Income Tax | Interest Earned On Surplus Lending Funds Is Attributable To Banking Business, Qualifies For 80P Deduction: Calcutta High Court

Section 80P of the Income Tax Act, 1961 provides 100% tax deductions to cooperative societies for income from specified activities. These activities commonly include marketing agricultural produce, purchasing agricultural supplies, processing products without power, offering banking services, and more.

Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) stated that interest earned by the West Bengal State Co-operative Agriculture & Rural Development Bank Ltd. on surplus funds from NABARD lending business eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

The assessee being the apex cooperative society of the land mortgage bank in the State of West Bengal, funds were received from NABARD during the relevant financial year.

The funds were received in two installments and the funds are in turn lent to the members in 100 of installments and as the assessee does borrow in a wholesale manner and lend on retail basis, there is always some floating fund.

Therefore, the assessee's case was that these activities are integral to their business of lending and the interest earning on the deposits is attributable to their lending business.

Further, the assessee contended that they received repayment from borrowers in several installments and they have to in turn repay to NABARD which has to be done only twice a year i.e., 31^st January and 31^st July of each year as per the Schedule fixed by NABARD.

Further, the assessee contended that the society is not carrying on any separate business for earning such interest income and the income so derived is the amount of profits and gains attributable to the activities of carrying in the business of banking or providing credit facilities to its members by a cooperative society and the same is liable to be deducted from the gross total income under Section 80P of the Act.

The Assessing Officer who completed the assessment under Section 143(3) of the Act by order dated 30.3.2016, did not accept the submissions made by the assessee by referring to the decision of the Supreme Court in Totgars Cooperative Sales Society Ltd. vs. ITO, (2010) 188 Taxman 282 (SC).

Aggrieved by such order, the assessee preferred appeal before the Commissioner of Income Tax (Appeals) which was dismissed.

Aggrieved by such order, the assessee preferred appeal before the Tribunal which was dismissed.

The issue before the bench was whether the disallowance of deduction of interest income under section 80P(2)(a)(i) was justified.

The bench looked into the case of Totgars Cooperative Sales Society Ltd. (supra) where the Supreme Court was dealing with the case where the assessee therein, apart from providing credit facility to the members, was also in the business of marketing of agricultural produce grown by its members and the sale consideration received from marketing agricultural produce of its members was retained in many cases and retained amount which was payable to its members from whom produce was bought, was invested in a short term deposit/security.

The facts of the case of the assessee is entirely different as the amount which was deposited in the bank was not an amount due to the members and it was not the liability of the society to the members and, therefore, the interest earned from such deposits in the bank should be held to be eligible for deduction under section 80P(2)(a)(i) of the Act, opined the bench.

The bench held that the Assessing Officer, the CIT(A) as well as the Tribunal erred in not granting the deduction as claimed by the assessee under section 80P(2)(a)(i) of the Act and also erred in following the decision in Totgars Cooperative Sales Society Ltd. (supra) which is not applicable to the facts and circumstances of the case.

In view of the above, the bench allowed the appeal.

Case Title: The West Bengal State Co-operative Agriculture & Rural Development Bank Ltd. v. Deputy Commissioner of Income Tax, Circle-54 Kolkata

Case Number: ITAT/36/2025

Counsel for Petitioner/Assessee: Subash Agarwal, Rajarshi Chatterjee, Nitish Bhandary, Amit Shaw and Suman Sahani

Counsel for Respondent/Department: Prithu Dudhoria