Introduction
The case of Amreli Jilla Dudh Utpadak Sahakari Sangh Ltd. v. DCIT/ACIT-2(1) (ITA No. 729/RJT/2026) before the Income Tax Appellate Tribunal (ITAT), Rajkot Bench, addresses a recurring issue under the Income-tax Act, 1961: whether interest earned on fixed deposits (FDs) maintained as collateral security for business credit facilities qualifies as business income eligible for deduction under section 80P(2)(d). This commentary dissects the Tribunal’s reasoning, focusing on the direct nexus between FDs and business operations, the principle of consistency, and reliance on precedent. The decision underscores the importance of factual context in characterising income for cooperative societies.
Facts of the Case
The assessee, a registered cooperative society engaged in procuring milk from members and supplying it to a federal society, filed its return for Assessment Year (AY) 2018-19. The Assessing Officer (AO), under section 143(3) of the Act, made an addition of Rs.33,39,749 by denying deduction under section 80P(2)(d) on certain receipts, treating them as income from other sources. On appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] partly allowed the claim but sustained a disallowance of Rs.7,44,170, being interest earned on FDs with banks. The CIT(A) held that such interest was assessable under the head “Income from Other Sources” and thus not eligible for deduction.
Aggrieved, the assessee appealed to the ITAT. The Tribunal condoned a 42-day delay in filing, satisfied that sufficient cause existed. During hearing, the assessee’s AR argued that the FDs were not independent investments; they were created at the bank’s insistence as collateral security for overdraft and credit facilities essential for the society’s business. The AR submitted that a direct and proximate nexus existed between the FDs and business activities, making the interest business income. He cited the coordinate bench decision in Moodbidri Co-operative Service Bank Ltd. v. Income Tax Officer (159 taxmann.com 1233) and noted that the Revenue had consistently accepted similar claims in earlier (AY 2013-14) and subsequent (AY 2021-22) assessment years. The Ld. DR supported the lower authorities but conceded that the FDs were created for obtaining overdraft facilities.
Reasoning of the ITAT
The Tribunal’s reasoning is structured around three key pillars: factual nexus, principle of consistency, and binding precedent.
1. Direct Nexus with Business Operations
The ITAT emphasised that the FDs were not made as an independent investment to earn interest. The material on record, including bank statements, showed that the deposits were created solely as collateral security for availing overdraft and other credit facilities required in the ordinary course of the society’s milk procurement and supply business. This established a direct and proximate nexus between the interest income and the business activities. The Tribunal noted that the Ld. DR fairly admitted this factual position. Consequently, the interest earned was an integral part of the business income and could not be isolated as “Income from Other Sources.” This reasoning aligns with the principle that income arising from assets used as a tool for business operations retains its business character.
2. Principle of Consistency
The ITAT highlighted that the Revenue itself had accepted the assessee’s claim in earlier and later years. For AY 2013-14, the CIT(A) vide order dated 23.06.2016 held that the interest on FDs constituted business income. In reassessment proceedings under section 147, the AO passed a reassessment order on 13.02.2022 without making any addition on this issue. Similarly, for AY 2021-22, the AO accepted the bank interest as business income and allowed deduction under section 80P(2)(d). The Tribunal observed that in the absence of any change in facts or statutory provisions, the principle of consistency demanded that the same treatment be accorded for the year under consideration. This principle, well-established in tax jurisprudence, prevents the Revenue from adopting a different stance for the same assessee without a valid reason.
3. Binding Precedent
The Tribunal relied on the coordinate bench decision in Moodbidri Co-operative Service Bank Ltd. v. Income Tax Officer (159 taxmann.com 1233). In that case, it was held that where fixed deposits are maintained under a statutory compulsion, the interest earned thereon constitutes business income eligible for deduction under section 80P(2)(d). The ITAT noted that the present facts were analogous: the FDs were maintained as collateral security, which, though not statutory, was a commercial compulsion for availing banking facilities. The Tribunal applied the ratio respectfully and held that the interest of Rs.7,44,170 is assessable as business income.
Accordingly, the ITAT set aside the orders of the lower authorities and directed the AO to allow the deduction under section 80P(2)(d).
Conclusion
This case reaffirms that the characterisation of interest income for cooperative societies depends on the purpose and use of the underlying deposits. When FDs are inextricably linked to business operations—serving as collateral for credit facilities—the resulting interest is business income, not passive income. The ITAT’s reliance on consistency and its refusal to disturb a settled factual finding underscore the need for factual coherence in tax administration. For cooperative societies, the decision provides clarity that such interest is eligible for deduction under section 80P(2)(d), aligning with the legislative intent to promote cooperative enterprises.