THE BHAVASARA KSHATRIYA CO-OPERATIVE SOCIETY LIMITED,MYSURU vs. INCOME-TAX OFFICER, WARD - 2(4), MYSURU, MYSURU

The assessee submitted thatit filed its return of income on 12 February 2022 declaring nil income after claiming deduction under section 80P of the Act. The return was processed under Page 1 of 5 section 143(1), and the Central Processing Centre disallowed the deduction claimed u/s 80 P of The Act on interest and dividend income from cooperative societies amounting to ₹ 10,51,183.The assessee contended that the return was filed within the extended due date of 15 February 2022, whereas the intimation dated 13 October 2022withdrew the deduction under section 80P.

The appellate authority held that the assessee’s claim was not sustainable in view of the decisions of the Hon’ble Supreme Court reported in 322 ITR 283 and 431 ITR 1. It further held that the interest income earned by the assessee was taxable as income from other sources, and not as business income, and was therefore not eligible for deduction under section 80P(2)(a)(i) of the Act. Accordingly, the assessee’s appeal was dismissed.

Aggrieved by the appellate order, the assessee has preferred the present appeal. We have heard Sri Narendra Sharma, advocate , learned Authorized Representative for the assessee, and Sri Ganesh R. Ghale, learned Standing Counsel for the Revenue, and have perused the orders of the lower authorities.

The assessee is a cooperative society engaged primarily in accepting deposits from, and providing credit facilities to, its members. The dispute relates to the tax treatment of interest income earned from cooperative banks. The CPC the receipts as income from other sources, whereas the assessee contends that they constitute business income attributable to its activity of providing credit facilities to members. The learned Authorized Representative submitted that the issue is covered in favour of the assessee by the decisions of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income Tax Officer, Ward-1, Tumkur [2015] 55 taxmann.com 447 (Karnataka), and Pr. Commissioner of Income Tax v. Totagars Co-operative Sale Society. Thus, according to him the adjustment by CPC is unsustainable.

The learned Departmental Representative submitted, however, that the issue is covered in favour of the Revenue by the decisions in Totagars Co-operative Sale Society, including [2017] 395 ITR 611 and [2017] 83 taxmann.com 140 (Karnataka).

Section 80P allows deduction of income specified in sub-section (2) where such income forms part of a cooperative society’s gross total income. In the case of a cooperative society engaged inbanking or providing credit facilities to its members, the entire profits and gains attributable to that activity aredeductible. The issue, therefore, is whether interest received from cooperative banks qualifies for deduction under section 80P(2)(a)(i) of the Act. The assessee contends that suchreceipts are business income attributable to its activity of 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 also note that the revenue relied on another decision of the Hon’ble Karnataka High Court holding that interest income from cooperative banks is taxable as income from other sources, and not as business income. It was further held that deduction under section 80P(2)(d) of the Act is not allowable in respect of such interest income.

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

Though any adjustment made subsequent to 1/4/2021, the CPC has power to disallow the claim of the assessee u/s 143(1) 9a) (iv) of the act only if the return is not filed in time, We further find that the Central Processing Centre had no authority to disallow the assessee’s claim under section 80P when the Hon’ble Jurisdictional High Court had decided the issue in favour of the assessee, as noted above. In any event, where the issue is debatable, an adjustment under section 143(1) of the Act is not sustainable in law.

Accordingly, the assessee’s claim is allowed. Where two decisions of the Hon’bleJurisdictional High Court support the assessee’s case, the adjustment made by the CPC is unsustainable in law.

In the result, the appeal filed by the assessee is allowed.