Interest on FDRs disallowed u/s 80P as investment income exceeded income from credit facilities
Issue
Whether the interest income of Rs. 1,50,19,858 earned by the assessee (a co-operative agricultural service society) from Fixed Deposits (FDRs) with scheduled banks is eligible for deduction under Section 80P(2)(a)(i) as income “attributable to” the business of providing credit facilities to members, or if it is taxable as “Income from Other Sources”.
Facts
Entity Type: The assessee is a co-operative agricultural service society registered in 1957.
Core Activities: Its bye-laws include encouraging thrift, accepting deposits, and providing credit for agricultural production. It also sells seeds and fertilizers.
Return of Income: For AY 2022-23, the assessee filed a return declaring ‘Nil’ income after claiming a deduction of Rs. 37,47,927 under Section 80P.
Income Breakdown:
Interest from loans to members: Rs. 19,27,995.
Interest on bank FDRs (scheduled banks like PNB, SBI): Rs. 1,50,19,858.
Trading Profit: Rs. 23,839.
AO’s Disallowance: The Assessing Officer (AO) disallowed the deduction, noting the assessee failed to furnish bye-laws initially and held the income was not from eligible business activities.
CIT(A)’s Ruling: The CIT(A) upheld the disallowance, relying on the Supreme Court judgment in Totgars’ Co-operative Sale Society Ltd., ruling that interest on funds not immediately required for business is taxable under Section 56 (“Income from Other Sources”) and not operational income.
Assessee’s Argument: The assessee argued the FDRs were made from member deposits (Service Fund) and were “attributable to” its credit business.
Decision
Predominant Activity Test: The Tribunal observed that the interest from FDRs (Rs. 1.50 Crore) vastly exceeded the interest from loans to members (Rs. 19 Lakhs). This indicated that the “predominant activity” was making investments rather than providing credit facilities.
Interpretation of “Attributable To”: The Tribunal held that “attributable to” requires a “first-degree nexus” (direct link) with the specified activity. Earning interest from scheduled banks does not have a close, proximate nexus with the activity of providing credit to members.
Metaphor Used: The Tribunal used the metaphor “the mustache has eclipsed the beard” to describe how the ancillary investment income overshadowed the core credit business, altering the entity’s character to an investment vehicle.
Distinguishing Precedents: The Tribunal distinguished cases cited by the assessee (like Pune Madhyamik Shikshak Sahkari), stating those applied where credit activity remained dominant and interest was incidental. Here, the investment activity was dominant.
Final Ruling: The appeal was dismissed. The interest on FDRs was treated as income from independent investment activity, not eligible for Section 80P deduction.
Key Takeaways
Proportion Matters: If investment income (interest on FDRs) significantly exceeds the income from the core activity (lending to members), the entity may lose its character as a credit society for tax purposes.
“Attributable To” Limitation: The phrase “attributable to” is not unlimited. It requires a functional and direct link to the core business. Mere investing of surplus funds in external banks does not qualify unless it is for operational liquidity or statutory requirements.
Totgars’ Principle Applied: The decision reinforces the Totgars’ Co-operative principle: surplus funds invested in non-cooperative banks earn “Income from Other Sources” (Section 56), not business income eligible for 80P deduction.
Operational vs. Investment Income: To claim 80P, the income must be operational. If the society acts primarily as an investment vehicle for surplus funds, the exemption is denied.
IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, ‘B’ CHANDIGARH
The Malan Co-operative Agricultural Service Society, Malan, Nagrota Bagwan, Kangra (H.P.).
Vs
The ITO, Ward, Dharamshala.
Date of Pronouncement : 23.12.2025
ITA No. : 275/CHD/2025
Source :- Judgement