ITAT Allows Section 80P Deduction on Bank Interest Income; Favours Assessee Amidst Conflicting HC Views

ITAT Allows Section 80P Deduction on Bank Interest Income; Favours Assessee Amidst Conflicting HC Views

Issue

Whether interest income earned by a cooperative society from surplus funds deposited in nationalized/scheduled banks constitutes business income eligible for deduction under Section 80P(2), or if it falls under “Income from Other Sources,” thereby denying the deduction.

Facts

• Assessee: A cooperative society.

• The Dispute: The assessee earned interest income amounting to Rs. 76,92,252/- from surplus deposits kept in scheduled/nationalized banks.

• Claim: The assessee claimed deduction under Section 80P on this interest income.

• Lower Authorities: Both the Assessing Officer (AO) and the CIT(A) denied the deduction. They held that such interest income derived from parking surplus funds is not “derived” from the eligible business activity of the society and must be taxed as “Income from Other Sources.”

• Arguments:

  • Revenue: Relied on the Gujarat High Court decision in Brahmarshi Co-op. Credit Society Ltd. (2025), which ruled in favor of the Revenue on this issue.

  • Assessee: Relied on the Andhra Pradesh High Court decision in Vaveru Co-operative Rural Bank Ltd. (2017), which ruled in favor of the assessee.

Decision

• The Income Tax Appellate Tribunal (ITAT) allowed the appeal in favor of the assessee.

• Absence of Jurisdictional Ruling: The Tribunal noted that the jurisdictional High Court (Allahabad HC in this context) had not passed a judgment on this specific issue.

• Conflicting Views: The Tribunal acknowledged the divergence of opinion between the Gujarat High Court (favoring Revenue) and the Andhra Pradesh High Court (favoring Assessee).

• Application of Vegetable Products Rule: Relying on the Supreme Court’s landmark judgment in CIT vs. Vegetable Products Ltd., the Tribunal held that when two reasonable constructions of a taxing provision are possible, the view favorable to the assessee must be adopted.

• Outcome: Consequently, the Tribunal directed the AO to allow the deduction under Section 80P on the interest income.

Key Takeaways

• Benefit of Doubt: The Vegetable Products doctrine remains a powerful tool for taxpayers. In the absence of a jurisdictional High Court ruling, if other High Courts have conflicting views, the Tribunal will follow the view that benefits the taxpayer.

• Section 80P & Interest Income: The taxability of interest income for cooperative societies remains a highly litigated area. While some courts treat it as business income (operational necessity), others treat it as passive income (other sources).

• Jurisdictional Precedence: The ruling implies that had the Allahabad High Court ruled on this matter, the Tribunal would have been bound by it, regardless of the Vegetable Products principle.

THE INCOME TAX APPELLATE TRIBUNAL,
DELHI BENCH: ‘G’ NEW DELHI
Bilari Cooperative Cane
Union, Bilari, Near Bus
Stand, Moradabad,Uttar Pradesh
Vs.
Income Tax Officer,Ward-2(1),
Moradabad
ITA No.2127/Del/2025
Date of pronouncement 03.11.2025