Calcutta High Court Favors Cooperative Bank | Interest On Surplus Funds And Personal Loans ‘Attributable To’ Core Banking Business, Eligible For 80P Deduction
Sanchayita Lahkar
The High Court of Calcutta Division Bench of Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) has allowed an appeal, holding that interest income earned from surplus funds deposited in banks by a cooperative society engaged in providing credit facilities to its members is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The court found that the interest was attributable to the business of providing credit facilities to members and that the authorities below erred in applying the Supreme Court’s decision in Totgars Cooperative Sales Society Ltd. to the facts of the case. The Bench partly allowed the claim for deduction on interest income from personal loans to members but upheld the disallowance of deduction on interest from house building loans to staff.
The appeal arose from an order dated 3 September 2024 passed by the Income Tax Appellate Tribunal, “C” Bench, Kolkata in respect of the assessment year 2013-14. The assessee, a cooperative society registered under the West Bengal Cooperative Societies Act and functioning as the apex cooperative land mortgage bank in the state, provides long-term credit facilities to its members. Funds were sourced from NABARD in two instalments during the relevant year and subsequently lent to members in smaller instalments. The society explained that because it borrows in bulk and lends in retail, surplus or “floating” funds arise, which are temporarily invested in short-term bank deposits. These deposits earn interest, which the society argued was integral to its lending operations and partly offsets interest payable to NABARD.
The assessee contended that repayments from borrowers are received in instalments, while repayments to NABARD are due only twice yearly, on 31 January and 31 July. In the intervening period, funds are deposited in banks to earn interest rather than remaining idle. The society maintained that such interest income is attributable to the business of providing credit facilities to members and qualifies for deduction under Section 80P(2)(a)(i). The assessee also claimed deductions for interest income on personal loans to members and on house building loans to staff.
The Assessing Officer, in an order dated 30 March 2016 under Section 143(3), rejected these claims, citing the Supreme Court’s decision in Totgars Cooperative Sales Society Ltd. v. ITO. The Officer held that interest from bank deposits, as well as from personal loans and house building loans to staff, did not qualify for deduction under Section 80P and instead was taxable under the head "income from other sources". The Commissioner of Income Tax (Appeals) upheld the assessment on 1 November 2023, adopting the AO’s reasoning. The Tribunal dismissed the assessee’s further appeal, also relying on Totgars.
The assessee brought the matter before the High Court under Section 260A, raising multiple substantial questions of law, including whether the authorities below erred in applying Totgars, in disallowing deductions on interest from bank deposits and loans to members, and in failing to allow deduction after attributing costs of funds.
The Bench noted that substantial questions of law 1, 2, and 3 were interlinked, concerning the applicability of Totgars and the eligibility of interest income from bank deposits for deduction under Section 80P(2)(a)(i). The court examined precedents including Guttigedarara Credit Co-operative Society Ltd. v. ITO, Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, Vavveru Co-operative Rural Bank Ltd. v. Chief Commissioner of Income Tax, and Principal Commissioner of Income Tax v. Gunja Samabay Krishi Unnayan Samity Ltd.
Quoting from Guttigedarara, the court recorded: “The word ‘attributable to’ is certainly wider in import than the expression ‘derived from’... A Co-operative Society which is carrying on the business of providing credit facilities to its members... If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only... and is liable to be deducted from the gross total income under Section 80P of the Act.”
The Bench observed that in Totgars, the amounts invested in short-term deposits were amounts payable to members from sale proceeds of their produce, constituting liabilities to the members. In the present case, the funds deposited were not amounts due to members nor liabilities, and thus Totgars was distinguishable. The court noted similar conclusions in Tumkur Merchants and Vavveru Co-operative, highlighting that the statutory phrase "attributable to" warranted a broader interpretation than "derived from".
Regarding personal loans to members, the Bench found that the assessee’s membership included four classes, with Class D comprising individuals above 18 years receiving loans through branches. Interest earned from such loans was held to be eligible for deduction under Section 80P. However, on house building loans to staff, the court concurred with the authorities below in denying deduction.
The Bench concluded that the Assessing Officer, CIT(A), and Tribunal erred in disallowing deduction on interest income from bank deposits, and that the application of Totgars was misplaced given the factual differences. It directed that substantial questions of law 1, 2, and 3 be answered in favour of the assessee, holding the interest from surplus funds in bank deposits as deductible under Section 80P(2)(a)(i). For substantial question 4, the court partly allowed the claim, granting deduction for interest on personal loans to members but denying it for interest on house building loans to staff. The appeal was allowed to this extent, and the connected application was disposed of.
Advocates Representing the Parties:
For the Appellants: Mr. Subash Agarwal, Advocate; Mr. Rajarshi Chatterjee, Advocate; Mr. Nitish Bhandary, Advocate; Mr. Amit Shaw, Advocate; Ms. Suman Sahani, Advocate.
For the Respondents: Mr. Prithu Dudhoria, Advocate.
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, IA No: GA/1/2025
Bench: Chief Justice T.S. Sivagnanam, Justice Chaitali Chatterjee (Das)
