2025 (12) TMI 539 - AT - Income Tax

ITAT allows cooperative society s.80P(2)(a)(i) deduction on interest from Treasury and Scheduled Bank deposits, treating business income

The ITAT Cochin allowed the assessee-cooperative society's appeal, holding it eligible for deduction under s. 80P(2)(a)(i) in respect of interest income ... Entitlement for deduction u/s 80P(2)(a)(i) - interest income earned from banks and treasury - business of accepting deposits from members and providing credit facilities to members - HELD THAT:- Regarding the interest income received from Treasury, Scheduled Banks, etc., this issue is no longer res integra, as it is covered by the judgement of the Hon'ble Jurisdictional High court in the case of CIT vs. Sahyadri Co-operative Credit Society Ltd. [2024 (9) TMI 1278 - KERALA HIGH COURT]. Respectfully following the same, the assessee is entitled for deduction u/s 80P(2)(a)(i) of the Act in respect of interest received from Treasury, Scheduled Banks, etc. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether interest income earned by a co-operative society from deposits with Treasury and Scheduled Banks constitutes profits and gains attributable to the business of providing credit facilities to its members and is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Deduction under section 80P(2)(a)(i) on interest income from Treasury and Scheduled Banks Legal framework (as discussed by the Court) 2.1 The Court considered section 80P(2)(a)(i) of the Income-tax Act, 1961, which grants deduction in respect of income of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. The Court also took note, through the cited precedent, of the statutory scheme under sections 63 and 64 of the Multi-State Co-operative Societies Act governing the manner of dealing with surplus profits. Interpretation and reasoning 2.2 The Tribunal noted that the issue of taxability of interest income received from Treasury and Scheduled Banks by a co-operative society providing credit facilities to members is covered by the binding decision of the jurisdictional High Court. 2.3 Referring to the reasoning of the jurisdictional High Court, the Tribunal emphasized that merely because the assessee deposits its surplus profits in a permitted bank or financial institution and earns interest thereon, such interest does not cease to form part of the profits and gains attributable to its business of providing credit facilities to members. 2.4 The Tribunal adopted the High Court's view that the assessee had not deployed its surplus funds in any investment or activity unrelated to its main business; it only deposited surplus profits in the manner mandated or permitted under the regulatory co-operative statute. The deposits were treated as a prudent method of dealing with surplus profits arising from the main lending activity. 2.5 The Tribunal further endorsed the finding that the interest so earned is to be regarded as an enhancement of the profits and gains from the principal business of providing credit facilities to members, and that the nature and character of the principal income does not change merely because the funds are deposited in a bank instead of being held in cash. 2.6 The Tribunal also accepted the principle that the provisions of the Income-tax Act cannot be interpreted so as to discourage prudent financial conduct by an assessee in dealing with its surplus funds in accordance with the governing co-operative law. Conclusions 2.7 Applying the binding jurisdictional High Court decision, the Tribunal held that the interest income received from Treasury and Scheduled Banks is part of the profits and gains attributable to the business of providing credit facilities to members. 2.8 The Tribunal concluded that such interest income is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. 2.9 The disallowance of deduction under section 80P(2)(a)(i) made by the Assessing Officer and confirmed by the appellate authority in respect of the interest income from Treasury and Scheduled Banks was set aside, and the deduction was directed to be allowed in full.