ITAT Surat on Section 80P deduction for interest from co-operative bank FDs

1. Background of the dispute

The case concerns Althan Bhatar Co-operative Credit Society Ltd. Vs ACIT decided by the Income Tax Appellate Tribunal, Surat Bench, for Assessment Year 2017-18.

The assessee, a co-operative credit society engaged in providing credit facilities to its members, claimed deduction under Section 80P of the Income Tax Act 1961 on:

  • Interest from fixed deposits held with Surat District Co-operative Bank Ltd., and
  • Income from its core activity of providing credit facilities to members.

The key controversy before the Tribunal was whether interest earned on fixed deposits placed with Surat District Co-operative Bank Ltd. qualifies for deduction under Section 80P(2)(d) and whether the Commissioner of Income Tax (Appeals) was justified in placing a restriction regarding interest/dividend from a “scheduled bank”.

2. Assessment proceedings – brief facts

  • The assessee is a co-operative credit society carrying on banking activities for its members.
  • Return of income was filed on 17.10.2017, declaring Nil income.
  • The case was selected for limited scrutiny specifically to verify deductions claimed under Chapter VI-A.

In the computation, the assessee claimed:

  • Deduction of Rs. 29,86,311/- towards interest on fixed deposits, and
  • Deduction of Rs. 15/- towards dividend income,
    both received from Surat District Co-operative Bank Ltd.; and
  • Deduction of Rs. 25,97,535/- under Section 80P(2)(a)(i) on income earned from the business of providing credit facilities to its members.

The Assessing Officer issued a show-cause notice dated 16.09.2019 calling upon the assessee to justify the deductions. A detailed reply was furnished and recorded in the assessment order.

However, in the final assessment order:

  • The Assessing Officer denied the assessee’s claim under Section 80P(2)(a)(i) and treated that income as “income from other sources” (as recorded in para 5-1).
  • The deduction under Section 80P(2)(d) was also disallowed on the reasoning that the assessee was not eligible for deduction under Section 80P at all (as per para 6).

Both disallowances were added to the total income.

3. Relief granted by CIT(A) and consequential dispute

On appeal, the assessee challenged:

  • Re-characterisation of its business income as “income from other sources”, and
  • Denial of deduction on interest/dividend income.

The CIT(A), National Faceless Appeal Centre, Delhi, partly accepted the assessee’s contentions and:

  • Directed the Assessing Officer to allow deduction of Rs. 25,97,199/- under Section 80P(2)(a)(i) in respect of income from providing credit facilities to members.
  • Accepted the principle that deduction under Section 80P(2)(d) was available, but simultaneously issued a direction that the Assessing Officer must “ensure that no deduction u/s 80P(2)(d) is allowed on interest income earned from a schedule bank.”

This restriction regarding interest/dividend from a “scheduled bank” triggered the assessee’s further appeal to the Tribunal, since its interest was from deposits with Surat District Co-operative Bank Ltd., a co-operative bank.

4. Grounds raised before the ITAT

The assessee’s grounds, in substance, were: