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2025 (5) TMI 503 - AT - Income TaxDeduction u/s 80P - Interest received on Investments held with Banks in form of FDR s - HELD THAT - As relying on Cooperative Cane Development Union Limited Maholi 2024 (9) TMI 1733 - ITAT LUCKNOW we restore the matter back to the file of the ld. AO to re-compute admissible deduction under section 80P to the interest earned on investments made in accordance with sections 58 and 59 of the U.P. Cooperative Societies Act 1965 and 173 of the U.P. Cooperative Society Rules 1968. Such investments that have been made in accordance with these statutory provisions would be regarded as attributable to the business of the assessee society and eligible for deduction under section 80P. Since the provident fund balances do not belong to the assessee but the assessee is merely a custodian of the same and the interest earned on the investments made on this account is credited to this account which is to ultimately be repaid to the employees at the conclusion of their contracted terms the interested on the same cannot be regarded as the income of the assessee and cannot be brought to tax in its hands.
The core legal questions considered in these appeals pertain to the eligibility of the assessee cooperative society for deduction under section 80P of the Income Tax Act, 1961, specifically regarding interest income earned on fixed deposits and savings bank accounts. The principal issues include whether such interest income is "attributable" to the business activities of the society or constitutes income from other sources; the applicability and interpretation of the Supreme Court's decision in the Totgars Cooperative Sale Society Limited case; the characterization of investments made pursuant to statutory reserve fund requirements under the U.P. Cooperative Societies Act, 1965; and the treatment of interest income earned on provident fund balances held by the society as a custodian. Additional issues relate to the allowance of proportionate deductions for management expenses and interest paid, and procedural aspects concerning delay in filing appeals.
The first issue revolves around the interpretation of section 80P of the Income Tax Act, which provides deduction for profits and gains of cooperative societies engaged in specified activities. The question is whether interest income earned on bank deposits qualifies for such deduction or must be treated as income from other sources under section 56. The authorities below disallowed the deduction, relying heavily on the Supreme Court's ruling in Totgars Cooperative Sale Society Limited vs. ITO, which held that interest earned on surplus funds not required for business operations falls outside the scope of section 80P and is taxable as income from other sources. The Court noted that in Totgars, the society was a sale society retaining sale proceeds, and the interest income was not considered "attributable" to the business. The assessee contended that the decision in Totgars is distinguishable on facts, as it is a welfare society for cane growers providing credit and marketing assistance, not a sale society. The assessee argued that the statutory requirement under section 58 of the U.P. Cooperative Societies Act mandates maintaining a reserve fund of at least 25% of profits, which must be invested in bank deposits. Such investments are not surplus funds but integral to the society's business activities. Therefore, the interest income on such deposits is "attributable" to the business within the meaning of section 80P, as opposed to "derived" solely from business operations. The use of the term "attributable" in the statute was emphasized to include income from sources connected with the business, even if not directly generated by core operations. In support, the assessee relied on precedents including a decision of the Madras High Court in Saravanampatti Primary Agricultural Co-Operative Credit Society Ltd. v. ITO, which held that statutory reserve fund investments cannot be treated as surplus funds, and the interest thereon is deductible under section 80P. The assessee also cited a recent ITAT Lucknow Bench decision in Cooperative Cane Development Union Limited vs. ACIT, where similar issues were examined. That Bench, after detailed consideration of the statutory provisions and byelaws, held that investments made pursuant to sections 58 and 59 of the U.P. Cooperative Societies Act and Rule 173 of the U.P. Cooperative Society Rules, 1968, are attributable to the society's main activity. The interest earned thereon is eligible for deduction under section 80P. Further, the ITAT noted that the Supreme Court had remanded a related matter for fresh adjudication, considering the statutory provisions, thereby limiting the precedential value of earlier High Court decisions that did not consider those provisions. The Revenue, on the other hand, maintained that the Supreme Court's decision in Totgars remains binding, reaffirmed by subsequent High Court rulings, including those of the Allahabad High Court, which held that investment in securities or bank deposits was not a primary object of the cooperative society, and interest income therefrom is taxable under section 56. The Revenue argued that the interest income is "other income" and not operational income eligible for deduction under section 80P. On the issue of provident fund balances of seasonal employees held in deposits by the society, the assessee contended that such amounts are not the society's investments but held in trust as a custodian. Therefore, interest earned on these deposits cannot be considered the society's income. The ITAT in the related Cooperative Cane Development Union Limited case had held similarly, and the present Tribunal agreed that such interest income should not be included in the society's taxable income. The Tribunal also addressed procedural issues regarding delay in filing appeals. The delays ranged from 65 to 357 days, with condonation petitions filed. The Tribunal considered the reasons for delay, including non-appointment of a secretary, pandemic-related exclusions of limitation periods, and communication failures with counsel. After evaluating the facts, the Tribunal condoned the delays in all three appeals, admitting them for adjudication in the interest of justice. Regarding the application of law to facts, the Tribunal observed that the facts across the three assessment years were substantially similar. The Assessing Officer had disallowed deductions claiming that interest income on bank deposits was not attributable to the society's business activities. The CIT(A) upheld these disallowances relying on the Totgars decision and Allahabad High Court rulings. However, the Tribunal noted that the statutory provisions under the U.P. Cooperative Societies Act, which require maintenance of reserve funds invested in banks, were not adequately considered by the lower authorities. The Tribunal referred to the recent ITAT Lucknow Bench decision which had remanded a similar matter for fresh examination in light of these statutory provisions and the Supreme Court's direction to consider them. The Tribunal further noted that the Assessing Officer, upon remand, had accepted that interest income arising from investments in statutory reserve funds and other funds as per sections 58 and 59 of the U.P. Cooperative Societies Act is attributable to the society's main activities. This acceptance aligned with the legal principle that statutory investments mandated as a condition precedent to carrying on business are connected with the business and thus eligible for deduction under section 80P. The Tribunal emphasized that the byelaws and breakup of investments require detailed examination by the Assessing Officer to determine the admissible deduction correctly. Competing arguments regarding the nature of interest income-whether operational or other income-were treated by distinguishing between surplus funds and statutory reserve funds. The Tribunal recognized that interest earned on statutory reserves is not surplus income but integral to the society's business, while interest on provident fund balances held in trust is not income of the society. The Tribunal also acknowledged the binding nature of the Supreme Court's decision but highlighted that the Supreme Court had remitted related matters for fresh adjudication considering statutory provisions not previously examined. Consequently, the Tribunal concluded that the matter should be remitted to the Assessing Officer for fresh consideration of the admissible deduction under section 80P, with regard to interest earned on investments made pursuant to statutory provisions of the U.P. Cooperative Societies Act and Rules. The Tribunal allowed the grounds relating to such interest income and provident fund interest, while other grounds were rendered infructuous or dismissed as not pressed. Significant holdings include the following verbatim excerpt from the Tribunal's reasoning in the related Cooperative Cane Development Union Limited case, which the Tribunal relied upon extensively: "Clause (c) of Section 80-P(2) exempts income of cooperative society to the extent mentioned in that section if the profits or gains are 'attributable' to the activity in which the Cooperative Society is engaged. The findings are that under statutory provisions the Cooperative Society is bound to invest 25% of its profits in Government securities. The assessee complied with this provision. The investment of the statutory percentage of its profits in Government securities was a condition of the carrying on the business. The profits or gains from such investments were connected with or incidental to the carrying on of the actual business. They were, in our opinion, rightly held by the Tribunal to be attributable to the activity carried on by the assessee within the meaning of clause (c) aforesaid." Core principles established include:
Final determinations on each issue are:
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