Section 80P(2)(a)(i) Deduction under income Tax Act allowable on Interest Income from Mandatory Co-op Bank Investments under State Societies Act : ITAT [Read Order]

In a recent decision, the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) determined that under Section 80P of the Income Tax Act, 1961, interest income from investments in cooperative society banks is eligible for deduction, provided such investments are obligatory under the Karnataka State Societies Act, 1959.

The petitioner, a cooperative society registered under the Karnataka Cooperative Societies Act, 1959, filed returns for the Assessment Years 2016-17, 2017-18, and 2018-19, claiming deductions under Section 80P of the Act amounting to Rs.1,35,63924/-, Rs.142,93,819/-, and Rs.1,28,36,935/-, respectively. However, the assessments for these years disallowed the deductions claimed under Section 80P.

The petitioner appealed to the Commissioner of Income Tax ( Appeals ) [CIT (A)], who partially allowed the appeals for the Assessment Years 2016-17 and 2017-18 but dismissed the appeal for the Assessment Year 2018-19. The CIT(A) held that interest income earned from investments with the Central District Cooperative Bank should be assessed as “Income from Other Sources” under Section 56 of the Income Tax Act and is not eligible for deduction under Section 80P(2)(a)(i) or Section 80P(2)(d) of the Act.

Furthermore, the CIT(A) confirmed the disallowance made by the Assessing Officer ( AO ) under Section 80P for the Assessment Years 2016-17 and 2017-18. For the Assessment Year 2018-19, the entire claim under Section 80P was disallowed since the interest received was from the Central District Co-operative Bank.

The tribunal, comprising Chandra Poojari ( Accountant Member ) and George George K ( Vice President ), directed the AO to examine whether the interest income received from investments with the Central Co-operative Bank was compelled under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If so, it may be considered as “business income” and eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act.

The ITAT emphasized that if the investments were made out of compulsion under the Act and relevant Rules, they would be part of the petitioner’s business activity, thus qualifying for the benefits of Section 80P(2)(a)(i) of the Income Tax Act. Consequently, the appeals filed by the petitioner were allowed.

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