Interest Income Earned by Cooperative Society from Surplus Funds Invested in Cooperative Banks is Business Income: ITAT [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) set aside the orders and ruled that interest income earned by the cooperative society from surplus funds invested in cooperative banks can be allowed as business income and eligible for deduction undersection 80P of the Income Tax Act.

Shree Sharada Credit Cooperative Society Limited (assessee) is a credit cooperative society engaged in borrowing from and lending to its members. During the relevant years, the society invested surplus funds in other cooperative societies and earned interest income.

The Assessing Officer (AO) contended that this interest income should be categorized as "Income from Other Sources" under Section 56, rather than business income, and was ineligible for deduction under Section 80P(2)(a)(i). The AO relied on the Supreme Court's decision in Totgars Cooperative Sale Society Ltd. to support the denial of the deduction.

Aggrieved by the AO’s order, the assessee filed an appeal before the commissioner of Income Tax (appeals) [CIT(A)]. The CIT(A) upheld the disallowance and dismissed the appeal. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

The Single Member bench comprising Prashant Maharishi (Vice President) observed that the legislature used the phrase "attributable to" in Section 80P(2)(a)(i), which has a wider legal meaning than "derived from". This covers receipts from sources beyond the actual conduct of primary business.

The tribunal also observed that If a society cannot immediately lend funds to members because there were no takers, depositing that money to earn interest is a business-related activity.

The tribunal noted that in the Totgars Supreme Court case, the society was investing funds that were liabilities (amounts due to members). The tribunal observed that in the current case, the investments were made from the society's own surplus profits and gains, not from member liabilities.

The tribunal observed that the interest income so derived or the capital, if not immediately required to be lent to the members then the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only.

The tribunal concluded that Section 80P is a beneficial provision that must be construed to further the cooperative movement. It directed the AO to grant the claimed deductions. The appeal of the assessee was allowed.

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