GOWDALLY V S S BANK,GOWDALLI vs. ITO MADIKERI, WARD 1, MADIKERI

The assessee is aggrieved by the order of the learned CIT(A) insofar as the deduction of ₹11,46,460 claimed under section 80P of the Income-tax Act was denied.

Briefly stated, the assessee, a credit cooperative society, filed its return of income declaring nil income after claiming deduction of ₹80,56,311 under section 80P of the Act. The return was processed under section 143(1) of the Income-tax Act on 09 February 2019, determining total income at ₹53,000. The case was selected for limited scrutiny to verify the deduction claimed under Chapter VI-A and notice under section 143(2) was issued on 22 September 2019. The Assessing Officer noted that the assessee had claimed deduction of ₹11,46,460 under section 80P(2)(d) of the Act. The assessment was completed on 12 March 2021 under section 143(3) read with sections 143(3A) and 143(3B) of the Act. The assessee carried the matter in appeal before the learned CIT(A), who confirmed the action of the Assessing Officer.

The assessee has therefore preferred this appeal before us. The appeal is delayed by 168 days, and the assessee has filed a petition seeking condonation of delay. It is submitted that the appellate order was never served on the assessee, either through the registered email address or by physical communication. The assessee became aware of the appellate order only on 10 March 2026, upon receiving a notice dated 6 March 2026 for levy of penalty under section 270A. The assessee immediately contacted its chartered accountant, and the appeal was filed on 17 March 2026. It is therefore concluded that the delay of 168 days was due to sufficient cause.

The learned authorised representative reiterated the same facts.

The learned departmental representative, Sri Ganesh R. Ghale, Advocate, Standing Counsel for the Department, strongly opposed the condonation petition. He submitted that the assessee had not shown sufficient cause for the delay of 168 days, as the appellate order was sent by email on the date of its pronouncement to the email address furnished by the assessee in Form No. 35. According to him, the assessee cannot therefore contend that the delay was due to sufficient cause.

We have carefully considered the rival submissions and perused the orders of the lower authorities. The assessee’s case is that the delay of 168 days occurred because the appellate order was not served on the email address stated by it. This assertion is supported by an affidavit and has not been controverted by the learned departmental representative by producing any material to show that the appellate order was in fact served on the assessee at the email address mentioned in Form No. 35. The assessee has categorically stated the facts on affidavit. In these circumstances, we find that the assessee became aware of the appellate order only upon receipt of the show-cause notice for penalty proceedings under section 270A of the Income- tax Act. The assessee thereafter immediately contacted its chartered accountant and filed the appeal before the Tribunal. We therefore hold that the delay of 168 days in filing the appeal was due to sufficient cause. The delay is accordingly condoned, and the appeal is admitted.

The issue in dispute is that the assessee is a primary agricultural credit co- operative society registered under the Karnataka Co-operative Societies Act, 1959. The assessee contends that it claimed deduction under section 80P(2)(a)(i) of the Income-tax Act, whereas the Assessing Officer wrongly treated the claim as one under section 80P(2)(d). The assessee submits that, being a member credit co-operative society, it was required to place statutory deposits with Kodagu District Central Co-operative Bank. Accordingly, the assessee claims that the interest income of ₹11,46,460 is deductible under section 80P(2)(a)(i). However, the Assessing Officer treated the claim as one under section 80P(2)(d) and, applying the decision of the Hon’ble jurisdictional High Court in the case of Totgars Co-operative Sale Society Ltd., denied the deduction on the ground that the interest was earned from a co-operative bank and not from a co-operative society. The learned CIT(A) confirmed the action of the Assessing Officer.

The learned authorised representative vehemently submitted that the assessee carries on the business of a primary agricultural credit co-operative society. He submitted that the assessee was required, under the Co-operative Societies Act, to place deposits with Kodagu District Central Co-operative Bank, from which it earned interest of ₹11,46,460. According to him, this interest formed part of the business income attributable to the assessee’s activities and therefore could not be disallowed by invoking section 80P(2)(d) of the Act. The assessee relied on the decisions of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, 55 taxmann.com 447, and the related decision reported at 2017 (1) TMI 1100 - KARNATAKA HIGH COURT The Pr. Commissioner of Income Tax, Versus the Totagars Co-operative Sale Society,[2017] 392 ITR 74, [2017] 78 taxmann.com 169 (Karnataka). It was further submitted that the decision relied on by the Assessing Officer is distinguishable, since the deposits were placed with the district co-operative bank in terms of Rule 28 of the Karnataka Co- operative Societies Rules. The assessee also relied on several decisions of the co-ordinate Benches.

Shri Ganesh R. Ghale, learned Standing Counsel for the Income-tax Department, strongly supported the orders of the lower authorities. He submitted that the issue is squarely covered against the assessee and in favour of the Revenue by the decision of the Hon’ble Karnataka High Court in ITA No. 118 of 2026. According to him, following the decision in Totgars Co- operative Sale Society Ltd., the Hon’ble High Court held that an assessee is not entitled to deduction of interest earned from co-operative banks under section 80P(2)(d) of the Act. He submitted that, since the assessee had also claimed deduction under section 80P(2)(d), the said decision applies squarely to the present case. He referred to three decision of honorable High court on this issue namely (1) 2026 (4) TMI 272 - KARNATAKA HIGH COURTBangalore Credit Co-Operative Society Limited Versus Income Tax Officer, Ward 7 (2) (1), Bengaluru.(2) 2025 (10) TMI 770 - KARNATAKA HIGH COURTM/s. Judicial Employees House Building Cooperative Society Limited Versus Income Tax Officer Ward -2 (2), Mysuru and (3) 2017 (1) TMI 1100 - KARNATAKA HIGH COURT The Pr. Commissioner of Income Tax, Versus The Totagars Co-operative Sale Society,[2017] 392 ITR 74, [2017] 78 taxmann.com 169 (Karnataka).

In rejoinder, the learned authorised representative submitted that the assessee’s claim is under section 80P(2)(a)(i) of the Income-tax Act and not under section 80P(2)(d). He therefore contended that the decision cited by the learned departmental representative does not apply and that the issue should be decided in favour of the assessee. Without prejudice, he submitted that, even if the interest income is held taxable, the assessee should at least be allowed deduction for the cost of funds, as held by the Hon’ble Karnataka High Court in 2015 (4) TMI 829 - KARNATAKA HIGH COURTM/s The Totgars' Co- Operative Sale Society Ltd. Versus The Income Tax Officer, Ward-1, Sirsi[2015] 58 taxmann.com 35 (Karnataka)

We have considered the rival submissions and examined the orders of the lower authorities. The assessment order states that the assessee claimed deduction under section 80P(2)(d) of the Act, while the assessee maintains that the claim was made under section 80P(2)(a)(i). However, no copy of the return of income has been placed on record to establish the precise provision under which the deduction was claimed.

If the assessee’s claim falls under section 80P(2)(a)(i) of the Income-tax Act, the decisions of the Hon’ble Karnataka High Court support the position that income attributable to the business activities specified in sub-section (2) is eligible for deduction.

If, however, the claim is under section 80P(2)(d), the binding decisions of the Hon’ble Karnataka High Court would preclude deduction of interest income earned from a co-operative bank under that provision. Even in that event, the assessee would be entitled, in terms of another decision of the Hon’ble Karnataka High Court, to deduction of the cost of funds incurred for earning such interest. Consequently, the deduction allowable under section 80P(2)(a)(i) would require corresponding adjustment, and the interest income taxable under the head “Income from other sources” would have to be reduced by the related cost of funds.

The assessee contends that, being a primary agricultural credit co-operative society, its income is deductible under section 80P(2)(a)(i), as it is attributable to its business activities. It further submits that the deposits with Kodagu District Central Co-operative Bank were made from statutory funds in compliance with Rule 28 of the Karnataka Co-operative Societies Rules and were therefore required by law.

In the alternative, the assessee submits that, if the interest income is held to be taxable under section 80P(2)(d), deduction for the corresponding cost of funds should also be allowed.

As the material on record does not clearly establish whether the assessee claimed deduction before the Assessing Officer under section 80P(2)(a)(i) or section 80P(2)(d) of the Act, we are unable to adjudicate the issue at this stage. The matter is therefore restored to the file of the learned Assessing Officer for fresh examination. The assessee shall substantiate that the interest income earned from the district co-operative bank arose from deposits made from statutory reserve funds. If the assessee seeks deduction under section 80P(2)(a)(i), it must show that the amount invested with the district central co- operative bank was from statutory reserves maintained in accordance with Rule 28 of the Karnataka Co-operative Societies Rules. The learned Assessing Officer shall then examine the claim under section 80P(2)(a)(i) and, if he finds that the income is attributable to the assessee’s specified business activities under section 80P (2), allow the deduction in accordance with law.

If, however, the claim is found to have been made under section 80P(2)(d) of the Act, the binding decisions of the Hon’ble Karnataka High Court would apply, and the interest income earned from the co-operative bank would not be deductible under that provision. Nevertheless, where such income is assessed under the head “Income from other sources,” the assessee shall be allowed deduction of the related cost of funds. The learned Assessing Officer is accordingly directed to reduce the income from other sources by the cost of funds incurred for earning such interest, with corresponding adjustment to the deduction allowable under section 80P(2)(a)(i), if applicable.

Accordingly, the issue is restored to the file of the learned Assessing Officer for fresh adjudication in accordance with the above directions, and the assessee’s appeal is allowed for statistical purposes.