credit society and whether interest earned on deposits of surplus funds retains the character of profits and gains attributable to the business of providing credit to members. The decision applies statutory language of section 80P and relevant explanations, and follows binding and persuasive precedents holding that an entity is a bank only if it holds an RBI banking licence and that interest earned on permitted deposits of surplus profits does not lose its character as business income attributable to the specified activities. Authorities considering investments of surplus in permitted banks and the regulatory context under cooperative societies statutes were applied to conclude that interest on such deposits is attributable to the core lending business and falls within deduction under section 80P(2)(a).Conclusion: The interest income earned by the assessee from co-operative banks and nationalised banks is eligible for deduction under section 80P(2)(a) of the Income-tax Act, 1961; conclusion in favour of the assessee.