GANGABISANJI BHUTADA NAGRI SAHAKARI PATSANSTHA MARYADIT SAYKHEDA,NASHIK vs. INCOME-TAX OFFICER, WARD 1(1), NASHIK, NASHIK

PER Dr. DIPAK P. RIPOTE, A.M : This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2018-19 on 26.12.2025, emanating from the Assessment Order u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act, dated 03.03.2021.

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credit facility to its members and accepting deposits from its members. Ld.AR submitted that Assessee had filed Return of Income u/s 139 and claimed deduction u/s 80P(2)(a) of the Act. Ld.AR submitted that Assessee is eligible for the deduction, Ld. AR relied on the various decisions filed in the paper book.

4.1 In reply to show cause notice issued by the AO, the Assessee submitted that as per RBI Guidelines, it is mandatory for the Assessee

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society to maintain certain deposits with banks. Hence, assessee during assessment proceedings pleaded that the interest earned is from business of providing credit facility. Assessee relying on various decisions justified the assessee's claim for deduction u/s 80P(2)(a) of the Act.

4.2 However, the AO in the Assessment Order held that the Interest earned by the Assessee from Deposits kept with cooperative banks and banks was not income from business of providing credit facility and held that Interest Income needs to be taxed as Income from Other Sources. AO relied on the decision of Hon’ble Karnataka High Court in the case of Totgars Cooperative Sales Society 83 taxmann.com 140(2017). , Hon’ble Supreme Court in the case of Totgars Cooperative Sales Society188 taxmann282(SC) and other decisions. Accordingly in the Assessment Order the AO made addition of Rs.56,86,385/-.

4.3 Aggrieved by the Assessment Order the Assessee filed appeal before the Ld.CIT(A) who confirmed the addition.

4.4 In this case admittedly assessee is a co-operative credit society in the business of providing credit facility to its members and accepting deposits from its members. It is duly registered under Maharashtra Cooperative Societies Act. We have already reproduced the list of Interest earned by the assessee. Assessee has pleaded that as per RBI Guidelines it has to maintain certain deposits. In this factual background we have to decide whether Assessee was eligible for deduction u/s 80P(2)(a) of the Act on the Interest earned from deposits ?

4.5 We will discuss various decisions to decide the issue before us.

4.6 Hon’ble Supreme Court in the case of CIT vs Karnataka State Co- operative Apex bank [2001] 251 ITR 194 (SC) observed as under : Quote, “The question in appeal reads : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 80P(2)(a)(i ) of the Income-tax Act, 1961 ?"

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While deciding the above question of Law raised by Revenue, the Hon’ble Supreme Court observed as under : Quote, “……There is no doubt, and it is not disputed, that the assessee-co- operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business……” Unquote.

The Hon’ble Supreme Court in the above case answered the question in favour of Assessee and against Revenue.

Thus, the proposition of law emanating from the above decision is that Interest earned from Funds deposited with State bank of India by Co- Operative Bank is business income and eligible for deduction u/s 80P(2)(a) of the Act.

4.7 The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371 analysed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagar Cooperative Sale Society, and held as under : Quote,“ 8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub- clauses (i) to (vii) of clause (a) of sub-section (2) of section 80P or not. 9. While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co-operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar's Co- operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283. …………………… 34. The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co-operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case

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(supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note. 35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be. 36. The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to". 37. Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.” Unquote.

Thus, Hon’ble High Court of AP &TS held that Interest Income earned by investing Income derived from Business and Profession by a Co-Operative Society was eligible for deduction u/ s80P(2)(a) of the Act.

4.8 In the case of Sahyadri Co-operative Credit Society Limited, the Sahyadri Co-operative Credit Society had deposited excess funds in the Banks or Institutions permitted by the Co-operative Societies Act. In that context, the Hon’ble Kerala High Court in the case of Pr.CIT Vs. Sahyadri Co-operative Credit Society Ltd., [2024] 301 Taxman 36 (Kerala) vide order dated 04.09.2024 has held as under : Quote “7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T. Act for a Co-operative Society that is assessed to tax under the head of 'Profits and Gains of Business or Profession' is of the

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whole of the amount of profits and gains of business attributable to any one or more of its activities. Thus, all amounts as can be attributable to the conduct of the specified businesses by a Co-operative Society will be eligible for the deduction envisaged under the statutory provision. The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns interest on such deposits, such interest would cease to form part of its profits and gains attributable to its business of providing credit facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount [the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co-operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members. Under those circumstances, if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.” Unquote

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Interest Income earned from the Banks and cooperative banks mentioned above. Accordingly, the AO is directed to delete the addition.

Order pronounced in the open Court on 30th June, 2026

Sd/- Sd/- (PAVAN KUMAR GADALE) (Dr. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER

पुणे/Pune; दिन ांक/Dated : 30-06-2026 Ravi Kumar Ravi Kumar Digitally signed by Ravi Kumar Date: 2026.06.30 15:28:01 +05'30' आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent 3. The concerned Pr. CIT, Pune 4. DR, ITAT, ‘SMC’ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Assistant Registrar आयकर अपीलीय अदिकरण,पुणे / ITAT, Pune