ITAT Allows Section 80P Deduction on Interest from Bank Deposits, Applying “Vegetable Products” Doctrine

ITAT Allows Section 80P Deduction on Interest from Bank Deposits, Applying “Vegetable Products” Doctrine

Issue

Whether interest income earned by a Co-operative Society (specifically a Cane Development Union) from surplus funds deposited in scheduled/nationalized banks qualifies for deduction under Section 80P(2) of the Income Tax Act, or if it should be treated as “Income from Other Sources,” thereby denying the deduction.

Facts

• The Assessee: Secretary, Co-operative Cane Development Union Ltd.

• The Dispute: The assessee claimed deduction under Section 80P for interest income earned from surplus funds parked in fixed deposits with scheduled/nationalized banks.

  • AY 2017-18: Interest Income of Rs. 89,88,343/-.

  • AY 2020-21: Interest Income of Rs. 1,79,10,356/-.

• Lower Authorities: Both the Assessing Officer (AO) and the CIT(A) denied the deduction. Their rationale was that such interest income is not “derived” from the eligible business activities of the society (like providing credit to members) but is merely income from parking surplus funds. Hence, they classified it as taxable “Income from Other Sources.”

• Conflicting Precedents:

  • The Revenue relied on the Gujarat High Court decision in Brahmarshi Co-op. Credit Society Ltd. Vs. ACIT (2025), which ruled against the assessee on this issue.

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

Decision

• The ITAT Delhi Bench allowed the twin appeals in favor of the assessee.

• Absence of Jurisdictional Ruling: The Tribunal noted that the jurisdictional High Court (Allahabad High Court) had not provided specific guidance on this issue.

• Application of Vegetable Products Rule: Faced with conflicting decisions from different High Courts (Gujarat vs. Andhra Pradesh), the Tribunal invoked the landmark Supreme Court judgment in CIT vs. Vegetable Products Ltd. [1973].

• The Rule: The SC held that when two reasonable constructions of a taxing provision are possible, the view that favors the assessee must be adopted.

• Outcome: Consequently, adopting the favorable view (the AP High Court position), the Tribunal held that the interest income is eligible for Section 80P deduction.

Key Takeaways

• Benefit of Doubt: In the realm of tax litigation, when High Courts differ and the jurisdictional High Court is silent, the Tribunal is bound to follow the interpretation that benefits the taxpayer.

• Section 80P Litigation: The classification of interest on surplus funds (Business Income vs. Other Sources) remains a highly litigated area for cooperative societies. This judgment adds weight to the pro-assessee stance using the Vegetable Products doctrine.

• Operational Funds vs. Surplus: While the Revenue often argues that “surplus” funds are distinct from “operational” funds, Tribunals may view prudent financial management (earning interest) as integral to the cooperative’s overall business.

Judgement :- 1763010616-aR4WSF-1-TO