KSRTC EMPLOYEES CO-OPERATIVE CREDIT SOCIETY LTD,BANGALORE vs. INCOME-TAX OFFICER WARD 7(2) (3), BANGALORE

In this appeal, the assessee has raised the following grounds: - 1. The order of the Learned Additional /Joint Commissioner of income-tax (Appeals)- 1 Chennai is opposed to law on the facts of the case 2. Learned JCIT (A) has held that interest of Rs. 3847742 received from Cooperative Bank on the Reserve Fund deposit is income-from other sources and hence not exempt u/s 80P (2) (a) (i) of the I.T. Act as per the decision of the Apex Court in the case of M/s. Totgar Society ltd. And Mavilayi service cooperative society (2021). 123 Taxman 161(SC) 169 3. The appellant has to keep certain percentage of deposits received and loan given to its members as security deposit in the Co-operative bank as directed by the Registrar of Co-operative societies in Karnataka to carry its business of accepting deposit from the members and give loans to its members 4. The appellant would have utilised the above amount in giving loans to its members if there is no statutory order from Government. So it is not income from other source but business income and falls u/s 80P 20(a) (i) of the I.T. Act. 5. The Honorable Supeme Court in the case of CIT V/s Karnataka State Cooperative Apex Bank Ltd. 251 ITR 154(SC) has held that interest on statutory Deposit is income from business and same is exempt under section 80P (2) (a) (i) Of the IT Act. 6. For these and such other grounds that will be urged at the time of hearing of this appeal it is prayed that the interest of Rs.3847742 received on statutory deposits kept in the co-operative bank may be deleted and such other orders may be passed to meet the ends of justice.

The solitary grievance of the assessee is against the denial of deduction under section 80P(2)(a)(i) of the Act in respect of interest on statutory deposits kept in co-operative bank.

We have considered the submissions of both sides and perused the material available on record. The assessee is an employee’s credit co- operative society. For the year under consideration, the assessee, inter alia, earned interest on statutory deposits kept in Karnataka State Apex Co- Operative Bank and claimed the same as a deduction under section 80P(2)(a)(i) of the Act while filing its return of income. The CPC-Bangalore vide intimation issued under section 143(1) of the Act, inter alia, disallowed the deduction claimed by the assessee under section 80P(2)(a)(i) of the Act in respect of interest earned on statutory deposits. The assessee’s rectification application under section 154 of the Act was also dismissed, confirming the additions made vide intimation issued under section 143(1) of the Act. The learned CIT(A), vide impugned order, rejected the submissions of the assessee on this issue and upheld the disallowance of deduction claimed under section 80P(2)(a)(i) of the Act. Being aggrieved, the assessee is in appeal before us.

In the present case, it is undisputed that the assessee is a co-operative society registered under the Karnataka State Co-operative Societies Act and is carrying on the business of providing financial/credit facilities to its members and collecting deposits from them. As per the assessee being a credit co-operative society, it has to comply with the provisions of Karnataka Co-Operative Societies Act, 1959, and rules made thereunder and the circulars and notifications issued by the Government of Karnataka. It is the plea of the assessee that, as per Notification/Circular 104:XMC:92-93 dated 29/09/1992 issued by the Registrar of Co-Operative Societies, Government of Karnataka, the credit co-operative society has to keep Statutory Liquid Ratio fund not less than 25% of the total Demand and Time Liabilities. Further, as per section 57 of the Karnataka Co-Operative Societies Act, 1959, every year a co-operative society shall out of its net profit in any year transfer an amount not less than 25% of the profits to the reserve fund and such reserve fund cannot be used as working capital of the society and shall be deposited into the co-operative bank. Therefore, it is claimed by the assessee that there is a business nexus to the earning of interest income on statutory deposits, and hence, the same is eligible for deduction under 80P(2)(a)(i) of the Act.

We find that while considering a similar issue, the Coordinate Bench of the Tribunal in Shri Shanteshwar VividoddeshagalaSahakara Sangha Niyamit vs. ITO, reported in [2026] 186 taxmann.com 733 (Bang.-Trib.), observed as follows: - “9.2 Further, on considering the argument raised by the AR of the assessee that the assessee is entitled for the deduction u/s 80P(2)(a)(i) of the Act to such portion of the interest from cooperative banks in respect of mandatorily maintenance of fluid resources as statutorily required under the Karnataka Cooperative Societies Act and rules thereunder and only the balance of interest over and above the mandatory SLR was liable to be charged u/s 56 of the Act, we take a note of the fact that the certain deposits in question as contended by the AR of the assessee was not voluntarily made by the assessee society for the investment purposes but were instead statutorily mandated by the Karnataka Cooperative Societies Act, 1959. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operation without prior approval from the Registrar of Cooperative Society. We also take note of the fact that if the statutory funds are not invested in the prescribed mode, the business of the assessee may also get hampered/effected due to the violation of these statutory provisions. Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the Cooperative banks are entitled for deductions u/s 80P(2)(a)(i) of the Act. In holding so, we also draw our support and guidance from the judgement of Hon'ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) which has considered the term "attributable" and held as follows: "As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business" of the specific industry (here generation and distribution of society) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from" been used, it could have with some force been contented that a balance charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression "derived from", as for instance, in Section 80J. In our view, since the expression of wider Page 4 of 7 import, namely "attributable to" has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity" 9.3 Further, we also draw support and guidance from the judgment of Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 118 Taxman 321 / 251 ITR 194 (SC) wherein it was held as under: "There is no doubt, and it is not disputed, that the assessee co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income tax thereon. The placement of such funds being imperative for the purpose of carrying on the banking business, the income derived there from would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co-operative Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital." 9.4 Further, the Apex Court in the case of Mehsana District Central Co- operative Bank Ltd. v. ITO [2001] 119 Taxman 785/ 251 ITR 522 (SC) had again reiterated by relying on its own judgment delivered in the case of Karnataka State Co-operative Apex Bank's case (supra) as under- "Insofar as the interest income upon statutory reserves is concerned, the question must be answered in favour of the assessee, in the light of the judgment delivered by us in Karnataka State Co-operative Apex Bank's case (supra)." In view of the above principles laid down by Hon'ble Supreme Court if the income is attributable to the profits & gains of business of the society, then the assessee society is entitled for deduction u/s 80P(2)(a)(i) of the Act. 9.5 Further, In the case of ClT v. Nawanshahar Central Cooperative Bank Ltd. [2007] 160 Taxman 48 (SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and Gains of Business and Profession". Even though the abovementioned decision was in the context of cooperative societies /Banks claiming deduction under section 80P (2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 as per the CBDT Circular No. 18/2015 dated 02/11/2015. 9.6 The Hon'ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer [2015] 55 taxmann.com 447 / 230 Taxman 309 (Karnataka) had also held as under- "7. The word 'attributable' used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word 'attributable' as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v.CIT [1978] 113 ITR 84 (SC) as under: