ITAT Upholds Co-op Society’s Tax Exemption, Cites ‘Operational Funds’ to Reject Revenue’s Appeal on Interest Income [Read Order]
The Tribunal highlighted that the co-operative society’s deposits were not surplus but were operational funds, maintained to ensure liquidity for repayment obligations and day-to-day business needs.
coop - society - tax - Taxscan
coop - society - tax - Taxscan
The Nagpur Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Revenue’s appeals and upheld the tax exemption granted to a Co-operative Credit Society under Section 80P of the Income Tax Act. The Tribunal’s order rules that the society’s interest income from deposits qualifies for deduction as it arises from operational funds maintained for business purposes.
In this case, the appellant, Maharashtra Urban Co-operative Credit Society Ltd., faced a challenge from the Income Tax Officer, regarding the allowability of deduction under Section 80P(2)(a)(i) for interest income earned from deposits, including those made with co-operative banks and from nominal members.
The Revenue argued that such income should be taxed under the heading “Income from Other Sources” in line with the Supreme Court’s decision in Totagar’s Co-operative Sales Society Ltd vs. ITO(2010), and not eligible for the claimed deduction.
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The Tribunal, however, found that the facts of the present case were distinguishable from Totagar’s case. Referring to earlier decisions, including the ITAT’s own ruling in The Ismailia Urban Co-operative Society vs. ITO (2024) and the jurisdictional High Court’s decision in CIT vs. Solapur Nagri Audyogik Sahakari Bank Ltd., the Bench noted that interest income earned from operational funds—those maintained for meeting business contingencies and not from surplus or idle funds constitutes business income and is eligible for deduction under Section 80P(2)(a)(i).
The Tribunal highlighted that the co-operative society’s deposits were not surplus but were operational funds, maintained to ensure liquidity for repayment obligations and day-to-day business needs. This distinction was crucial, as the Supreme Court in Totagar’s had dealt with surplus funds not immediately required for business, while in the present case, the funds were integral to the society’s regular operations.
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The ITAT cited its earlier findings in cases such as MSEB Engineers Co-op Credit Society Ltd. (2016) and Chhattisgarh Urban Sahakari Sanstha Maryadit vs. ITO (2015), reiterating that operational funds invested in short-term deposits do not lose their character as business income.
Two Member Bench composed of V.Durga Rao (Judicial Member) and K.M. Roy (Accountant Member) , concluded that the benefit of deduction under Section 80P(2)(a)(i) was rightly granted by the Commissioner of Income Tax (Appeals). The Tribunal expressly stated that the interest income from deposits with co-operative banks and from nominal members is assessable as business income and not as income from other sources.
Accordingly, the ITAT dismissed the Revenue’s appeals for all three assessment years, affirming the co-operative society’s entitlement to the tax exemption claimed in its returns.
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