INCOME TAX OFFICER, WARD-6(2)(1), BANGALORE, BANGALORE vs. BASAVESHWARANAGARA CO-OPERATIVE CREDIT SOCIETY LIMITED, BANGALORE

Both the appeals are heard together and a common order has been passed since the issue involved in these appeals are common. The facts involved in the A.Y. 2020-21 has been narrated for the sake of convenience. The appeal in ITA No. 1326/Bang/2025 relevant to A.Y. 2020-21 is taken as

The brief facts of the case are that the assessee is a credit co-operative society registered under the provisions of the Karnataka Co-operative Societies Act. The assessee is carrying on the business of providing credit facilities to its members. The assessee filed their return of income and claimed deduction u/s. 80P(2)(a)(i) of the Act. The case of the assessee has been taken up for scrutiny by issuing notice u/s. 143(2) of the Act. The AO disallowed the claim of deduction on the ground that the interest income was earned from the co-operative banks and other banks.

As against the said order, the assessee filed appeals before the Ld.CIT(A). The Ld.CIT(A) after considering the fact that the assessee had earned interest income from co-operative banks and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act on the ground that the assessee society is earning the said income which is attributable to the business activity of the assessee. The Ld.CIT(A) had relied on the judgment of the Hon’ble Jurisdictional High Court reported in (2014) 369 ITR 86 and also the judgment of the Hon’ble Supreme Court reported in 431 ITR 1 in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT and allowed the interest income earned from the co-operative banks. The Ld.CIT(A) had confirmed the disallowance on the interest earned from the IDBI bank and directed to assess the said income as income from other sources.

As against the said order, the present appeals are filed by the revenue.

At the time of hearing, the Ld.DR submitted that the reliance of the judgment of the Hon’ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. v. CIT by the Ld.CIT(A) is not correct. The Ld.DR further submitted that the assessee had not earned interest income from the members but earned from the co-operative and other banks and therefore the said income is not eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.DR also relied on the judgment of the Hon’ble Jurisdictional High Court

The Ld.AR submitted that the Ld.CIT(A) had relied on the judgment of the Hon’ble Jurisdictional High Court and also the judgment of the Hon’ble Supreme Court and therefore the order of the Ld.CIT(A) is in order. The Ld.AR further submitted that the assessee had claimed deduction u/s. 80P(2)(a)(i) of the Act and therefore the interest income earned from the deposits with the co-operative banks could be treated as income attributable to the business of the assessee and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.AR also relied on the another judgment of the Hon’ble Jurisdictional High Court reported in (2015) 55 taxmann.com 447 (KAR) in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO in support of his proposition. The Ld.AR also relied on the circular of the CBDT No. 18/2015 dated 02/11/2015 which was issued based on the judgment of the Hon’ble Supreme Court in the case of The Nawanshahr Central Co-operative Bank Ltd. and therefore submitted that the interest income earned by the assessee is attributable to the business of the assessee of providing credit facilities to its members. The Ld.AR also submitted that the assessee had claimed deduction u/s. 80P(2)(a) and therefore the deduction is allowable.

We have heard the arguments of both sides and perused the materials available on record.

The only dispute involved in these appeals are, whether the interest income earned by the assessee from the co-operative banks are treated to be as income attributable to the business of the assessee and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.CIT(A) had considered the issue and also relied on the Hon’ble Jurisdictional High Court as well as the Hon’ble Supreme Court and granted the deduction on the interest income earned from the co-operative banks u/s. 80P(2)(a)(i) of the Act.

We find that the issue is squarely covered in favor of the Assessee by the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] holding that co-operative 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 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. Society is not carrying on any separate business for earning such interest income. The income 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. As the interest income 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(2)(a)(i) of the Act.

Even though the Ld.CIT(A) had on different reasoning had partly allowed the appeal filed by the assessee, in view of the above said findings, we are affirming the order of the Ld.CIT(A). In arriving such a conclusion, we are following the decision of the Hon’ble Karnataka High Court relied on by the assessee in the case of Tumkur Merchants Souharda Credit Co- operative Ltd. vs. ITO reported in (2015) 55 taxmann.com 447 on the issue of availability of deduction u/s. 80P(2)(a)(i) of the Act. We, therefore dismiss the appeals filed by the revenue and confirm the order of the Ld.CIT(A) by granting the deduction u/s. 80P(2)(a)(i) of the Act on the ground that the said income is attributable to the business income of providing credit facilities to its members.

In the result, both the appeals filed by the revenue are dismissed. Order pronounced in the open court on 01st June, 2026.