2025 (5) TMI 1243 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income - as per DR income was not earned from cooperative society operation but from deposits made in banks and other institutions - HELD THAT - We note that under similar facts and circumstances various decisions including the decision of Katwa-Kalna Co-operative Agriculture and Rural Development Bank Ltd. 2023 (6) TMI 1483 - ITAT KOLKATA have held that interest income earned on statutory deposits made in compliance with the directives issued by the Registrar of Cooperative Societies is eligible for deduction u/s 80P(2)(a)(i) of the Act. We further note that the ld. CIT(A) in the previous assessment years i.e. A.Ys 2012-13 2013-14 2014-15 vide orders dated 30.09.2019 03.02.2020 03.02.2020 respectively had accepted the assessee s claim of deduction of interest income and allowed the appeal of the assessee by deleting the respective additions. We find force in the assessee s contentions and the revenue has not brought any contrary material or evidence to demonstrate any change in facts or legal positions which may warrant different view in the present year. It is settled law that the principle of consistency must be followed and we place reliance on the decision of Radha Soami Satsang 1991 (11) TMI 2 - SUPREME COURT . We are of the considered view that the Assessing Officer as well as the ld. CIT(A) were not justified in denying the benefit of deduction u/s 80P(2)(a)(i) of the Act to the assessee. We therefore set aside the order of the ld. CIT(A) and direct the Assessing Officer to delete the said addition made on account of interest income. Appeal of assessee is allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the interest income earned by a cooperative credit society on fixed deposits made with banks and financial institutions, pursuant to mandatory directions issued by the Registrar of Cooperative Societies under the West Bengal Cooperative Societies Act, qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act.

2. Whether such interest income should be treated as business income eligible for deduction or as income from other sources not eligible for deduction under the said provision.

3. Whether the principle of consistency applies to the treatment of such interest income across assessment years when similar facts and legal issues arise.

Issue-wise detailed analysis:

1. Eligibility of Interest Income for Deduction under Section 80P(2)(a)(i) of the Income Tax Act

Relevant legal framework and precedents: Section 80P(2)(a)(i) of the Income Tax Act provides for deduction of income earned by cooperative societies from their business of providing credit facilities to members. The legal question is whether interest income earned on fixed deposits, made pursuant to statutory directions, falls within this scope.

The Tribunal referred to a coordinate bench decision in Katwa-Kalna Co-operative Agriculture and Rural Development Bank Ltd. vs. ITO, where under similar facts, interest income earned on statutory deposits made in compliance with directives issued by the Registrar of Cooperative Societies was held eligible for deduction under section 80P(2)(a)(i).

Court's interpretation and reasoning: The Court noted that the assessee is a registered cooperative society engaged in providing long-term credit facilities to its members. The investments in fixed deposits were not out of surplus or non-business funds but were mandated by a government circular (Memo No.2301 dated 11.03.1993) issued by the Registrar of Cooperative Societies under the West Bengal Cooperative Societies Act. This circular requires that 70% of the surplus funds of cooperative credit societies be kept in fixed deposits or certificates with nationalised or scheduled banks to ensure liquidity and compliance with regulatory norms.

The Court reasoned that these deposits form part of the working capital necessary for the cooperative society to meet its obligations, including timely repayment of deposits to members. Therefore, the interest income earned on such deposits is integrally connected to the business of providing credit facilities and must be treated as business income eligible for deduction under section 80P(2)(a)(i).

Key evidence and findings: The circular issued by the Registrar of Cooperative Societies was a crucial piece of evidence demonstrating the mandatory nature of the deposits. The assessee's prior compliance with this circular and the consistent treatment of similar interest income in earlier assessment years (2012-13, 2013-14, and 2014-15) where the deduction was allowed, further supported the claim.

Application of law to facts: The Court applied the legal provision of section 80P(2)(a)(i) to the facts that the interest income arose from deposits made pursuant to statutory directions integral to the cooperative's credit business. It rejected the Assessing Officer's characterization of the interest income as income from other sources, which would disqualify it from deduction.

Treatment of competing arguments: The revenue contended that the interest income was not earned in the course of providing credit facilities but was from deposits with banks, hence not eligible for deduction. The Court rejected this argument, emphasizing the statutory mandate and the necessity of such deposits for the cooperative's business operations. The Court also noted the absence of any contrary material or evidence from the revenue to justify a different conclusion.

Conclusions: The interest income earned on fixed deposits made in compliance with the Registrar's directions is business income eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act.

2. Treatment of Interest Income as Business Income vs. Income from Other Sources

Relevant legal framework and precedents: The classification of income is crucial for determining eligibility for deductions. The Tribunal relied on the principle that income earned from activities integral to the cooperative society's business must be treated as business income.

Court's interpretation and reasoning: The Court found that since the deposits were mandated and formed part of the working capital necessary for the cooperative's credit operations, the interest income was intrinsically linked to the business. Hence, it should be treated as business income rather than income from other sources.

Key evidence and findings: The circular mandating the deposits and the consistent prior treatment of such income as business income were pivotal. The Court also observed that the funds were neither borrowed funds nor reserves set aside for specific purposes but genuine working capital.

Application of law to facts: The Court applied the principle that income arising from the core business operations, including statutory compliance requirements, must be classified as business income.

Treatment of competing arguments: The revenue's argument that the interest income was from deposits and not from credit operations was rejected as it ignored the statutory context and the integral role of such deposits in the business.

Conclusions: The interest income is rightly classified as business income and is eligible for deduction under the relevant provisions.

3. Application of the Principle of Consistency in Tax Treatment

Relevant legal framework and precedents: The principle of consistency in tax matters is well-established, requiring that similar facts and circumstances be treated alike unless there is a change in law or facts. The Court relied on the Supreme Court decision in Radha Soami Satsang vs. CIT (1992) 193 ITR 321 (SC), which underscores the importance of consistency in taxation.

Court's interpretation and reasoning: The Court observed that the assessee's claims for deduction of interest income in earlier assessment years under identical facts were allowed by the CIT(A). The revenue had not demonstrated any change in facts or law to justify a departure from the earlier consistent treatment.

Key evidence and findings: Orders of the CIT(A) for assessment years 2012-13, 2013-14, and 2014-15 allowing the deduction were relied upon. No contrary evidence was presented by the revenue to distinguish the present year.

Application of law to facts: The Court applied the principle of consistency to uphold the assessee's claim for deduction in the current assessment year.

Treatment of competing arguments: The revenue did not provide any material to counter the principle of consistency or to justify a different treatment in the present year.

Conclusions: The principle of consistency mandates allowing the deduction under section 80P(2)(a)(i) for the interest income in the present year as well.

Significant holdings:

"We find force in the assessee's contentions and the revenue has not brought any contrary material or evidence to demonstrate any change in facts or legal positions which may warrant different view in the present year. We further note that it is settled law that the principle of consistency must be followed and we place reliance on the decision of the Hon'ble Supreme Court in the case of Radha Soami Satsang vs. CIT (1992) 193 ITR 321 (SC). In the light of the above discussion, we are of the considered view that the Assessing Officer as well as the ld. CIT(A) were not justified in denying the benefit of deduction u/s 80P(2)(a)(i) of the Act to the assessee."

Core principles established:

- Interest income earned by a cooperative credit society on fixed deposits made pursuant to statutory directions issued by the Registrar of Cooperative Societies is business income eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act.

- Classification of income must consider the statutory and business context; income arising from mandatory deposits integral to the business cannot be treated as income from other sources.

- The principle of consistency is fundamental in tax matters, and prior accepted treatment of identical facts must be followed unless there is a material change in law or facts.

Final determinations:

- The addition of Rs. 1,43,64,931/- on account of interest income disallowed by the Assessing Officer and sustained by the CIT(A) is set aside.

- The assessee is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act for the interest income earned on fixed deposits made pursuant to statutory mandates.

- The findings apply mutatis mutandis to all connected appeals for other assessment years, which are accordingly allowed.