Section 80P Deduction Allowed on FDR Interest from Cooperative Bank Investments
The Delhi Bench of the Income Tax Appellate Tribunal in Deoband Cooperative Cane Development Union Ltd. Vs AO has reaffirmed an important principle for cooperative societies regarding deduction under Section 80P of the Income Tax Act 1961. The dispute centered on whether interest earned from Fixed Deposit Receipts (FDRs) constituted income eligible for deduction under Section 80P(2)(a)(i) and Section 80P(2)(d) when such deposits were made with cooperative banks and other banking institutions.
The decision is particularly relevant for cooperative societies that maintain surplus funds and park them in FDRs with cooperative banks, cooperative societies, or even nationalized banks, and thereafter claim deduction under Section 80P on the resultant interest income.
Background of the Case
The assessee, Deoband Cooperative Cane Development Union Ltd., filed an appeal for Assessment Year 2022-23 challenging the order dated 24.09.2025 passed by the Commissioner of Income Tax (Appeals)/NFAC, Delhi. The issue before the Tribunal was narrow but significant: the tax treatment of interest income from FDRs for a cooperative society claiming deduction under Section 80P.
Core Dispute
- The assessee had invested surplus funds in FDRs.
- Interest accrued on these FDRs was claimed as eligible for deduction under
Section 80P. - The Assessing Officer denied this deduction, a view that was subsequently upheld by the lower authorities.
- The Revenue’s position was that such interest income did not arise from eligible business activities contemplated under
Section 80P(2)and, therefore, should be taxed without deduction.
The assessee carried the matter in appeal before the ITAT Delhi, contending that the interest was eligible for deduction under both Section 80P(2)(a)(i) and Section 80P(2)(d).
Revenue’s Reliance on Judicial Precedent
The Senior Departmental Representative supported the disallowance and placed strong reliance on the judgment of the Hon’ble Supreme Court in:
Totgars Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283 (SC)
According to the Revenue, the ratio of this decision indicated that interest from surplus funds invested in deposits did not qualify as income “derived from” the business of providing credit facilities to members, and hence fell outside the purview of Section 80P(2).
The argument was that such interest constituted “income from other sources” and was not directly attributable to the primary business activity of the assessee-cooperative society.
Tribunal’s Approach and Scope of Examination
The Tribunal heard both sides and examined the records. It then considered whether the issue stood settled by prior decisions of coordinate benches, especially where cooperative societies had invested surplus funds with cooperative banks and claimed deduction under Section 80P.
The Tribunal observed that this question was no longer res integra and referred extensively to a recent ruling:
ITO Vs. Shri Bhairavnath Multistate Cooperative Credit Society Ltd. (2024) 164 com 382 (Pune Tribu.)
In this Pune Bench decision, the Tribunal had comprehensively dealt with the eligibility of interest income from investments of surplus funds for deduction under Section 80P(2)(a)(i) and Section 80P(2)(d).
Key Extract from Pune Tribunal’s Reasoning
The Delhi Bench reproduced and relied upon the detailed reasoning in ITO Vs. Shri Bhairavnath Multistate Cooperative Credit Society Ltd., where the Pune Tribunal had held that:
- Interest income earned by a cooperative society from investments made out of surplus funds with cooperative banks or cooperative societies qualifies for deduction under
Section 80P(2)(d). - Since a cooperative bank is a species of cooperative society, interest from deposits with a cooperative bank should be treated at par with interest received from other cooperative societies.
- Such interest income also qualifies for deduction under
Section 80P(2)(a)(i), depending on the factual matrix and judicial interpretation.