Section 80P Deduction Allowed as Bank Deposits Were Security for Business Loans: ITAT Hyderabad

Andhra Bank Farmers Service Cooperative Society Limited Vs ITO (ITAT Hyderabad)

The assessee, a cooperative society, filed appeals before the Income Tax Appellate Tribunal (ITAT), Hyderabad, challenging orders of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), for Assessment Years 2015-16 and 2016-17. There was a delay of 303 days in filing the appeals. The assessee sought condonation of the delay, explaining that it was under a bona fide belief that it should wait for the Assessing Officer to pass consequential orders pursuant to the CIT(A)’s directions regarding deduction under Section 80P. The Revenue opposed the condonation, arguing that no sufficient cause had been shown and that the appeals were not filed even within the limitation period after the consequential orders were passed.

The Tribunal noted that the assessee had explained the delay on the ground that it was awaiting consequential orders and believed that further action was required only after those orders were received. Considering that the assessee was a cooperative society and that the dispute involved the eligibility of deduction under Section 80P in respect of interest earned from deposits with Andhra Bank (now merged with Union Bank of India), the Tribunal found that the assessee had raised an arguable case on merits. Taking a lenient view, the Tribunal condoned the delay of 303 days subject to payment of costs of ₹10,000 in each appeal to the ITAT Tax Bar Association, Hyderabad.

On merits, the dispute concerned deduction under Section 80P in respect of interest earned on deposits maintained with Andhra Bank/Union Bank of India. The assessee contended that these deposits were not investments made to earn interest. Instead, they were security deposits placed with the bank as a condition for availing loans used in the assessee’s business of providing credit facilities to its members. The assessee argued that the interest earned on such deposits was incidental to its business activities and therefore eligible for deduction under Section 80P(2)(a)(i). The assessee also contended that the CIT(A) had wrongly considered the matter under Section 80P(2)(d) instead of Section 80P(2)(a)(i).

The Revenue argued that interest earned from deposits with commercial banks was not eligible for deduction under Section 80P(2). Reliance was placed on judicial precedents which held that deduction was not available in respect of interest earned from deposits with commercial banks and that the benefit was restricted to investments with cooperative societies or cooperative banks.

After examining the facts, the Tribunal found that there was no dispute that the interest income had been earned from deposits maintained with Andhra Bank/Union Bank of India. However, it accepted the assessee’s explanation that the deposits were made as security for obtaining loans used in its business of providing credit facilities to members. The Tribunal observed that the deposits were not made as investments of surplus funds for earning interest. Rather, they were required for the conduct of the assessee’s business activities. Consequently, the interest income was directly connected with and incidental to the business of the assessee.

The Tribunal relied on earlier decisions, including those of the Hyderabad and Visakhapatnam Benches, and noted the distinction between interest earned on surplus funds invested for earning income and interest earned on deposits made in the course of carrying on business. It observed that where deposits are made as a requirement for obtaining loans used in business operations, the resulting interest income remains attributable to the business activity of the cooperative society. The Tribunal also referred to precedents that recognised such income as eligible for deduction under Section 80P(2)(a)(i).

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

These two appeals by the Assessee are directed against two separate Orders of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC], Delhi, both dated 12.09.2024, for the assessment years 2015-2016 and 2016­-2017.

2. There is a delay of 303 days in filing these appeals before the Tribunal. The assessee has filed petition for condonation of delay which is also supported by the affidavit of the assessee. The learned Authorised Representative of the Assessee has submitted that due to some confusion regarding the impugned orders passed by the learned CIT(A) whereby the Assessing Officer was directed to allow the deduction u/sec.80P(2)(d) of the Income Tax Act [in short “the Act], 1961 in respect of the interest earned from the deposits with the Cooperative Banks and further the Assessing Officer was also directed that if any expenses have been incurred to earn the interest income from commercial banks the same will be allowed to the assessee after verification of record. Thus, the assessee was under the bonafide belief that it should wait till the consequential order is passed by the Assessing Officer. The learned Authorised Representative of the Assessee has thus submitted that the learned CIT(A) has granted the relief in respect of the interest earned by the assessee from Cooperative Banks but has directed the Assessing Officer to assess the interest income from commercial banks after allowing the expenditure. Since the tax liability was subjected to the consequential order passed by the Assessing Officer after allowing the expenditure against the interest income therefore, the assessee waited for the Order passed by the Assessing Officer and thereafter filed the present appeals. The learned Authorised Representative of the Assessee has then submitted that the Assessing Officer has assessed the entire interest income to tax and disallowed the claim of deduction u/sec.80P(2)(d) of the Act. He has pointed out that the interest income in question was earned from the security deposits with the Andhra Bank now merged with Union Bank of India which is a promoter of the assessee Cooperative Society is otherwise allowable u/sec.80P(2)(a)(i) of the Act because that security deposit was made for availing the loan from the bank which was utilised for the business of the assessee. Therefore, the interest income was part of the business activity of the assessee and atleast incidental to the business activity of the assessee eligible for deduction u/sec.80P(2)(a)(i) of the Act. Thus, he has prayed that the delay of 303 days in filing the appeals before the Tribunal may be condoned.

3. On the other hand, the learned DR has vehemently opposed to the condonation of delay and submitted that the assessee has not explained any reasonable cause much less the sufficient cause for the inordinate delay of 303 days. He has further contended that the assessee has given the reasons for delay that it was waiting for the consequential orders passed by the Assessing Officer to give effect to the order of the learned CIT(A) however, the assessee has not filed these appeals even within the period of limitation after giving effect orders passed by the Assessing Officer on 03.07.2025. Therefore, it is a case of gross negligence on the part of the assessee.

4. We have considered the rival submissions as well as the reasons explained by the assessee in the petition for condonation of delay which reads as under:

1. “The Appeal is filing appeal against the Order of The Commissioner of Income Tax Appeals NFAC ITBA/ 1VFAC/ S/ 250/ 2024­25/ 1068641091(1) dated 12.09.2024. The due date to file appeal falls on 30.11.2024 but the appeal has been filed on i.e.29.09.2025. Thus, there was a delay of 303 days in filing of appeal. The delay caused due to lack of proper/ timely action on the part of appellant on one hand and appellant was waiting for consequential orders to be passed by JAO to take further course of action on other. The JAO passed the order dt 03.07.2025 levying tax on interest on fixed deposits held with nationalized bank (Le. promoter bank of the appellant). The appellant is not lethargy rather under boda fide belief that only on receipt of consequential order need to act upon. This caused the delay in filing the appeal before this Hon’ble Tribunal.

2. It is humbly submitted that, the appellant may please to allow to file this appeal and request to condone the delay in view of the above facts and circumstances. The appellant humbly requested to condone the delay of 303 days in filing of appeal and allow presenting the facts and figures for redress.”

4.1. Thus, the assessee has explained the cause of delay as it was under bonafide belief that only on receipt of the consequential order necessary steps were to be taken for filing the appeals. Considering the reasons explained by the assessee and particularly, the facts and circumstances that the assessee is a cooperative society and the disallowance of claim of deduction u/sec.80P of the Act was sustained by the learned CIT(A) in respect of the interest earned by the assessee from the deposits with Andhra Bank now merged with the Union Bank of India which is a commercial bank. The assessee has explained the purpose of deposit with Andhra Bank as assessee availed the loan from the bank and the deposits were made as security for availing the loan. Therefore, the assessee has made out an arguable case on the merits of the issue. Hence, having regard to the facts and circumstances of the case, we are taking a lenient view to condone the delay of 303 days in filing these two appeals subject to cost of Rs.10,000/- in each appeal to be paid to ITAT Tax Bar Association, Hyderabad, within a period of one month from the date of this Order.

ITA.No.1582/Hyd./2025 – A.Y. 2015-2016 :

5. The assessee has raised identical grounds in its appeals for both the assessment years i.e., 2015-2016 and 2016-2017 in ITA.Nos.1582/Hyd./2025 and ITA.No.1565/ Hyd./2025 respectively. For the assessment year 2015-2016 the assessee has raised the following grounds of appeal:

1. “The Ld. Appellate Authority NFAC erred in passing the order proposing tax on interest earned by appellant on deposits held with nationalized bank.

2. The Ld. Appellate authority-NFAC failed to consider and appreciate the order of this Hon’ble Tribunal passed in ITA No:111/ Hy d/ 2023 dated 11.04.2023 for AY 2018-19 submitted during the appeal proceedings.

3. The Ld. Appellate Authority -NFAC erred in misinterpreting the facts so far as interest income in the hands of appellant stating that the same is ineligible u/ s.80P(2)(a)(i) of IT Act, 1961.

4. The Ld. Appellate Authority-NFAC erred by not appreciating the fact that appellant earned interest on mandatory deposits held with promoter nationalized bank.

5. The Ld. Appellate Authority-NFAC erred in directing the jurisdictional assessing authority to pass the consequential order affecting the appeal order on verification of correctness of claim of deduction u/ s.80P(2)(a)(i) of IT Act, 1961, to the extent of interest earned on fixed deposits held with only cooperative banks.

6. The Ld. Appellate Authority-NFAC erred in misinterpreting the applicability of clause 80P(2)(d) of IT Act, 1961 instead of sub clause (i) of clause(a) of sub section (2) of Section 80P of IT Act, 1961 and directing the JAO to disallow the deduction claimed.

7. The Ld. Appellate Authority-NFAC erred and failed to appreciate the fact that interest earned on deposits by appellant is out of the funds pertaining to the members of the appellant society parked under deposits and formed part of its business transactions or services to its members of appellant society.

8. The Ld. Appellate Authority-NFAC erred in not appreciating the fat that deduction was claimed u/ s.80P(2)(a)(i) of the Act, since money was deposited in the nationalized banks for security reasons and operational convenience and further interest is only an offshoot and thus the same is eligible for deduction.

9. The appellant craves the right to amend, add, delete all or any of the above grounds of appeal during the appeal proceedings.”

6. The learned Authorised Representative of the Assessee has submitted that the learned CIT(A) has sustained the disallowance of deduction u/sec.80P of the Act in respect of the interest earned by the assessee on the deposits made with Andhra Bank/ Union Bank of India whereas the purpose of the said deposit was to avail the loan from the said bank for the business of the assessee. Thus, the interest earned by the assessee is incidental income to the business activity of the assessee and therefore, eligible for deduction u/sec.80P(2)(a)(i) of the Act. In support of his contention, he has relied upon the following decisions:

6.1. The learned Authorised Representative of the Assessee has submitted that this is not an investment of fund of the assessee but it is only a deposit made in the course of the business of the assessee society. Therefore, the interest income earned by the assessee is incidental to the business activity of the assessee which is a Primary Credit Cooperative Society providing credit facilities to its members by availing the funds from the bank for which the assessee has made the security deposit. Thus, the learned Authorised Representative of the Assessee has submitted that the claim of deduction u/sec.80P of the Act be allowed in respect of interest income earned by the assessee from the deposits made in the Nationalised Bank for availing the loan for the purpose of business activity of the assessee providing credit facilities to its members.

7. On the other hand, the learned DR has submitted that the interest income earned by the assessee from the deposits with the commercial banks is not eligible for deduction u/sec.80P(2) of the Act. He has submitted that these issues are considered by the Hon’ble Gujarat High court in the case of Brahmarshi Co-op. Credit Society Ltd., vs. ACIT [2025] 170 taxmann.com 336 (Gujarat) and submitted that the Hon’ble High Court has held that even in case of society engaged in carrying on the business of bank or providing credit facilities to its members the deduction u/sec.80P(2) is in respect of the interest is available only to the extent of the said income derived by the Cooperative Society from its investment with the other Cooperative Society/Banks. Therefore, the interest earned from the deposits made with the commercial bank is not eligible for deduction u/sec.80P(2) of the Act. He has also relied upon the Judgment of Hon’ble Andhra Pradesh High Court in the case of The Vavveru Co-operative Rural Bank Ltd., Buchireddy Palem (V lis M), Kavali Division, Nellore District vs. CCIT, Vijayawada in W.P.Nos.12727 of 2016 and batch, dated 15.03.2017.

8. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the interest income in question which was held to be not eligible for deduction u/sec.80P(2) of the Act by the learned CIT(A) is earned by the assessee from the deposits made with the Andhra Bank now merged with the Union Bank of India. The assessee is a Primary Cooperative Credit Society and providing the credit facilities to its members. The assessee has explained the purpose of deposit made with the Andhra Bank/Union Bank of India that in order to avail the loan facility the said deposit was made as security with the bank and therefore, the loan availed by the assessee was for the business purpose of the assessee for providing the credit facilities to its members and the interest income on such security deposit is directly related to the business activity of the assessee. Therefore, we find that the interest income in question earned by the assessee is incidental to the business activity of the assessee. It is not a case of investment of surplus fund or otherwise fund available with the assessee for earning the interest income but the deposits were made as required for the business activity of the assessee for availing the loan from the bank. Hence, the interest income on such security deposits for availing the loan will be considered as incidental to the business activity of the assessee and therefore, the same is eligible for deduction u/sec.80P(2)9a)(i) of the Act. This issue has been considered by this Tribunal in series of the decisions including in the case of M/s. The West Godavari District Co-operative Marketing Society Ltd., vs. PCIT, Visakhapatnam (supra) as under:

“9. As regards the findings of the learned PCIT that the interest income of Rs. 68,94,925 claimed as deduction by the assessee under section 80P(2)(a)(iv) of the Act does not constitute the “operational income” but simply accrues to the assessee outside the ambit of section 80P of the Act, the learned Authorised Representative (“learned AR”) submitted that the interest income received by the assessee is out of its own funds from activities contemplated under section 80P(2)(a) and the said interest income is also entitled for deduction under section 80P(2)(a) of the Act. In this regard, the learned AR placed reliance upon the decision of the coordinate bench of the Tribunal in The Chebrole Large-Sized Co­op Society Limited v/ s The Income Tax Officer, in ITA No. 36/Viz/ 2024, for the assessment year 2018-19. From the perusal of the aforesaid decision, we find that the coordinate bench of the Tribunal vide its order dated 04.03.2025 observed as follows: –

“6. We have gone through the record in the light of the submissions made on either side. It could be seen from the record that the assessee offers credit services and also sale of fertilizers and pesticides with its members. Coming to the objection of the learned PCIT that any interest accrued from investment with the state cooperative central bank not attributable to the activities specified in section 80P(2)(a) of the Act, and cannot be allowed as a deduction is concerned, this issue is no longer res integra. Hon’ble jurisdictional High Court considered the same in extenso in The Vavveru Co-operative Rural Bank Ltd. (supra). On a threadbare analysis of the provisions under section 80P of the Act in the light of various decisions including the decision of the Hon’ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) and jurisdictional High Court in the case of CIT vs. Andhra Pradesh State Cooperative Bank Ltd [2011] 12 taxmann.com 66 (Andhra Pradesh), the Hon’ble High Court reached a conclusion that if the investment is made in fixed deposits in nationalised banks from out of the own funds of the assessee, the interest derived from such investment would be from the activities listed in clause (i) to (vii) of section 80P(2)(a) of the Act and would be eligible for deduction. For the sake of completeness, we deem it necessary to extract the relevant observations of the Hon’ble High Court hereunder,-

“28. ……………….. Before considering the effect of the various decisions cited on both sides, we think it would be ideal to look at the statutory prescription in pure and simple form. As we have indicated earlier, section 80P(2) is actually divided into six parts, categorised under clauses (a), (b), (c), (d), (e) and (1). Each one of these clauses deal with different types of co-operative societies engaged in different types of activities. The benefit made available to each one of them is also different from the other. Therefore, it may be useful to present a tabular form, the six categories of co­operative societies covered by clauses (a) to (f) and the nature and extent of the benefit available to each one of them, as follows:

… …. …

… …. …

30. Therefore, what follows is that when a co-operative society engaged in any one of the activities stipulated in sub-clauses (i) to (vii) of clause (a) makes profits and gains out of business attributable to anyone of those activities, the case would fall under clause (a). The moment the income derived from one of those activities is invested in another cooperative society and an interest or dividend is derived therefrom, the case would be covered by clause (e). In case the profits and gains of business arising out of the activities listed in sub-clauses (i) to (vii) of clause (a) is invested in immovable properties, such as, godowns or warehouses and an income is derived therefrom, the case would be covered by clause (e) of section 80P(2).

31. The only area of distinction between clause (a) on the one hand and clauses (d) and (e) on the other hand is that the benefit under clause (a) is restricted only to those activities of a co­operative society enlisted in sub-clauses (i) to (vii) of clause (a). On the other hand, the benefit under clauses (d) and (e) are available to all cooperative societies, without any restriction as to the nature of the activities carried on by them.

32. In simple terms, the position can be summarised like this. If there is a co-operative society, which is carrying on several activities including those activities listed in sub-clauses (i) to (vii) of clause (a), the benefit under clause (a) will be limited only to the profits and gains of business attributable to any one or more of such activities. But, in case the same cooperative society has an income not attributable to any one or more of the activities listed in sub-clauses (i) to (vii) of clause (a), the same may go out of the purview of clause (a), but still, the co-operative society may claim the benefit of clause (d) or (e) either by investing the income in another cooperative society or investing the income in the construction of a godown or warehouse and letting out the same.

32. In other words, the benefit conferred by clause (d) upon all types of co-operative societies is restricted only to the investments made in other co-operative societies. Such a restriction cannot be read into clause (a), as the temporary parking of the profits and gains of business in nationalised banks and the earning of interest income therefrom is only one of the methods of multiplying the same income. To accept the stand of the Department would mean that cooperative societies carrying on the activities listed in clauses (i) to (vii), which invest their profits and gains of business either in other cooperative societies or in the construction of godowns and warehouses, may benefit in terms of clause (d) or (e), but the very same societies will not be entitled to any benefit, if they invest the very same funds in banks. Such an understanding of section 80P(2) is impermissible for one simple reason. The benefits under clauses (d) and (e) are available in general to all cooperative societies, including societies engaged in the activities listed in clause (a). Section 80P(2) is not intended to place all types of cooperative societies on the same pedestal. The section confers different types of benefits to different types of societies. Special types of societies are conferred a special benefit.

34. The case before the Supreme Court in Totgar’s Co-operative Sale Society Ltd.’ s case (supra) was in respect of a cooperative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar’s Co-operative Sale Society Ltd.’ s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar’ s struck a different note.

35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other cooperative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.

36. The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression “attributable to” and not any one of the two expressions, namely, “derived from” or “directly attributable to”.

37. Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside”.

7. It is, therefore, clear that the assessee being a primary agricultural cooperative society invested the own surplus funds with the district cooperative central bank and, therefore, the assessee is entitled to claim the deduction under section 80P(2)(a)(i) of the Act. With this view of the matter, we find that there are no merits in the impugned order and the same is liable to be quashed. Grounds are answered accordingly.”

10. Therefore, respectfully following the aforesaid decision rendered by the coordinate bench of the Tribunal, we are of the considered view that the assessee is entitled to claim a deduction under section 80P(2)(a) of the Act in respect of interest income of Rs.68,94,925.”

8.1. The Visakhapatnam Bench of this Tribunal has decided this issue in favour of the assessee by following the Judgment of Hon’ble Andhra Pradesh High Court in the case of CIT vs. Andhra Pradesh State Co-operative Bank Ltd., [2011] 12 taxmann.com 66 (Andhra Pradesh-HC). A similar view has been taken by this Tribunal in other cases. The decisions relied upon by the learned Departmental Representative are on the point where the surplus fund were invested by the Cooperative Society with the bank and therefore, the interest earned on the investment with the commercial banks was considered as not falling in the ambit of sec.80P(2)(d) of the Act or attributable to the business carried on by the assessee society. Hence, those Judgments are not applicable in the facts of the case in hand where the deposits are made by the assessee as security for availing loan from the banks for the purpose of business of the assessee. Once the deposits are not made as an investment for earning the interest income but these are required to be made for the business activity of the assessee then, the interest on such deposits is incidental and attributable to the business activity of the assessee. Therefore, following the earlier Orders of this Tribunal we allow the claim of deduction u/sec.80P(2)(a)(i) in respect of the interest earned by the assessee on the security deposit made for availing loan for business purpose of the assessee.

9. In the result, ITA.No.1582/Hyd./2025 of the assessee for the assessment year 2015-2016 is allowed.

10. For the assessment year 2016-2017 in ITA.No.1565/Hyd./2025 the assessee has raised identical grounds. We have already considered the identical issue on merits for the assessment year 2015-2016 following the earlier Orders of this Tribunal and allowed the claim of deduction u/sec.80P(2)(a)(i) of the assessee in respect of the interest earned by the assessee on the security deposit made for availing loan for business purpose of the assessee. Our findings for the assessment year 2015-2016 shall follow mutatis mutandis for the assessment year 2016-2017. We Order accordingly.

11. In the result, ITA.No.1565/Hyd./2025 for the assessment year 2016-2017 is allowed.

12. To sum-up, both the appeals of the Assessee are allowed. A copy of this common order be placed in the respective case files.

Order pronounced in the open Court on 15.05.2026.