Co-operative society wins appeal on Section 80P deduction for interest income from bank deposits

ITAT Chennai-AT allowed the appeal of a co-operative society formed by Tamil Nadu Government through Social Welfare Department. The tribunal held that interest income from State Bank of India and Tamil Nadu Industrial Co-operative Bank deposits constituted regular business operations of the cottage industry. Relying on Tumkur Merchants Souharda Credit Co-operative Ltd case, the tribunal ruled that interest from idle funds deposits was attributable to business profits. The assessee was entitled to deduction under Section 80P(2)(a)(ii) for entire income including interest earnings, overturning lower authorities' disallowance.

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Issues:
- Disallowance of deduction u/s. 80P for interest income received from banks
- Interpretation of provisions related to deduction for a cooperative society engaged in a cottage industry

Analysis:
1. The appeal was filed against the order disallowing the deduction u/s. 80P for interest income received by the assessee from State Bank of India and Tamilnadu Industrial Co-Op.Bank. The assessee, a cooperative society formed by the Govt. of Tamilnadu, claimed the interest income as part of its business operations under section 80P(2)(a)(ii) of the Income Tax Act, 1961.

2. The Assessing Officer disallowed the interest income, stating that cooperative banks are not cooperative societies, and the interest income from banks is not eligible for deduction u/s. 80P. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the appeal before the Appellate Tribunal ITAT Chennai.

3. The Appellate Tribunal considered the criteria for availing benefits under section 80P(2)(a)(ii) for a 'cottage industry' as specified by Circular No.722 of the CBDT. The Tribunal found that the interest income earned by the society was attributable to its business operations as a cottage industry, making it eligible for deduction under section 80P(2)(a)(ii).

4. Relying on a decision of the Hon'ble High Court of Karnataka, the Tribunal emphasized that interest income earned from deposits made out of idle funds is attributable to the profits and gains of the business. The Tribunal concluded that the lower authorities erred in disallowing the deduction under section 80P(2)(d) without considering the claim of the assessee as a cottage industry eligible for deduction u/s. 80P(2)(a)(ii).

5. Ultimately, the Appellate Tribunal allowed the appeal of the assessee, stating that the entire income of the cooperative society was attributable to its business and therefore eligible to claim interest earned on deposits as a deduction u/s. 80P(2)(a)(ii) of the Act. The decision was pronounced on 7th August, 2024, in Chennai.

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