ADARSHA SOUHARDA PATINA SAHAKARI NIYAMITHA,CHITRADURGA vs. INCOME TAX OFFICER, CHITRADURGA

In this appeal, the assessee has raised the following grounds: -

The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the order passed by the AO on all the issues. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute that the assessee is a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997, and is engaged in extending credit facilities/loans to its members. The AO, as well as the learned CIT(A), solely on the basis that the assessee is not a “co-operative society” within the meaning of section 2(19), denied the applicability of section 80P of the Act to the present case. We find that the Hon’ble Jurisdictional High Court in Government of India, Ministry of Finance vs. Karnataka State Souharda Federal Co-operative Ltd., reported in [2022] 134 taxmann.com 170 (Karn.), held that the taxpayer, which is a co-operative society registered under Karnataka Souharda Sahakari Act, 1997, would be construed as co-operative society within ambit of section 2(19) and thus, would be entitled to claim benefit of section 80P of the Act. The relevant findings of the Hon’ble High Court, in the aforesaid decision, are reproduced as follows: – “33. The provisions of section 80P offers tax deduction in respect of income of Co-operative Societies which is enacted with a laudable object of promoting Co-operating moment. Such benefit cannot be denied to the so called Co-operatives under the Souharda Act merely on hyper technicalities. The interpretation given by the Revenue to section 2(19) of the Act is untenable. A harmonious reading of the said provisions would indicate that Co-operative Society registered under the Co-operative Societies Act, 1959 alone is not the Cooperative Society for the purposes of the Income-tax Act, as the phrase 'or' employed with the following words 'under any other law for the time being in force in any State for the registration of Co-operative Society' if read, Co-operative Societies registered under the Souharda Act which is a State enactment would certainly be construed as Co-operative Society coming within the ambit of section 2(19).”

Therefore, respectfully following the aforesaid decision of the Hon’ble Jurisdictional High Court, we are of the considered view that the provisions of section 80P of the Act are applicable in the case of the assessee, being a Souharda Co-Operative Society. Thus, the deduction claimed by the assessee under section 80P of the Act in respect of its income earned from the business of extending credit facilities/loans to its members is allowed.

Insofar as the interest income earned by the assessee from deposits in Banks, there is no dispute regarding the fact that the interest income on which deduction under section 80P(2)(a)(i) of the Act was claimed by the assessee was from deposits in the nationalised banks. As per the assessee, the interest income is attributable to its business of providing credit facilities to its members, and therefore, it is eligible for deduction under section 80P(2)(a)(i) of the Act. As per the assessee the amount which was invested in the banks to earn interest was not an amount due to any members and the same was not liability in its account, and instead the said amount was in the nature of profits and gains and since the same were not immediately required by the assessee for lending money to the members, it was deposited in the bank on which interest income was earned and the same has been claimed as deduction under section 80P(2)(a)(i) of the Act.

We find that while deciding a similar issue the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO, Ward-V, Tumkur, reported in (2015) 55 taxmann.com 447 (Kar), after considering the decision of the Hon’ble Supreme Court in Totgar’s Co- operative Sale Society Ltd vs ITO., reported in [2010] 322 ITR 283 (SC), held that the interest earned by the Co-operative Society, which is engaged in the business of providing credit facilities to its members, from deposit of excess amount for short term in bank is eligible for deduction under section 80P(2)(a)(i) of the Act. The relevant findings of the Hon’ble Jurisdictional High Court, in the aforesaid decision, are as follows: - “6. From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1,77,305/- represents the interest earned from short-term deposits and from savings bank account. The assessee is a Cooperative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i): "Deduction in respect of income of co-operative societies: 80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: (a) in the case of co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) to (vii) the whole of the amount of profits and gains of business attributable to any one or more of such activities." 7. The word 'attributable' used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word 'attributable' as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) as under: 'As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature, has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression ''derived from", as, for instance, in section-80J. In our view, since the expression of wider import, namely, "attributable to'', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.' 8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. 9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law. 10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue.”

Therefore, respectfully following the decision of the Hon’ble Jurisdictional High Court, as cited supra, we set aside the impugned order on this issue, and direct the AO to allow the deduction under section 80P(2)(a)(i) of the Act in respect of interest income earned by the assessee from the deposits maintained with Banks.

As regards the issue of cash deposit during the demonetisation period, as per the assessee, it was nothing but the amount received from the members towards recovery of their loans, pigmy collection, etc. During the assessment proceedings, the assessee filed the list of members from whom the cash was received. The lower authorities rejected the contention of the assessee on the basis that the assessee is a co-operative society, and thus, does not fall into any of the exempted categories to accept the demonetised currency. Accordingly, the cash deposited during the demonetisation period was considered as unexplained money of the assessee under section 68 of the Act.

In the present case, even if the assessee society received SBN from its members during the demonetization period, it is undisputed that the said money was deposited by the assessee in its bank account maintained with scheduled banks. Thus, the very fact that SBN ceased to be a legal tender from 09/11/2016 cannot lead to an addition in the hands of the assessee under section 68 of the Act. Further, since the assessee has received money from its members in the normal course of carrying on its business, which consisted of accepting deposits from its members and lending money to them, the assessee may not be required to prove their creditworthiness. However, at the same time, the assessee cannot be absolved from satisfactorily proving the identity of its members from whom the SBN was received and provide their complete KYC details. Therefore, for the limited purpose of granting the assessee an opportunity to provide the KYC details of the members from whom the SBN was received during the demonetization period, the matter is restored to the file of the jurisdictional AO. We further direct the AO to delete the addition made under section 68 of the Act in respect of SBN received from all those members in respect of whom the assessee provides the details. Needless to mention, no order shall be passed without affording reasonable and adequate opportunity of hearing to the assessee. With the above directions, the impugned order on this issue is set aside, and the grounds pertaining to this issue are allowed for statistical purposes.

As regards the ground pertaining to the applicability of the amended provisions of section 115-BBE of the Act to the year under consideration, we find that the Hon’ble Kerala High Court in Maruthi Babu Rao Jadav v/s ACIT, reported in [2025] 171 taxmann.com 463 (Kerala), held that the provisions of section 115-BBE, as amended by the Taxation Laws (Second Amendment) Act, 2016, with effect from 01/04/2017, increasing the rate of tax in respect of the income, inter-alia, referred to in section 68 of the Act to 60% is applicable from the assessment year 2017-18. We further find that the coordinate bench of the Tribunal in Spectra Equipment (P.) Ltd. v/s ITO, reported in [2025] 211 ITD 61 (Hyderabad - Trib.), following the decision of the Hon’ble Kerala High Court cited supra and the decision of the coordinate bench of the Tribunal in Chandan Garments (P.) Ltd. v. Pr. CIT [IT Appeal No. 125 (Ind.) of 2022], held that the higher rate of tax prescribed in section 115-BBE of the Act is applicable to the assessment year 2017-18.

Therefore, respectfully following the decisions cited supra, we are of the considered view that the higher rate of tax, i.e., 60%, as provided under the amended provisions of section 115-BBE of the Act, is applicable to the year under consideration, and in case addition is made by the AO under section 68 of the Act pursuant to our directions in the foregoing paragraphs, the higher rate of tax as per amended provisions shall be levied.

In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 30th June, 2026 Sd/- Sd/- (PRASHANT MAHARISHI) (SANDEEP SINGH KARHAIL) VICE PRESIDENT JUDICIAL MEMBER Bangalore,