2025 (8) TMI 194 - AT - Income Tax

Deduction Allowed Under Section 80P(2)(a)(i) for Interest on Term Deposits by Co-operative Societies

ITAT Jaipur allowed the deduction under section 80P(2)(a)(i) to a co-operative society engaged in banking activities and providing credit to members. The ... Deduction u/s 80P(2)(a)(i) - interest received on term deposit - CIT(A) confirmed the denial of deduction on the ground that the assessee being co-operative society their claim should be in accordance with the provision of section 80P(2)(d) of the Act and since the interest is not received from the co-operative bank deduction was not allowed by him - assessee submitted that the deduction u/s. 80P(2)(a)(i) cannot be equated with the deduction u/s. 80P(2)(d) HELD THAT:- The issue raised in this appeal is squarely covered with the decision of the co-ordinate bench in [2023 (12) TMI 1455 - ITAT JAIPUR] held that the credit society which is carrying on the business of banking activity and providing credit facility to its members is eligible for deduction u/s.80P(2)(a)(i). Also in Royal Credit Co-operative Society Ltd [2023 (6) TMI 1026 - ITAT JAIPUR] surplus funds parked by way of short-term deposit with the co-operative bank, viz. Malavia Urban Cooperative 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). Decided in favour of assessee. ISSUES: Whether interest income earned by a co-operative society from term deposits (FDRs) is 'business income' attributable to the activity of providing credit facilities to its members under section 80P(2)(a)(i) of the Income Tax Act, 1961.Whether such interest income from term deposits with nationalised banks or co-operative banks other than primary agricultural credit societies is eligible for deduction under section 80P(2)(a)(i) or is excluded under section 80P(2)(d) and section 80P(4) of the Act.Interpretation of the term 'attributable to' in the context of section 80P(2)(a)(i) and its scope in determining eligibility for deduction of interest income.Whether the provisions of section 80P(4), which exclude co-operative banks other than primary agricultural credit societies from deduction under section 80P, apply to a co-operative society providing credit facilities solely to its members.Application of judicial precedents and consistency in allowing or disallowing deduction under section 80P for interest income earned on term deposits by co-operative societies. RULINGS / HOLDINGS: The interest income earned by the co-operative society on term deposits with nationalised banks is not 'business income' attributable to the activity of providing credit facilities to members and hence not eligible for deduction under section 80P(2)(a)(i) of the Act, as it is income from other sources derived from idle or surplus funds.Section 80P(2)(d) allows deduction only for interest or dividends derived from investments with other co-operative societies, not from nationalised banks or co-operative banks, and section 80P(4) excludes co-operative banks other than primary agricultural credit societies from deduction under section 80P.The term 'attributable to' in section 80P(2)(a)(i) is of wider import than 'derived from' and covers profits and gains connected with the business activity, including income from funds temporarily invested pending their deployment in providing credit facilities.A co-operative society providing credit facilities solely to its members is not a 'co-operative bank' under the Banking Regulation Act and thus section 80P(4) does not apply to deny deduction under section 80P(2)(a)(i).Consistent judicial precedents hold that interest income on term deposits or short-term investments made from surplus funds, when integrally linked to the business of providing credit facilities, is eligible for deduction under section 80P(2)(a)(i).The denial of deduction for interest income earned from nationalised banks was confirmed by lower authorities relying on section 80P(2)(d) and judicial decisions, but this was distinguished and reversed by the tribunal on facts where the society's funds were not idle but actively linked to its credit business. RATIONALE: The court applied the statutory framework of section 80P of the Income Tax Act, 1961, focusing on sub-sections (2)(a)(i), (2)(d), and (4), which respectively provide deductions for income from specified business activities, exclude interest income from investments with other co-operative societies, and exclude co-operative banks other than primary agricultural credit societies.Judicial interpretation of 'attributable to' as a broader term than 'derived from' was relied upon, referencing the Apex Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, emphasizing that income need not be directly derived from the core business but can be connected or linked to it.Distinctions were drawn from the Supreme Court's decision in Totgars Co-operative Sale Society Ltd., clarifying that interest income on amounts retained as liabilities to members is not attributable to business income, but this principle does not apply where funds are genuinely surplus and used in the course of business.The court considered the definition of 'co-operative bank' under the Banking Regulation Act, 1949, and held that a co-operative society providing credit only to its members is not a co-operative bank, thus section 80P(4) does not apply to deny deduction.Multiple coordinate bench decisions and High Court rulings were examined and followed, establishing a doctrinal position that interest income on term deposits, when integrally connected to the credit business of the co-operative society, is eligible for deduction under section 80P(2)(a)(i).The tribunal emphasized consistency in judicial decisions and the principle that the society's funds were not idle but actively used or pledged in the business, thus the interest income is 'profits and gains of business attributable to' the activity of providing credit facilities.