ITAT Rajkot permits Section 80P(2)(d) deduction on interest from collateral fixed deposits

Background and procedural history

The Income Tax Appellate Tribunal, Rajkot Bench, in the case of Amreli Jilla Dudh Utpadak Sahakari Sangh Limited Vs DCIT/ACIT (ITAT Rajkot), examined whether interest earned on fixed deposits placed with a bank as collateral for overdraft and other credit facilities qualifies as business income eligible for deduction under Section 80P(2)(d) of the Income Tax Act 1961.

The dispute related to Assessment Year 2018-19, arising from an assessment framed under Section 143(3) and an appellate order passed by the National Faceless Appeal Centre under Section 250. While completing the assessment, the Assessing Officer disallowed a total claim of deduction under Section 80P(2)(d) amounting to Rs. 33,39,749/-, holding that certain receipts constituted “Income from Other Sources” rather than business income.

On first appeal, the CIT(A) granted partial relief but confirmed disallowance of Rs. 7,44,170/-, being interest earned on fixed deposits with a bank, on the footing that such interest was taxable under the head “Income from Other Sources” and thus outside the scope of Section 80P(2)(d).

The assessee challenged this surviving disallowance before the Tribunal.

Delay in filing the appeal and condonation

Condonation of delay

At the outset, it was noted that the appeal before the Tribunal had been filed with a delay of 42 days beyond the prescribed limitation period. The assessee moved an application supported by an affidavit explaining the reasons for the delay.

After evaluating the contents of the application and being satisfied that the assessee was prevented by sufficient cause from filing within time, the Tribunal exercised its discretion to condone the delay. The appeal was accordingly admitted for decision on merits.

Note: Condonation of delay is a discretionary relief. Where the Tribunal is satisfied about bona fide reasons and absence of mala fides or negligence, delay is generally condoned to advance substantial justice.

Facts of the assessee’s business and nature of deposits

Nature of assessee’s activities

The assessee, Amreli Jilla Dudh Utpadak Sahakari Sangh Limited, is a registered co-operative society. Its core activity consists of procuring milk from its member-producers and supplying the same to a Federal Co-operative Society. The books of account are duly maintained, and the return of income for AY 2018-19 was filed declaring its income after claiming deduction under Section 80P.

Fixed deposits as collateral, not investment

The controversy centred on interest of Rs. 7,44,170/- earned on fixed deposits placed with a bank. The assessee’s case was that:

  • The fixed deposits were not voluntary investments made for the purpose of earning interest.
  • The bank had insisted that the assessee maintain fixed deposits as collateral security as a precondition for granting overdraft and other credit facilities.
  • These banking facilities were directly required for day-to-day business operations of the co-operative society.
  • Consequently, the fixed deposits were inextricably linked to the business and formed part of its business apparatus rather than constituting standalone income-generating investments.

On this basis, the assessee argued that the interest income had a direct and proximate nexus with its business activities and, therefore, should be assessed as business income, making it eligible for deduction under Section 80P(2)(d).

Rival contentions before the Tribunal

Submissions on behalf of the assessee

The authorised representative for the assessee advanced the following key arguments:

1.