ANNAPURNA MAHILA CO OPERATIVE CREDIT SOCIETY LIMITED,PUNE vs. INCOME TAX OFFICER WARD 2(2), PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE

BEFORE Ms. ASTHA CHANDRA, JUDICIAL MEMBER AND SHRI DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER

ITA No. A.Y. Appellant Respondent Annapurna Mahila Co-operative Credit 3209/PUN/2025 2020-21 Society Limited, Suvasta Prestige, Behind RMD Institute, ITO, Ward-2(2), Near Aaditya Garden City, Pune Off Mumbai Bangalore 3210/PUN/2025 2022-23 Highway Service Road, Warje, Pune-411058 [PAN: AAAAA7999P] Assessee by : Shri Nikhil Pathak Department by : Shri Bharat Andhale, Addl.CIT (Vitrual) Date of Hearing : 21-04-2026 Date of Pronouncement : 09-07-2026

O R D E R PER ASTHA CHANDRA, J.M.:

The captioned two appeals are directed against the order(s) of the Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi [“CIT(A)/NFAC”], u/s. 250 of the Income Tax Act, 1961 (the “Act”), both dated 27-10-2025, pertaining to Assessment Years (“AYs”) 2020-21 & 2022-23. Since common issues are involved, both these appeals were heard together and are being disposed of by this common order.

ITA No. 3209/PUN/2025:

“6. Decision 6.1 The present appeal arises from the assessment order passed u/s 143(3) r.w.s. 1448 dated 27.09.2022 by the Assessing Officer, wherein the total income of the appellant was determined at Rs.1,10,12,976/- against the returned income of Nil for A.Y. 2020-21, after disallowing deduction u/s 80P claimed in respect of interest earned from deposits with banks and financial institutions. The addition was made on the ground that such interest income does not constitute income from providing credit facilities to members but represents income from investment of surplus funds, taxable under the head "Income from Other Sources". Aggrieved, the appellant has preferred the present appeal. The appellant is a multi-state co-operative society registered under the Maharashtra State Co-operative Societies Act, 1960 as well as the Multi-State Co-operative Societies Act, 2002. It carries on micro-finance activities by providing small unsecured loans to women belonging to low- income groups. The appellant claims that the entire profit from such business activity is eligible for deduction u/s 80P(2)(a)(i). During the year under consideration, the appellant claimed a deduction of Rs.4,75,88,197/- u/s 80P of the Act. On examination of the financial statements, the Assessing Officer noted that the appellant had earned interest income aggregating to Rs.1,10,12,976/- from fixed deposits and savings accounts maintained with various nationalised and co-operative banks, including Indian Overseas Bank, Bank of Baroda, Bank of Maharashtra, SIDBI, Ananya Finance, Cosmos Co-op Bank, Saraswat Bank, and Shamrao Vithal Bank. The AO held that such interest income was not derived from the appellant's business of providing credit facilities to its members and accordingly denied deduction u/s 80P on this portion of income. During the appellate proceedings, the appellant filed detailed submissions and documentary evidences explaining that the deposits were not made from surplus funds but were kept with banks and financial institutions as a business necessity and in compliance with statutory provisions and the terms of borrowings. The appellant submitted that the deposits were partly required to be maintained as security under the loan sanction conditions of its lenders, and that some savings accounts were opened solely to facilitate salary disbursals, interest payments, and day-to-day operations. It was argued that the placement of deposits was imperative for the purposes of the business and therefore, interest derived therefrom formed part of the business income eligible for deduction u/s 80P(2)(a)(i). The appellant also referred to judgments of the Hon'ble Supreme Court in CIT v. Karnataka State Co- operative Apex Bank (251 ITR 194) and CIT v. Ramanathapuram District Co-op Central Bank Ltd. (255 ITR 423) and argued that where funds are compulsorily placed with banks for operational or statutory reasons, the resultant income must be treated as business income. Reliance was also placed on Mehsana District Central Co-op Bank Ltd. v. ITO (251 ITR 522), Kundalika Nagari Sahakari v. ITO (ITAT Pune) and other Tribunal decisions. Alternatively, the appellant pleaded that interest earned on deposits with co-operative banks was at least eligible for deduction u/s 80P(2)(d). The appellant also emphasized that in earlier assessments, such interest was accepted as business income, and therefore, disallowance in this year violates the principle of consistency. I have carefully considered the assessment order, submissions of the appellant, case laws cited, and the statutory provisions. The issue for adjudication is whether the interest income earned from deposits placed with nationalised banks, co-operative banks, and other financial institutions qualifies for deduction u/s 80P(2)(a)(i) or u/s 80P(2)(d), or whether the same is taxable as income from other sources. At the outset, it is relevant to note that the Hon'ble Supreme Court in Totgars' Co-operative Sale Society Ltd. v. ITO (322 ITR 283) authoritatively held that interest income earned from the investment of surplus funds by a co-operative society engaged in providing credit facilities to its members does not qualify for deduction u/s 80P(2)(a)(i). The Court observed that such income is not attributable to the business activity of providing credit facilities to members but arises from the investment of funds not immediately required for the business. The Apex Court clearly distinguished between "operational income" derived from business and "other income" accruing incidentally from investment of funds. This judgment is squarely applicable to the facts of the present case. The appellant's argument that the deposits were mandatory or incidental to its business has not been established by contemporaneous evidence. The explanations filed are general in nature and do not precedent for availing loans. Even if certain deposits were required as margin money, the same cannot convert the entire interest income from all banks into operational business income. The appellant has also failed to correlate specific deposits with corresponding borrowings or to demonstrate that such interest income was directly linked with the lending operations. It is well settled that for income to qualify under section 80P(2)(a)(i), there must be a direct and proximate nexus between the income and the business of providing credit facilities to members. The interest income in question emanates from investments of funds with external banks, not from lending activities to members. Therefore, it cannot be said to be attributable to the appellant's core business. The Hon'ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 431 ITR 1 reaffirmed that the deduction under section 80P(2)(a)(i) is available only for income from activities of providing credit to members and not from investment of surplus funds. The Hon'ble Supreme Court reiterated that once income is found to be arising from deployment of funds outside the circle of mutuality, it loses the character of business income and becomes taxable under section 56 of the Act. The appellant's reliance on Karnataka State Co-op Apex Bank and Ramanathapuram District Co-op Central Bank is misplaced. Those cases pertain to co-operative banks, not credit societies, and in those facts, the placement of funds with the Reserve Bank or State Bank was statutorily mandated under the Banking Regulation Act, 1949. The appellant herein is not a co-operative bank licensed by the RBI and is not governed by such statutory compulsion. The plea that the deposits were made to protect business interests or ensure continuity does not equate to a statutory obligation. Therefore, the ratio of those judgments is inapplicable. The argument of the appellant that no surplus funds existed and that the deposits were merely temporary placement of idle working capital is not borne out by its financial statements. The contention that such deposits were required by bye-laws or under Section 64 of the Multi- State Co-operative Societies Act also cannot alter the character of the income. Statutory permission to invest funds in specified modes does not mean that income therefrom automatically becomes business income. Such income remains income from investment of funds and is taxable accordingly. The appellant has further claimed deduction alternatively under section 80P(2)(d) in respect of interest from co-operative banks. However, the law on this issue is also settled by judicial authority. The Hon'ble Karnataka High Court in PCIT v. Totagars Co-op Sale Society (83 taxmann.com 140) held that a co-operative bank is a distinct entity from a co-operative society and interest earned from deposits with co-operative banks is not deductible under section 80P(2)(d). The insertion of section 80P(4) by the Finance Act, 2006 explicitly excludes co-operative banks from the ambit of section 80P. Once the Legislature has consciously omitted co-operative banks from the definition of co-operative society for this purpose, such interest cannot be treated as eligible income under section 80P(2)(d). The appellant's reliance on ITAT decisions allowing deduction u/s 80P(2)(d) cannot override the binding precedents of the jurisdictional Hon'ble High Court and the Hon'ble Supreme Court, which take a contrary view. It is also important to note that deduction provisions must be construed strictly, as held by the Constitution Bench of the Hon'ble Supreme Court in CIT v. Dilip Kumar & Co. (2018) 9 SCC 1. The burden lies on the assessee to demonstrate that the conditions for deduction are fully satisfied. In the present case, the appellant has not been able to it has a direct nexus with the business of providing credit to its members. The overall explanation remains general, and no evidence has been produced to establish that deposits were placed wholly and exclusively for the business of lending to members. Therefore, the Assessing Officer was justified in treating such income as "Income from Other Sources" and denying the deduction claimed. In view of the above facts, legal position, and judicial precedents, I hold that the Assessing Officer's action in disallowing deduction of Rs.1,10,12,976/- u/s 80P(2)(a)(i) is correct and fully in accordance with law. The interest income earned from deposits with banks and financial institutions cannot be regarded as income from the appellant's business of providing credit facilities to its members, nor can it qualify for deduction u/s 80P(2)(d) in view of the statutory exclusion of co-operative banks from the scope of section 80P. 6.2 In the result, the appeal is devoid of merit and is hereby dismissed.”

“1] The learned CIT(A) erred in confirming the disallowance of deduction of Rs.1,10,12,976/- u/s 80P(2)(a)(i) of the Act on the ground that the interest income was earned out of deposits / investments of funds in other banks and the same was taxable as income other sources and therefore, deduction u/s 80P was not available to the assessee. 2] The learned CIT(A) erred in holding that the deduction u/s 80P(2)(a)(i) is available only to the income attributable to the business operation of the assessee and the above referred interest income could not be categorised as an operational income and accordingly, deduction u/s 80P(2)(a)(i) was not available to the assessee. 3] The learned CIT(A) failed to appreciate that the assessee has invested funds in the course of its business of providing credit facilities to its members and accordingly, the deduction u/s 80P(2)(a)(i) was allowable to the assessee in respect of the above referred interest income earned by it. 4] The learned CIT(A) erred in not appreciating that the above referred interest income was generated out of the main operations of the assessee of providing credit facilities to its members and accordingly, the said interest income was rightly offered to tax as income from business and therefore, the deduction u/s 80P(2)(a)(i) was allowable in respect of the same. 5] Without prejudice to the above grounds, the assessee submits that the interest income received from the co-operative banks is eligible for deduction u/s 80P(2)(d) of the Act and the ld. CIT(A) erred in holding that the assessee society was not entitled to claim deduction u/s. 80P(2)(d). 6] Without prejudice to the above grounds, the assessee submits that in case, the above referred interest income is held to be not eligible for deduction u/s 80P(2)(a)(i)/80P(2)(d), in that event, the net interest income after allowing proportionate expenditure can be taxed and the learned A.O. has erred in taxing the entire gross interest income received by the assessee society. 7] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.” 5. We have heard the Ld. Representatives of the Parties and perused the material available on record. The only issue to be decided in this appeal pertains to the allowability of deduction u/s 80P(2)(a)(i) of the Act in respect of interest received by the assessee from the nationalized banks / cooperative banks / other financial institutions amounting to Rs.1,02,61,578/-.

(2010) 322 ITR 283 (SC) and in the case of Mavilayi Service Co-operative Bank Ltd. (2021) 431 ITR 1 (SC) has dismissed the grounds raised by the Revenue by observing as under: "9 We have heard the Ld. Representatives of the parties and perused the material on record. We find that the impugned issue is no more res-integra by virtue of catena of decisions passed by the Co-ordinate Benches of this Tribunal as also the decision of Hon'ble Apex Court and High Court (supra) cited by the Ld. CIT(A)/NFAC. We find that there is no dispute on facts regarding the assessee having derived the impugned interest income from deposit of surplus funds in Nationalized Bank(s). Nothing has been brought on record by the Revenue to rebut the findings of Ld. CIT(A)/NFAC.” 6. Respectfully, following the decision of the Tribunal cited (supra) and in absence of any contrary material brought on record by the Ld. DR, the first issue raised by the Revenue in grounds of appeal is dismissed.

ITA No. 3210/PUN/2025 (AY.2022-23): 9. Since the facts of the present case are identical to the facts in ITA No. 3209/PUN/2025 for the AY. 2020-21 (supra) and, therefore, our findings in the said appeal, mutatis mutandis, would apply to this appeal as well. Accordingly, the Ld.AO is directed to allow the interest received from other co-operative banks and nationalized banks as deduction u/s 80P(2)(a)(i) of the Act for this assessment year also. The effective grounds raised by the assessee are accordingly allowed.

Order pronounced in the open Court on 09-07-2026 (DR. DIPAK P. RIPOTE) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Tadepalli Naga Digitally signed by Tadepalli पुणे/Pune; Naga Murali Mohan दिन ांक/Dated : 09-07-2026 Murali Mohan Date: 2026.07.10 09:54:50 +05'30' TNMM

आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent 3. The concerned Pr.CIT, Pune 4. DR, ITAT, „A‟ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, ////