Interest from Surplus Funds Not ‘Other Sources’: ITAT Bangalore
The ITAT Bangalore held that interest income of Rs 504,996 earned by Daivagna Credit Co-operative Society from temporary surplus funds deposited in banks is part of its business income, not “income from other sources”, and therefore allowed the society’s appeal.
The present appeal has been filed by Daivagna Credit Co-operative Society Ltd against ITO, challenging the order passed by CIT(A) dated July 31, 2025.
Background of the Case
The society (assessee) claimed a tax deduction on interest of Rs 504,996 earned from deposits in banks, including a cooperative bank and a savings account with Axis Bank. However, AO and CIT(A) denied this deduction and treated the interest as “income from other sources” and said it was not eligible for deduction under Section 80P of the Income Tax Act.
The society then approached the Tribunal. During the hearing, the assessee argued that this interest income was part of its regular business. The society further explained that the money deposited in banks came from surplus funds that were temporarily not needed for lending to its members. Therefore, the income should be considered business income and qualify for deduction under Section 80P(2)(a)(i).
The tax department, however, relied on an earlier decision of the Karnataka High Court judgement in the Totagars case, which held that such interest income is taxable as “income from other sources” and not eligible for deduction.
Tribunal’s Decision
After reviewing both sides, the Tribunal observed that this case was closer to another Karnataka High Court ruling in the Tumkur Merchants case. In that judgement, the court had allowed a deduction on interest income earned from temporary deposits of surplus funds, considering it part of the business activity of a cooperative society.
The Tribunal observed that the funds deposited by the society were not liabilities owed to members but surplus funds not immediately required for lending. Since the money was part of the society’s business operations, the interest earned from it was also considered business income.
Based on this reasoning, the Tribunal ruled in favour of the society. It allowed the deduction of Rs 504,996 under Section 80P(2)(a)(i) and overturned the earlier decisions of the lower authorities. As a result, the tribunal allowed the society’s appeal partly.
Citation: Daivagna Credit Co-operative Society Ltd Vs ITO (ITAT Bangalore); ITA No. 1997/Bang/2025; 02/04/2026; 2017-18.
