Interest Characterisation under Section 80P: surplus-fund investment interest treated as business income; AO to reassess treatment.

Interest earned on investments made from surplus funds under statutory cooperative society obligations should be characterised as business income for purposes of Section 80P; where interest arises from savings accounts, treatment should follow the relevant jurisdictional High Court precedent. If interest is treated as income from other sources, corresponding expenses may be allowed. The matter is restored to the assessing officer for fresh adjudication on these points after giving the assessee an opportunity to be heard.

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Issues: Whether interest earned by a primary agricultural credit cooperative society from investments with nationalized banks is eligible for deduction under Section 80P of the Income-tax Act, 1961 or should be treated otherwise.

Analysis: The assessee is a primary agricultural credit cooperative society engaged primarily in providing credit facilities to members and also in agricultural inputs supply. The tribunal examined the nature of the society's investments, their origin from surplus funds and statutory requirements under the Multi State Co-operative Societies Act, 2022 to keep part of funds in banks and government securities. The tribunal considered coordinate-bench precedents which held that (i) interest from savings accounts may be allowed under section 80P in line with the jurisdictional High Court decision, (ii) if interest is treated as income from other sources corresponding expenses may be allowed, and (iii) interest from investments made out of surplus funds in terms of provisions of the Multi State Co-operative Societies Act should be treated as business income. In view of these authorities and the factual finding that investments arose from surplus funds and statutory obligations, the tribunal concluded that the issue required fresh adjudication by the assessing officer in light of these principles and directed restoration to the AO to decide accordingly after affording opportunity to the assessee.

Conclusion: The appeal is allowed for the assessee for statistical purposes and the issue is restored to the file of the assessing officer to decide (a) treatment of interest from savings accounts in accordance with the jurisdictional High Court precedent, (b) allowance of corresponding expenses if interest is treated as income from other sources, and (c) treatment of interest as business income where investments are made out of surplus funds in terms of the Multi State Co-operative Societies Act, 2022.

Ratio Decidendi: Interest earned on investments made out of surplus funds by a cooperative society in terms of the Multi State Co-operative Societies Act, 2022 is to be treated as business income for purposes of Section 80P of the Income-tax Act, 1961; where interest is treated as income from other sources corresponding expenses may be allowed.

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