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2025 (4) TMI 1267 - AT - Income TaxBenefit of deduction u/s 80P - AO treated the interest income received from banks as income from other sources and denied the benefit of deduction - HELD THAT - We are of the view that the money kept in the commercial and co-operative banks was not on account of money withheld which was due to its members. We note that the money deposited in the bank account of the assessee was out of the funds available from day-to-day operation of the society therefore the assessee is entitled to deduction u/s 80P(2)(a) of the Act as the interest income from deposits with banks is a business income. Appeal of the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal question considered in this appeal is whether the interest income of Rs. 2,29,87,670/- earned by a Primary Agricultural Co-operative Society from deposits with commercial and co-operative banks qualifies for deduction under Section 80P(2)(a) of the Income Tax Act or should be treated as income from other sources. Specifically, the issues are:
2. ISSUE-WISE DETAILED ANALYSIS Issue: Eligibility of deduction under Section 80P(2)(a) for interest income earned on bank deposits by a Primary Agricultural Co-operative Society Relevant legal framework and precedents: Section 80P(2)(a) of the Income Tax Act provides deduction in respect of income earned by cooperative societies engaged in the business of banking or providing credit facilities to its members. The provision aims to exempt profits derived from such business activities. The question is whether interest income earned from deposits with banks constitutes income derived from the business of banking/credit facilities to members. The Assessing Officer (AO) denied the deduction, treating the interest income as income from other sources, relying on the decision of the Hon'ble Apex Court in Saptagiri Pattina Souharda Sahakari Sangha Niyamitha vs. Income-tax Officer, which held that deduction under Section 80P is not available for interest income earned from funds owed to members for purchase of goods on credit. However, the Hon'ble Calcutta High Court in Principal Commissioner of Income-tax vs. Gunja Samabay Krishi Unnayan Samity Ltd. took a contrary view, holding that interest earned on bank deposits from funds not due to members or held as liability is eligible for deduction under Section 80P(2)(a). This decision relied on the Karnataka High Court ruling in Guttigedarara Credit Co-operative Society Ltd. vs. Income-tax Officer, which held that surplus funds invested in banks to earn interest are not liabilities and the interest income is attributable to the business of banking, hence eligible for deduction. The Andhra Pradesh High Court in CIT v. Andhra Pradesh State Co-operative Bank Ltd. also supported this view. Court's interpretation and reasoning: The Tribunal examined the facts that the assessee is a registered Primary Agricultural Co-operative Society engaged exclusively in providing banking and credit facilities to its members. The interest income arose from surplus funds deposited with commercial and co-operative banks. The Tribunal noted that these funds were not amounts owed to members nor held as liabilities, but surplus funds from the society's operations. The Tribunal distinguished the Apex Court decision relied upon by the AO, emphasizing that the interest income in the present case was not on funds owed to members for purchase of goods on credit but on surplus funds available from daily operations. The Tribunal gave significant weight to the Calcutta High Court and Karnataka High Court precedents, which held that interest income on such surplus funds is business income and eligible for deduction under Section 80P(2)(a). Key evidence and findings: The assessee's return of income claimed deduction under Section 80P(2)(a) treating the interest income as business income. The AO's assessment and the CIT(A)'s appellate order rejected this claim, treating the interest income as income from other sources. The Tribunal found that the money deposited in banks was not held as liability towards members but was surplus money available for investment. The Tribunal relied on judicial precedents to conclude that such interest income is attributable to the business of banking. Application of law to facts: Applying the principles laid down in the Calcutta and Karnataka High Court decisions, the Tribunal held that the interest income earned on surplus funds deposited in banks by a Primary Agricultural Co-operative Society engaged in banking and credit activities to its members is eligible for deduction under Section 80P(2)(a). The Tribunal rejected the AO's and CIT(A)'s reliance on the Apex Court decision as factually distinguishable. Treatment of competing arguments: The AO and CIT(A) argued that interest income from bank deposits does not qualify for deduction under Section 80P(2)(a) and must be treated as income from other sources, relying on the Apex Court decision. The Tribunal distinguished this precedent on facts and accepted the contrary judicial pronouncements from the Calcutta, Karnataka, and Andhra Pradesh High Courts, which supported the assessee's claim. The Tribunal gave precedence to the view that surplus funds invested to earn interest form part of the business income. Conclusions: The Tribunal concluded that the interest income earned by the assessee from deposits with commercial and co-operative banks is business income attributable to the banking and credit activities of the society and hence eligible for deduction under Section 80P(2)(a) of the Income Tax Act. 3. SIGNIFICANT HOLDINGS The Tribunal held: Core principles established include:
Final determination on the issue was in favor of the assessee, allowing the deduction under Section 80P(2)(a) and treating the interest income as business income rather than income from other sources.
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