KEDILA VYAVASAYA SEVA SAHAKARI SANGHA LTD.,KEDILA vs. INCOME TAX OFFICER, MANGALURU

We have heard Sri Mahesh Uppin, Advocate, for the assessee and Sri Ganesh R. Ghale, Standing Counsel, for the Department.

The assessee is a cooperative society registered under the Karnataka Cooperative Societies Act, 1959. It provides credit facilities to its members and also trades in essential and agricultural commodities. The assessee filed its return of income on 12 October 2017 declaring total income of ₹ 14,700 and claimed deduction of ₹ 30,81,974 under section 80P of the Act. The case was selected for scrutiny and notices were issued. The learned AO disallowed the claim on the ground that the assessee had different classes of members, including nominal members, and that this violated the principle of mutuality. The assessee submitted that section 18 of the Karnataka Cooperative Societies Act permits nominal members within the prescribed limits and that it had only ordinary nominal members. It therefore contended that it complied with the State Act and was eligible for deduction under section 80P. The learned AO rejected the claim, relying on the decision of the Hon‟ble Supreme Court in Citizen Co- operative Society Ltd.

On examining the details furnished, the learnedAO also noted that the assessee had earned interest of ₹ 48,37,352 from scheduled banks and cooperative banks other than cooperative societies. He held that such interest was taxable under the head “income from other sources” and was not eligible for deduction under section 80P(2)(d), relying on decisions of the Hon‟ble Karnataka High Court. The assessee explained that the deposits were made out of members‟ funds and statutory reserves required under the Karnataka Cooperative Societies Act, and therefore the income was deductible under section 80P(2)(a)(i). It also relied on the decisions of the Hon‟ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. and Totagars Co-operative Sale Society. The learned CIT(A), however, upheld the assessment order and dismissed the appeal.

The objection that the assessee dealt with non-members and therefore was not entitled to deduction under section 80P is without merit. Nominal members are also members of a cooperative society, as held by the Hon‟ble Supreme Court in 2021 (1) TMI 488 - Supreme CourtThe Mavilayi Service Cooperative Bank Ltd. & Ors. Versus Commissioner of Income Tax, Calicut & Anr.[2021] 431 ITR 1 ( SC), 2021 (7) SCC 90, 2021 AIR 612, [2021] 123 taxmann.com 161 ( SC) it was held that :- “45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co- operative banks which are cooperative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm‟s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.”

Although that decision arose under the Kerala Cooperative Societies Act, comparable provisions permitting nominal members within prescribed limits exist under the Karnataka law. The learned AO has not identified any transaction with persons who were neither regular nor nominal members. Nor has any order, notification, or adverse finding of the Karnataka cooperative regulatory authority been brought on record to show that the assessee violated the Karnataka Cooperative Societies Act, 1959.

According to section 2 of the Karnataka cooperative societies Act 1959 defines members as :- (f) ‗member„ means a person joining in the application for the registration of a cooperative society and a person admitted to membership after such registration in accordance with this Act, the rules and the bye-laws and includes a nominal and an associate member;

Accordingly, the assessee cannot be denied deduction under section 80P on this ground.

As to the interest income, the assessee carries on the business of providing credit facilities to its members and supplying certain goods.

The assessee is primarily engaged in accepting deposits from, and extending credit facilities to, its members. The issue is whether interest earned from cooperative banks should be assessed as income from other sources or as business income attributable to the assessee‟s credit activity. The learned Authorized Representative submitted that the issue stands 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.

The learned Departmental Representative, however, submitted 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 permits deduction where the gross total income of a cooperative society includes income specified in sub-section (2).In the case of asociety engaged inbanking or providing credit facilities to its members, the whole of the profits and gains attributable to that activity are deductible. The question is therefore 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 note that the learned AO relied on another decision of the Hon‟ble Karnataka High Court holding that interest earned from cooperative banks is taxable as income from other sources, and not as business income, and that deduction under section 80P(2)(d)is not allowable in respect of such interest.

Coordinate benches have held that, where conflicting decisions of the Hon‟ble Karnataka High Court exist, the decision whose facts most closely match the case before the Tribunal should be followed. In the present case, the facts are closer to the decisions relied upon by the assessee. The interest income is therefore eligible for deduction under section 80P(2)(a)(i), and the assessee‟s claim is allowed.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 22nd June, 2026