KOLLUR SHREE MOOKAMBIKA VYAVASAYA SEVA SAHAKARI SANGHA LIMITED,UDUPI vs. INCOME TAX OFFICER, WARD-1 & TPS, UDUPI

These are the three Appeals filed by M/s. Kollur Shree Mookambika Vyavasaya Seva Sahakari Sangha Ltd., for Assessment Year 2017–18, 2018–19 and 2020–21 involving similar facts and therefore these are dealt with by this common order.

For Assessment Year 2017–18, the Assessee has challenged the appellate order dated 16.10.2025 passed by the Ld. National Faceless Appeal

Aggrieved by the said order, the Assessee is in appeal before us. The Assessee primarily seeks deduction under section 80P(2)(a)(i) of the Act, or, alternatively, if the interest income is assessed under the head “Income from other sources,” deduction of the corresponding cost of funds. The other issues relate to the disallowance of the differential provision of Rs. 5,32,953/-and the NPA provision of Rs. 1,71,960/-.

Briefly, the Assessee, a registered cooperative society, claimed deduction under section 80P of the Act in respect of income earned from carrying on the business of banking or providing credit facilities to its members. For Assessment Year 2017–18, it filed its return of income on 10.10.2017 declaring gross total income of Rs. 64,32,314/- and nil taxable income after claiming the entire amount as deduction under section 80P. The return was selected for scrutiny by issue of notice under section 143(2). The Ld. Assessing Officerheld that the Assesseewas not entitled to deduction under section 80P because it had different classes of membership and its nominal members exceeded 15% of regular members, allegedly violating the Karnataka Cooperative Societies Act and the principle of mutuality. In response to the show cause notice, the Assessee submitted that it dealt

Aggrieved by the assessment order, the Assessee preferred an appeal before the Ld. CIT(A). After considering the Assessee’s explanation, the Ld. CIT(A) confirmed the disallowance of deduction under section 80P. The Ld. CIT(A) held that the interest income received from banks was taxable under the head “Income from other sources” and, in view of the decision of the Hon’ble Karnataka High Court dated 16.06.2017, the Assessee was also not entitled to deduction under section 80P(2)(d) of the Act. The disallowance of the excess provision for interest of Rs. 5,32,953/- and the

The Assessee aggrievedwith the same and is in appeal before us.

For Assessment Year 2018–19 also, the Assessee was denied deduction under section 80P(2)(a)(i) of the Act, and an addition of Rs. 34,21,122/- was made by disallowing the provision for interest. The Ld. CIT(A) confirmed the action of the Ld. Assessing Officer.

ForAssessment Year 2020–21, the Ld. Assessing Officer again denied the Assessee deduction under section 80P(2)(a)(i) of the Act, amounting to Rs. 30,81,446/-, and the same was confirmed by the Ld. CIT(A). Thus, in all three assessment years, the principal issue is the Assessee’s eligibility for deduction under section 80P(2)(a)(i) of the Act.

The learned authorized representative submitted that assessee is a primary agricultural credit society registered under the provisions of the Karnataka co-operative Society act and is carrying on the activity of loan to its members. It is not transacting with nonmembers. He referred to the provisions of section 80 P (2) (a) (I) of the act and submitted that claim of the deduction is made under that section as the income is attributable to the business of banking. According to the provision whole of the interest income and the income which is attributable to the business of the

We have carefully considered the rival contentions, perused the orders of the lower authorities,and examined the relevant decisions of the Hon’ble Karnataka High Court.The Assessee is a Primary Agricultural Credit Society registered under the Karnataka Cooperative Societies Act and is engaged in providing credit facilities to its members for agricultural activities, besides supplying fertilizers, manures, and related items within the statutory framework. In its return of income, the Assessee declared gross total income of Rs. 64,32,314/- and claimed the same as deduction under section 80P of the Act. The gross total income included interest in investments of Rs. 46,15,894/-, which was disclosed as business income. Since the said interest was treated as business income, the Assessee claimed deduction thereon under section 80P(2)(a)(i), contending that it formed part of the profits and gains attributable to its activity of providing credit facilities to members.

According to the provisions of section 80P (1) in case of a cooperative society the gross total income includes if any of the specified income covered under subsection (2), the Assessee is entitled for the deduction of such sum. According to the provisions of sub section (2), the Assessee is

The Assessee is engaged only in providing credit facilities to its members and carries on no other activity. The interest income was earned from statutory funds required to be maintained as a business necessity under the Cooperative Societies Act. Such interest, therefore, forms part of the profits and gains attributable to the Assessee’s business. The Ld. Assessing Officer disputed the Assessee’s claim that bank interest constituted business income and treated it as income from other sources, without bringing any supporting evidence on record. Since the interest was earned either from members’ funds or statutory reserves, both of which have a direct nexus with the Assessee’s business, such income cannot be regarded as anything other than business income.

Further, in Principal Commissioner of Income-tax, Hubli v. Totagars Co- operative Sale Society [2017] 78 taxmann.com 169 (Karnataka) / [2017] 392 ITR 74 (Karnataka) [05.01.2017], the Hon’ble Karnataka High Court allowed deductionof interest income under section 80P(2)(d) of the Act.

It is alsonoted that inPrincipal Commissioner of Income-tax, Hubballi v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka) / [2017] 395 ITR 611 (Karnataka) / [2017] 297 CTR 158 (Karnataka) [16.06.2017], the Hon’ble Karnataka High Court held that interest earned by a cooperative society, engaged in marketing its members’ agricultural produce, from surplus deposits kept with a cooperative bank was not eligible for deduction under section 80P(2)(d). Thus, there appears to be a divergence in the decisions of the Hon’ble Karnataka High Court on this issue, both having considered the decision of the Hon’ble Supreme Court. 19. However, the facts of the present case are closer to those in Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax Officer, Ward- V, Tumkur [2015] 55 taxmann.com 447 (Karnataka) / [2015] 230 Taxman 309 (Karnataka) [28.10.2014], which is therefore required to be followed.

Thus, the Assessee’s claim for deduction is squarely covered in its favour by the decisions of the Hon’ble jurisdictional High Court, which were rendered after considering the decision of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd.v. ITO [2010] 322 ITR 283 / 188 Taxman 282 (SC).

Further, the Assesseehas consistently stated that it has not dealt with any non-members. Accordingly, the Ld. Assessing Officer’s finding to the contrary is without merit.

In view of the above, we direct the Ld.Assessing Officer to allow deduction under section 80P(2)(a)(i) of the Act in respect of the Assessee’s entire business income attributable to providing credit facilities to its members, including bank interest. Accordingly, grounds Nos. 1 to 3 of the Assessee’s appeal for Assessment Year 2017–18 are allowed.

Since the corresponding grounds for Assessment Years 2018–19 and 2020–21 raise the same issue, they are also allowed.

For the same reasons, ground No. 4 of the appeal for Assessment Year 2018–19 is also allowed.

As to ground No. 4(b), the Assesseedebited Rs.1,71,960/- as provision for non-performing assets. This provision was made in accordance with the prudential norms applicable to cooperative societies and was based on criteria prescribed by the regulator. It therefore cannot be treated as an unascertained liability. Accordingly, we direct the Ld. Assessing Officer to delete the addition of Rs. 1,71,960/-, and ground No. 4(b) is allowed. 27. In the result all three Appeals filed by the Assessee are allowed.