SRI SAI SOUHARDHA CREDIT COOPERATIVE LTD.,KOLAR vs. INCOME TAX OFFICER, WARD -1, KOLAR

At the outset, we consider the delay in filing the appeal. The appellate order was uploaded on 20.03.2024, while the present appeal was filed on 28.03.2026, resulting in a delay of 666 days.

The assessee sought condonation of delay, supported by an affidavit of its Chief Executive Officer, Mr. Manjunatha. It stated that for A.Y. 2018-19 it had filed a return declaring nil income after claiming deduction under section 80P. Though the return was processed under section 143(1), scrutiny assessment was completed on 26.03.2021, determining income at Rs.28,06,921 after disallowing the section 80P claim. The appeal before the CIT(A)/NFAC was partly allowed by order dated 20.03.2024 and uploaded on the e-filing portal. The assessee explained that its portal was handled by its Chartered Accountant, Sri K.I. Ravindranath, and that it was unaware of the appellate order. After receiving the Tribunal’s order for A.Y. 2020-21, it made enquiries and discovered that no appeal had been filed for A.Y. 2018-19 because the Chartered Accountant could not attend to the matter due to his wife’s serious illness. The assessee then downloaded the order, obtained professional advice in Bangalore, and filed this appeal. It submitted that the delay was bonafide and beyond its control, and that condonation would not prejudice the Revenue, whereas refusal would cause hardship to the small co-operative society.

The learned authorised representative reiterated these facts and submitted that sufficient cause existed for the delay. He argued that there was no malafide intention in not filing the appeal within time and that the affidavit was supported by the Chartered Accountant’s inability to act because of his wife’s illness. He therefore prayed that the delay be condoned.

We have considered the rival submissions, the orders of the lower authorities, and the petition for condonation of delay. The delay occurred because the Chartered Accountant entrusted with filing the appeal could not act due to his wife’s illness. Nothing on record indicates any malafide intention on the assessee’s part. Once the assessee became aware of the omission, it obtained legal advice in Bangalore and promptly filed the appeal. In these circumstances, the length of the delay is not decisive; the relevant question is whether sufficient cause is shown. We are satisfied that the assessee was prevented by sufficient cause from filing the appeal in time. Accordingly, the delay of 666 days is condoned, and the appeal is admitted for adjudication on merits.

On merits, the assessee is a members’ credit co-operative society. It filed its return on 29.09.2018, claiming its entire income as deductible under section 80P(2)(a)(i) on the ground that the income was attributable to its business of providing credit facilities to members. The Assessing Officer noted that the assessee had earned interest of Rs.23,76,194 from deposits with co-operative and commercial banks, which formed part of its net profit. He held that the deposits represented surplus funds and that the interest was taxable as income from other sources under section 56, not as business income. Relying on the decision of the Hon’ble Supreme Court, he concluded that deduction under section 80P(2)(a)(i) is available only for operational income from providing credit facilities to members and therefore disallowed the deduction on bank interest income.

The assessee appealed before the learned CIT(A)/NFAC, who partly allowed the appeal. Following Totgar’s Co-operative Sale Society Ltd. v. ITO and other High Court decisions, the CIT(A) held that interest on bank deposits was not profits and gains of business eligible for deduction under section 80P(2)(a)(i). He then examined whether the interest qualified under section 80P(2)(d). Relying on Pr. CIT v. Peroorkada Service Co-operative Bank Ltd., he held that interest from investments with co-operative banks is eligible for deduction under section 80P(2)(d), while interest from commercial banks is not. The Assessing Officer was directed to identify interest derived from co- operative banks and allow deduction under section 80P(2)(d) accordingly. For interest from commercial banks, the CIT(A) directed that any relief for cost of funds and proportionate administrative expenses be considered under section 57 in accordance with law.

Aggrieved, the assessee is in further appeal before us. It contends that, as a members’ credit co-operative society, its entire income is deductible under section 80P(2)(a)(i).The learned authorised representative relied on decisions of the Hon’ble Karnataka High Court on similar facts, where deduction was allowed after considering the Supreme Court decision relied on by the lower authorities.He also submitted that interest earned on funds invested to comply with statutory reserve requirements qualifies for deduction under section 80P(2)(a)(i). He clarified that the assessee is not claiming such interest as income from other sources eligible for deduction under section 80P(2)(d).

We have also heard Shri Ganesh R. Ghale, learned Standing Counsel for the Department. He submitted that the assessee is not entitled to deduction under section 80P(2)(a)(i) because it had parked funds with other banks. According to him, the learned CIT(A) rightly held that interest earned from parties other than co-operative banks is not eligible for deduction under section 80P(2)(a)(i). He further submitted that the learned CIT(A) correctly allowed relief towards cost of funds.

We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee is a co-operative society primarily engaged in accepting deposits from, and providing credit facilities to, its members. The issue is whether interest received from co-operative banks and other banks is business income or income from other sources. The Assessing Officer treated it as income from other sources, whereas the assessee contends that it is business income attributable to its activity of providing credit facilities to members.

Section 80P allows a co-operative society to deduct the income specified in sub-section (2) from its gross total income. For a society engaged in banking or providing credit facilities to its members, the whole of the profits and gains attributable to that activity is deductible. The question is whether interest received from co-operative banks and other banks qualifies for deduction under section 80P(2)(a)(i). The assessee submits that such receipts are business income attributable to providing credit facilities to members. We find that the issue is covered in favour of the assessee by decisions of the Hon’ble Karnataka High Court.

We further find that the distinction between interest received from co- operative banks and from other banks is relevant to section 80P(2)(d), but section 80P(2)(a)(i) makes no such distinction. Therefore, where interest earned from deposits with banks forms part of the profits attributable to the assessee’sbusiness of providing credit facilities to its members, the assessee is entitled to deduction under section 80P(2)(a)(i). This includes interest from co-operative banks, co-operative societies, and other banks, including scheduled banks.

We also note that the Assessing Officer relied on another decision of the Hon’ble Karnataka High Court holding that interest earned from co-operative banks is taxable as income from other sources and not as business income, and that deduction under section 80P(2)(d) is not allowable on such interest income.

Several coordinate benches have held that where there are conflicting decisions of the Hon’ble Karnataka High Court, the decision whose facts are closer to the case before the Tribunal should be followed. In the present case, the facts are closer to the decisions relied on by the assessee. Accordingly, the interest income is eligible for deduction under section 80P(2)(a)(i), and the assessee’s claim is allowed.

We therefore hold that the assessee is entitled to deduction under section 80P(2)(a)(i) on the interest income, including interest from scheduled banks and co-operative banks, as it is business income attributable to the co- operative society’s activity of providing credit facilities to its members.

We therefore do not approve the direction of the learned CIT(A) to tax interest earned from other banks under section 57 after allowing deduction for cost of funds. Interest earned by the assessee from such banks is also attributable to its business of providing credit facilities to members.The Assessing Officer is accordingly directed to allow deduction under section 80P(2)(a)(i) on the relevant income, including interest from co-operative banks and other banks.

In the result, the appeal of the assessee is allowed.