Interest from Surplus Funds in Co-op Banks Not Deductible Under S.80P; Not 'Business Income': ITAT Kolkata - 2025-08-11

Interest from Surplus Funds in Co-op Banks Not 'Business Income', Ineligible for S.80P Deduction: ITAT Kolkata

Kolkata: The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, has ruled that a cooperative society is not entitled to claim deductions under Section 80P of the Income Tax Act, 1961, on interest income earned from surplus funds deposited in cooperative or commercial banks. The bench, comprising Accountant Member Shri Rakesh Mishra and Judicial Member Shri Sonjoy Sarma, held that such income is not "attributable to" the society's core business activities and must be treated as 'Income from other sources'.

The Tribunal dismissed the appeal filed by Bibhisanpur Samabay Krishi Unnayan Samity Ltd., upholding the decisions of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].

Case Background

The appellant, Bibhisanpur Samabay Krishi Unnayan Samity Ltd., a cooperative society, filed its income tax return for the Assessment Year 2020-21, declaring 'NIL' income after claiming a deduction of ₹32,79,394 under Section 80P. The AO observed that this income included interest earned from deposits and investments made in various cooperative and commercial banks.

The AO disallowed the deduction, classifying the interest income as 'Income from other sources' under Section 56 of the Act and assessing the society's total income at ₹32,79,394. The CIT(A) confirmed this order, prompting the society to appeal to the ITAT.

Key Arguments

Appellant's Contentions: The assessee argued that the interest income was generated from its business activities and that it was statutorily required to deposit its surplus funds in designated banks. They contended that a liberal interpretation should be applied to the benevolent provisions of Section 80P.

Department's Contentions: The revenue department argued that Section 80P deductions are only available for "operational income" directly attributable to the society's primary business, such as providing credit facilities to its members. Relying on established legal precedents, the department maintained: 1. Interest earned by investing surplus funds, not immediately required for business, is not operational income and thus ineligible for deduction under Section 80P(2)(a)(i). 2. The deduction under Section 80P(2)(d) for income from "any other co-operative society" does not extend to "co-operative banks," which are a distinct class of entities governed by the Banking Regulation Act, 1949. 3. The insertion of Section 80P(4) by the Finance Act, 2006, explicitly excludes cooperative banks from the purview of Section 80P benefits, demonstrating clear legislative intent.

Legal Precedents and Tribunal's Analysis

The Tribunal heavily relied on the landmark Supreme Court judgment in Totgars Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka , which established that interest earned on surplus funds not required for business purposes constitutes 'other income' and is not deductible under Section 80P.

The ITAT quoted the CIT(A)'s order, which noted:

"The words 'the whole of the amount of profits and gains of business' emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society."

Furthermore, the Tribunal analyzed the distinction between a 'co-operative society' and a 'co-operative bank' for the purposes of Section 80P(2)(d). It cited the Karnataka High Court's decision in PCIT V. Totagars Co-operative Sale Society , which held that cooperative banks are a different "species" from cooperative societies, and the legislative intent is to exclude them from Section 80P benefits.

The judgment stated:

"The reference to co-operative Society in Section 80P(2)(d) of the Act is a reference to the co-operative Society which is not a Co-operative Bank and is not carrying on any banking activity... with effect from 01.04.2007 all Co-operative Banks for the purpose of Income Tax Act have been brought at par with other commercial banks and any interest or dividend received from a Co-operative Bank is no longer allowable as a deduction u/s 80P(2)(d) of the Act."

The Tribunal found that the assessee's argument of being statutorily required to deposit funds did not entitle it to the Section 80P benefit, as there was no prohibition on investing in other eligible cooperative societies whose income would have been exempt.

Final Decision

The ITAT concluded that the interest income earned by the society from its investments in cooperative and commercial banks was correctly disallowed by the tax authorities. Dismissing the appeal, the bench affirmed that the income was not attributable to the society's primary business operations and therefore not eligible for deduction under any provision of Section 80P.