Interest from Statutorily Mandated Deposits is 'Attributable to Business', Qualifies for 80P(2)(a)(i) Deduction: ITAT Bangalore - 2025-07-02

ITAT Delivers Nuanced Ruling on 80P Deductions for Co-operative Societies, Remits Matter to AO for Re-computation

Bangalore, India – In a significant order clarifying the scope of deductions under Section 80P of the Income Tax Act, 1961, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has ruled that interest earned by a co-operative society on statutorily mandated deposits is "attributable to" its business and thus eligible for deduction under Section 80P(2)(a)(i). The Tribunal has remitted the case back to the Assessing Officer (AO) for a fresh computation based on a multi-pronged directive.

The Bench, in a combined order for assessment years 2018-19 and 2020-21, addressed appeals filed by the Revenue department and cross-objections by the assessee, a co-operative society.

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Background of the Case

The assessee, a co-operative society engaged in providing credit facilities to its members, had its claim for deduction under Section 80P disallowed by the AO. The AO, relying on the Karnataka High Court's decision in the Totgar’s Co-operative Sale Society case, treated the interest income of ₹3.05 crore earned from Fixed Deposits with co-operative banks as 'Income from Other Sources' under Section 56 of the Act.

However, the Commissioner of Income-tax (Appeals) [CIT(A)] overturned the AO's order, allowing the deduction in full. Aggrieved by this, the Revenue filed an appeal before the ITAT.

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Key Arguments Presented

Revenue's Stance: The department argued that interest earned from surplus funds invested in FDs is not part of the society's core operational income. It contended that such income should be taxed as 'Income from Other Sources', citing the Supreme Court's judgment in Totagar Sales Society Vs. ITO and a specific Karnataka High Court ruling (395 ITR 611).

Assessee's Counter-Arguments: The assessee, through its cross-objections, presented a multi-layered defence:

Primary Claim (Sec 80P(2)(a)(i)): The entire interest income is "attributable to" the business of providing credit facilities and should be fully deductible.

Statutory Deposits: A significant portion of the interest was earned from deposits statutorily mandated under the Karnataka Co-operative Society Act, 1959. This income is intrinsically linked to its business operations and qualifies for deduction under Section 80P(2)(a)(i).

Alternative Claim (Sec 80P(2)(d)): For interest from other co-operative societies/banks, the assessee is eligible for deduction under Section 80P(2)(d). It argued that a conflicting Karnataka HC judgment (395 ITR 611) relied upon by the Revenue was per incuriam (rendered in ignorance of a binding precedent) and should not be followed.

Deduction for Expenses (Sec 57): If any interest income is taxed under 'Income from Other Sources', then proportionate costs of funds and administrative expenses must be allowed as a deduction under Section 57.

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Tribunal's Observations and Ruling

The ITAT Bench conducted a meticulous analysis of the legal provisions and judicial precedents to arrive at its decision.

On Statutorily Mandated Deposits

The Tribunal gave significant weight to the assessee's argument regarding mandatory deposits. It noted that the Karnataka Co-operative Society Act, 1959, compels societies to maintain reserve funds and fluid resources by investing in specified institutions.

"Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the banks are entitled for deductions u/s 80P(2)(a)(i) of the Act."

The Tribunal cited the Supreme Court's decision in Cambay Electrical Supply Industrial Co. Ltd. Vs. CIT to emphasize that the term "attributable to" has a wider import than "derived from," covering receipts from sources other than the direct conduct of business if they are linked to it.

On Interest from Surplus Funds

The Tribunal differentiated between interest from statutory deposits and interest from surplus funds parked voluntarily for earning returns.

"If the Idle fund/ surplus money... are invested/deposited into bank with an intention to earn Interest income only as these funds are not immediately required for the purposes of the business then it can not be said that such interest income earned are attributable to the business of the assessee."

The Bench held that interest from such surplus funds cannot be claimed under Section 80P(2)(a)(i).

On Deductions under Sec 80P(2)(d) and Sec 57

The ITAT acknowledged the complex legal landscape created by conflicting High Court judgments. It directed the AO to consider deductions under Section 80P(2)(d) for interest earned from investments with other co-operative societies .

Critically, for interest from surplus funds invested in co-operative/scheduled banks, which is to be taxed as 'Income from Other Sources', the Tribunal directed the AO to allow a proportionate deduction for the cost of funds and administrative expenses under Section 57 of the Act, following the jurisdictional High Court's ruling.

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Final Decision and Implications

The ITAT set aside the CIT(A)'s order and remitted the matter back to the AO with a clear, five-point directive for re-computation. The AO must now segregate the interest income into different categories: 1. Interest from credit facilities to members (eligible under 80P(2)(a)(i)). 2. Interest from statutorily required deposits (eligible under 80P(2)(a)(i)). 3. Interest from investments with other co-operative societies (eligible under 80P(2)(d)). 4. Interest from surplus funds invested in banks (to be taxed as 'Income from Other Sources'). 5. Allow proportionate expenses under Section 57 against income from surplus funds.

This ruling provides a structured framework for both taxpayers and tax authorities in assessing the income of co-operative societies, distinguishing clearly between income attributable to business operations and income from surplus fund management.