ITAT Bangalore Allows 80P Deduction On Interest Income Earned From Co-Operative Bank Deposits

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) on 20 May held that a co-operative credit society is entitled to deduction under Section 80P of the Income Tax Act on interest income earned from deposits placed with co-operative banks, as the income remains attributable to its business of providing credit facilities to members.

A single-member Bench comprising Vice-President Shri Prashant Maharishi also held that transactions with nominal members do not disentitle the society from claiming the deduction and allowed an appeal by Hamdard Co-operative Society Limited. The Bench held:

“If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. Society is not carrying on any separate business for earning such interest income.”

Hamdard Co-operative Society filed its return for Assessment Year 2017–18 claiming deduction under Section 80P. During scrutiny, the Assessing Officer treated interest income of Rs. 5.78 lakh as taxable under the head “Income from Other Sources” and withdrew the deduction under Section 80P.

The Assessing Officer also held that transactions involving nominal members disentitled the society from claiming deduction under Section 80P. The Commissioner (Appeals) upheld the assessment order, prompting the society to approach the Tribunal.

Before the Tribunal, the society argued that it carried on the business of accepting deposits and providing credit facilities to its members, and that it earned interest income from deployment of business funds.

The Bench accepted this submission and held that the income retained its character as business income attributable to the core activity of providing credit facilities. On the issue of nominal members, it relied on the Supreme Court decision in Mavilayi Service Co-operative Bank Ltd. v. CIT and held that transactions with nominal members do not affect eligibility for deduction under Section 80P. It observed:

“Further the Honourable Supreme court also in Mavilayi Service Co-operative Bank Ltd. vs. CIT [123 Taxman 161] held that income derived from transaction with nominal members is also eligible for deduction u/s 80 P of the Act.”

The Bench noted that the society did not undertake transactions with non-members and therefore satisfied the statutory conditions for deduction.

Accordingly, the ITAT set aside the denial of deduction and directed the Assessing Officer to allow the claim under Section 80P(2)(a)(i) on the entire eligible income and allowed the appeal.

Appearance for the Assessee: Shri. G S Bhatt, CA

Appearance for the Revenue: Shri. Ganesh R Ghale, Standing Counsel for the Dept