Section 80P Deduction Upheld for Co-operative Credit Society on Interest from Bank Deposits — ITAT Pune

Overview

A significant ruling has emerged from the Income Tax Appellate Tribunal, Pune, in the matter of Thermax Employee Co-op. Credit Society Ltd. Vs ITO (ITAT Pune) concerning Assessment Year 2021-22. The central question before the Tribunal was whether interest income earned by a co-operative credit society on funds deposited with banks qualifies for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, or whether such interest must be treated as income from other sources and therefore excluded from the deduction.

The Tribunal, after thoroughly examining the applicable judicial precedents and the nature of the assessee's business, ruled in favour of the assessee and directed deletion of the addition of ₹22,08,616. The ruling reinforces a well-established but frequently contested principle: that surplus funds generated from the eligible business of a co-operative credit society do not shed their business character merely because they are placed in fixed deposits or maintained with banks.

Background and Facts of the Case

Thermax Employee Co-operative Credit Society Ltd. is a registered co-operative credit society whose membership is confined exclusively to the employees of Thermax Company. The society's primary purpose is to extend credit facilities to its members.

For AY 2021-22, the assessee filed its return of income declaring Nil income after availing deductions under Chapter VI-A of the Income Tax Act, 1961. The case was subsequently selected for scrutiny under CASS, specifically to examine the deduction claimed under Section 80P.

During the course of assessment proceedings, the assessee explained that it was obligated under applicable regulatory guidelines, including RBI directives, to maintain funds with co-operative institutions and financial bodies. In keeping with this regulatory requirement, the society had parked its funds with co-operative banks and other banks and earned interest income amounting to ₹22,08,616 during the relevant year.

Assessing Officer's Position

The Assessing Officer (AO) did not accept the assessee's claim. The AO took the position that:

  • Depositing or investing funds with banks does not constitute part of the society's principal business of providing credit facilities to members.
  • The interest income derived from such deposits was assessable as income from other sources and was therefore outside the scope of Section 80P(2)(a)(i).
  • Relying on the Supreme Court's ruling in Totgars Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (SC), the AO disallowed the deduction of ₹22,08,616.

The AO's order specifically noted:

"Depositing / investing funds in a co-operative bank / commercial bank is not a part of the business of providing credit facilities to its members. Such an interest income is not the 'operational income' of assessee-society from providing credit facilities to its members. Consequently, the interest income has to be treated as 'income from other sources' not eligible for deduction u/s 80P of the Act."

Proceedings Before CIT(A) and the Tribunal

The assessee filed an appeal before the Commissioner of Income Tax (Appeals), NFAC, Delhi [CIT(A)], which passed an order under Section 250 of the Income Tax Act, 1961 on 10.03.2025, dismissing the appeal for non-compliance. Aggrieved by this outcome, the assessee approached ITAT Pune.

Condonation of Delay of 278 Days

A preliminary procedural issue arose before the Tribunal. There was a delay of 278 days in filing the appeal. The assessee submitted an application setting out the reasons responsible for the delay. After examining the explanation, the Tribunal was satisfied that sufficient cause had been demonstrated. The Tribunal reiterated the settled principle that substantial justice must prevail over procedural technicality, and that no assessee ordinarily benefits from filing a belated appeal. Accordingly, the delay was condoned and the appeal was admitted for adjudication on merits.

The Tribunal undertook a comprehensive review of decisions from the Supreme Court and various High Courts before arriving at its conclusion.

Supreme Court — CIT v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC)

The Tribunal first examined this Supreme Court decision, where the question before the court was whether interest earned on investments made from reserve funds was exempt under Section 80P(2)(a)(i). The Supreme Court observed: