VSS Bank Makkandur Vs ITO (ITAT Bangalore)
Bank Deposit Interest of a Credit Society: The Source of the Funds Makes the Difference
Interest earned from a bank deposit is often assessed as “income from other sources”. But where a credit co-operative society temporarily deposits funds belonging to its business, can the interest retain its character as income attributable to providing credit facilities to members? The Bangalore Tribunal answered yes on the facts of this case and allowed deduction under section 80P(2)(a)(i).
The dispute over ₹25.10 lakh
VSS Bank Makkandur is an agricultural credit co-operative society registered under the Karnataka Co-operative Societies Act, 1959. It provides credit facilities to its members. For AY 2020–21, it claimed deduction under section 80P, including deduction in respect of interest earned on funds placed with banks.
The Assessing Officer held that interest on bank deposits was not received from members for credit facilities provided to them. He treated the disputed ₹25,10,475 as taxable under section 56, denied deduction under section 80P(2)(a)(i), and increased the assessed income accordingly. The CIT(A) upheld that view.
The society argued that its bank deposits were connected with its credit business. According to it, the deposits were made from members’ funds and funds maintained under the requirements of the Karnataka co-operative law. Money not immediately needed for lending had been placed with banks; earning interest on that money did not amount to carrying on a separate activity.
