KALABURAGI SOUHARDA PATTINA SAHAKARI SANGHA NIYAMITA KALABURAGI,KALABURAGI vs. INCOME TAX OFFICER, WARD-1 & TPS, GULBARGA

PER KESHAV DUBEY, JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 25.11.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1082970191(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2020-21.

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(i) Deduction from total income under Chapter VI-A (ii) Investment/advances/loans (iii) High creditors/liabilities and (iv) Unsecured loans.

3.1 Accordingly, the AO issued statutory notice u/s 143(2) of the Act on 29/06/2021. Further, in this regard, the assessee was asked to provide details as per three numbers of notices issued u/s 142(1) of the Act but the assessee had not complied with any of the notices. The AO was left with no other option but to complete the case on the basis of document/details available on record. As the deduction claimed of Rs. 54,95,927/- under section 80P(2)(a)(i) of the Act was not verified & therefore the same was denied and added back to the total income of the assessee.

3.2 Further, on perusal of ITR, the AO observed that the assessee had debited interest expenses amounting to Rs.55,04,007/- in the profit & loss during the year under consideration, on which tax is deductible at source under chapter XVIIB of the Act. In this regard, details of TDS deduction was sought from the assessee but the assessee had not furnished any details/information and in the absence of any details/information, the AO held that the assessee had defaulted the provision u/s 40a(ia) of the Act and therefore, the

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 4 of 17 amount of Rs.16,51,202/- (30% of total interest paid of Rs.55,04,007) had been disallowed and added back to the total income of the assessee. The AO concluded the assessment proceedings on a total assessed income of Rs.71,47,129/-.

a. No list of members have been provided b. No Society Registration Certificate has been provided by the appellant. c. No list of customers have been provided by the appellant to this Appellate authority d. No Audited financials have been provided by the appellant to this Appellate authority e. No work activities of the appellant society have been provided. f. In the absence of any details furnished by the assessee to justify that the “concept of mutuality” is adhered to in its case, the claim of deduction u/s 80P of the Act is frivolous.

5.1 Further, w.r.t. the addition of Rs. 16,51,202/- u/s 40(a)(ia) of the Act, the ld. CIT(A)/NFAC held that the AO has been fair as the assessee had not been able to furnish the details of the parties to whom the interest was paid out and the TDS done against it. Thus due to non-submission of satisfactory replies by the assessee before the AO & non-filing of such evidences

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 5 of 17 before the ld. CIT(A)/NFAC, the additions/disallowances made by the AO was upheld.

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9.1 First we proceed to adjudicate the ground related to disallowance of interest expenses u/s 40(a)(ia) of the Act amounting to Rs. 16,51,202/-[30% of total Interest of Rs.55,04,007/-]. Undisputedly, the assessee society had debited total interest expenses of Rs.55,04,007/- in its profit & loss account during the year under consideration. The AO is of the opinion that these interest expenses debited to P&L A/c are subject to TDS under Chapter XVIIB of the Act & accordingly the assessee had defaulted the provision contained u/s 40(a)(ia) of the Act. Before us, the ld. AR of the assessee contended that the assessee is not required to deduct TDS u/s 194A of the Act with respect to the interest paid to members in terms of section 194A(3)(v) of the Act. On perusal of the provision of Section 194A(3)(v) of the Act, we find that where income credited or paid by a Co-operative Society to a member or any other co-operative society, then provision of section 194(1) of the Act shall not apply. Further, the proviso to Section 194A(3)(v) of the Act inserted by the Finance Act, 2020, w.e.f. 01/04/2020 also states that a co-operative society shall be liable to deduct income tax in accordance with the provisions of section 194(1) of the Act, if the total sales, gross receipts or turnover of the co-operative society exceeds fifty crores rupees during the FY immediately preceding the FY in which interest is credited and paid and amount of interest, or the aggregate of the amounts of such interest credited or paid during the financial year is more than 50,000/- in the case of payee being a senior citizen and 40,000/- in any other case. In view of the above, as the assessee neither furnished any details with regards to details of payment of interest & the turnover of the immediately preceeding FY before the lower Authorities nor before us, we deem it fit & proper to remit this issue to the file of the AO to decide as per the provisions contained under section 194A(3)(v) of the Act after obtaining the details of breakup of interest paid to the members

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 7 of 17 during the year under consideration as well as Audited statement of Accounts of the immediately preceeding FY. Needless to say, a reasonable opportunity of being heard must be granted to the assessee. The assessee is also directed to submit all such details to substantiate the claim as made by the assessee. It is ordered accordingly.

9.2 We make it clear that in case the disallowance are made u/s 40(a)(ia) of the Act, the business profit of the assessee will accordingly enhanced & the assessee will accordingly eligible to claim higher deduction u/s 80P of the Act in view of the Circular No.37/2016 dated 02/11/2016 where the CBDT has accepted the settled position that the disallowances made u/s 32, 40(a)(ia), 40A(3), 43B, etc of the Act and other specific disallowances, related to the business activity against which the chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under chapter VI-A is admissible on the profits so enhanced by the disallowance. In the result, this ground of appeal is partly allowed for statistical purposes.

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 8 of 17 “9.2 First we will consider the argument of the AR of the assessee supporting that the assessee is entitled for the deduction under section 80P(2)(a)(i) of the act as the entire interest earned by the cooperative society from Co-operative Bank/Scheduled Bank/Co-operative society is attributable to the business of the assessee. The Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 123 taxmann.com 161/431 ITR 1/279 Taxman 75 (SC) has held that the co-operative societies providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the Act. We are of the considered opinion that if the Idle fund/ surplus money which are neither required to be deposited for maintaining the fluid resources nor statutorily required to be deposited under the Karnataka State Co-operative societies Act are invested/deposited into bank with an intention to earn Interest income only as these funds are not immediately required for the purposes of the business then it can not be said that such interest income earned are attributable to the business of the assessee. Therefore, such interest income earned on the surplus fund can neither be treated as an operational income of the assessee nor can it be said to be attributable to the business of the assessee. Had the intention of the legislature was to treat all the interest income earned by society are attributable to the business of the assessee only, then the provision of section 80P(2)(d) of the Act would be completely redundant. According to Section 14 of the Act, all income shall, for the purposes of charge of income tax and computation of total income, be classified under the five heads of income as specified. Therefore, we do not agree with the contention of the assessee that the entire interest income of Rs.3,42,99,582/-are allowable as deduction u/s 80P(2)(a)(i) of the Act. 9.3 Further the ld. CIT(A)/NFAC, heavily relied upon the decision of the Apex Court in the case of Totagar Sales Society (supra) and contended that the interest earned out of surplus funds kept by co-operative societies with banks are not eligible for deduction u/s 80P(2)(d) of the Act and the same are taxable as Income from Other sources u/s 56 of the Act. When we look at the decision of Hon'ble Supreme Court in case of Totgars Cooperative Sale Society's case (supra), relied by the Ld. DR, Hon'ble Supreme Court was dealing with a case where the assessee therein, 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 payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein 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. On these facts Hon'ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 as income from other sources of the Act. Hon'ble Supreme Court, also clarified that, they are confining the said judgment to the facts of that case alone. 9.4 Further the adjudication by the Hon'ble Supreme Court in case of Totgars Co- operative Sale Society Ltd. (supra) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction under Sec.80P(2)(d) on the interest income on the investments/deposits parked with a cooperative bank.

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 9 of 17 Therefore, reliance was placed by the Ld. CIT(A)/NFAC on the decision of Hon'ble Supreme Court in the case of T otgars Co-operative Sale Society Ltd. (supra) is distinguishable on facts. 9.5 Now we will consider the second argument raised by the AR of the assessee by contending that the assessee is entitled for the deduction under section 80P(2)(a)(i) of the act to such portion of the interest from co-operative banks in respect of mandatorily maintenance of fluid resources as compared under the assessee's governing statute and only the balance of interest over and above the mandatory SLR was liable to be charged under section 56 of the Act. 9.6 We note that the primary issue in dispute pertains to the eligibility of deduction u/s 80P(2)(a)(i) of the Act/80P(2)(d) of the Act in respect of interest income earned from deposit made with cooperative banks and district co-operative banks/Scheduled banks. The crux of the matter is whether such interest income is to be considered as "business income" eligible for deduction u/s 80P(2)(a)(i) of the Act or 80P(2)(d) of the Act or to be classified as "income from other sources" and taxed accordingly. 9.7 We also take a note of the fact that the certain deposits(FDs) in question as contended by the AR of the assessee was not voluntarily made by the assessee society for investment purposes but were instead statutorily mandated by the Karnataka State Cooperative Society Act, 1959/ Karnataka Souharda Sahakari Act,1997. As per section 57(2) of the Karnataka State Co-operative Society Act, 1959, a co-operative society shall, out of its net profit in any year transfer an amount not being less than twenty-five per cent of the profits to the reserve fund. Further as per Rule 28 of the Karnataka Co-operative Societies Rules, 1960, every Co-operative Society accepting deposits and granting cash credits shall maintain fluid resources in such form and according to such standards as may be fixed by the Registrar, from time to time, by general or special order. As per section 58 of the Karnataka State Co-operative Society Act, 1959, such reserve funds must be mandatorily invested in specified institutions including co-operative banks. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the Registrar of Co-operative Societies. We also take note of the fact that if the Statutory funds are not invested in the prescribed fund, the business of the assessee may get hampered/affected due to the violation of these statutory provisions. 9.8 Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the banks are entitled for deductions u/s 80P(2)(a)(i) of the Act. In holding so, we also draw our support and guidance from the judgment of the Hon'ble Supreme Court in the case of Cambay Electrical Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) which has considered the term "attributable" and held as follows: "As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business" of the specific industry (here generation and distribution of society) on which the learned Solicitor-General relied, it will be pertinent to observe that the

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 10 of 17 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" been used, it could have with some force been contented that a balance 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" 9.9 Further, we also draw support and guidance from the judgment of Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 118 Taxman 321/251 ITR 194 (SC) wherein it was held as under: "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 purpose of carrying on the banking business, the income derived there from would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co-operative Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital." 9.10 Further, the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. v. Income-tax Officer [2001] 119 Taxman 785/251 ITR 522 (SC) had again reiterated by relying on its own judgment delivered in the case of Karnataka State Co-operative Apex Bank's case (supra) as under- "Insofar as the interest income upon statutory reserves is concerned, the question must be answered in favour of the assessee, in the light of the judgment delivered by us in Karnataka State Co-operative Apex Bank's case (supra)." In view of the above principles laid down by Hon'ble Supreme Court if the income is attributable to the profits & gains of business of the society, then the assessee society is entitled for deduction u/s 80P(2)(a)(i) of the Act. 9.11 Further, In the case of ClT v. Nawanshahar Central Cooperative Bank Ltd. [2007] 160 Taxman 48/289 ITR 6 (SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and Gains of Business and Profession". Even

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 11 of 17 though the abovementioned decision was in the context of cooperative societies /Banks claiming deduction under section 80P (2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 as per the CBDT Circular No. 18/2015 dated 02/11/2015. 9.12 The Hon'ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax Officer [2015] 55 taxmann.com 447/230 Taxman 309 (Karnataka) had also held as under- "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 SolicitorGeneral, 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

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 12 of 17 and is liable to be deducted from the gross total income under Section 80P of the Act." 9.13 However, we are also conscious to the fact that the details of quantum of amount necessary to be deposited to comply with the Karnataka Co-operative Society Act/Karnataka Souharda Sahakari Act is not provided by the assessee to the AO. Therefore, we, in the interest of justice and fair play are inclined to set aside this issue to the file of AO with a direction to compute the required quantum of amounts needs to be deposited as per the statutory requirement and allow the claim of the deduction u/s 80P(2)(a)(i) of the Act of the corresponding interest income irrespective of the fact that the investment were made by the co-operative society in cooperative Banks or scheduled banks. 9.14 Furthermore, without prejudice to the above findings, we are also inclined to consider the argument/contention of the Revenue. In the event that the AO found that any amount of investment over and above the mandatory statutory limits, the AO may consider the claim of deduction u/s 80P(2)(d) of the I.T. Act and accordingly, we direct the A.O. to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act. 9.15 The Revenue also in the grounds of appeal profoundly relied upon the decision of Hon'ble High Court of Karnataka in the case of Totgars Cooperative Sale Society (supra) which held that the intention of legislature is clear that Co- operative banks are not specie of genus cooperative society, which would entitle to exemption or deduction under the Special Provisions of chapter VIA in the form of section 80P of the Act. 9.15.1 We are of the considered opinion that the Hon'ble Supreme Court in the case of Kerala State co-operative agricultural and rural development bank Ltd. KSCARDB v. Assessing Officer [2023] 154 taxmann.com 305/295 Taxman 675/458 ITR 384 (SC) analyzed, whether the assessee therein could be treated as a "co-operative Bank" within the meaning of sec. 80P(4) of the Act. The Hon'ble Supreme Court considered the above issue in case of an assessee who is a state level Agricultural and Rural Development Bank, governed as a cooperative society, under the relevant state cooperative societies Act, and was engaged in providing credit facilities to its members who were cooperative societies only. On facts, the assessee therein claimed deduction under Section 80P (2)(a)(i) of the Act. The Ld.AO disallowed the deduction under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Ld.AO therein held that the appellant/assessee is a "co-operative bank" and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. This was upheld by the Ld. CIT(A) and the Tribunal. The decision of the Tribunal was confirmed by Hon'ble Kerala High Court. 9.15.2 The Apex Court analyzed the legal framework, relevant provisions under the co-operative societies Act, NABARD Act, provisions of sec. 80P under the Income Tax Act, 1961, RBI Act, the Banking Regulation Act and the various

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 13 of 17 judicial precedents on similar issues. The observations of Hon'ble Supreme Court in Paras 14.3 and 15.8 are relevant that read as under: - "14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court: (i) Firstly, the marginal note to Section 80P which reads "Deduction in respect of income of co-operative societies" is significant as it indicates the general "drift" of the provision. (ii) Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". (iii) Thirdly, the gross total income must include income that is referred to in sub-section (2). (iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being "engaged in", inter alia, carrying on the business of banking or providing credit facilities to its members. (v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. (vi) Sixthly, the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. (vii) Seventhly, under Section 80P(1)(c), the co-operative societies must be registered either under Co-operative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). (viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other cooperative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole. .............. 15.8. Since the words 'bank' and 'banking company' are not defined in the NABARD Act, 1981, the definition in sub-clause (i) of clause (a) of Section 56 of the BR Act, 1949 has to be relied upon. It states that a cooperative society in the context of a co-operative bank is in relation to or as a banking company. Thus, cooperative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of Section 5 of the BR Act, 1949 is seen, it means any company which transacts

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 14 of 17 the business of banking in India and as already noted banking business is defined in clause (b) of Section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank and in such a case, Section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a cooperative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci). Whereas a cooperative bank is in the nature of a banking company which transacts the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949. But if a cooperative society does not transact the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a cooperative bank. Then the definitions under the NABARD Act, 1981 would not apply. If a co-operative society is not a co- operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act." 9.15.3 In any event Hon'ble Supreme Court in the decision has elaborately analyzed the requirement of a cooperative bank that could fall within the exception of section 80P(4) of the Act. Based on such principle analyzed by Hon'ble Supreme Court and respectfully following the view taken by the Hon'ble Karnataka High Court in the case of PCIT & Anr. v. Totagars Cooperative Sale Society reported in (2017) Principal Commissioner of Income-tax v. Totagars Co-operative Sale Society [2017] 78 taxmann.com 169/392 ITR 74 (Karnataka) and the Hon'ble Gujarat High Court in the case of State Bank Of India v. CIT [2016] 72 taxmann.com 64/241 Taxman 163/389 ITR 578 (Gujarat), we are also of the considered opinion that interest earned on any amount of investment over and above the required statutory limits from such commercial/cooperative banks that fall within the definition of "banking company' as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head 'income from other sources' as held by the jurisdictional High Court of Karnataka in the case of Totagars Co-operative Sale Society (supra). 9.16 Insofar as AR of the assessee's claim that if interest income is to be assessed as income from other sources, necessarily, the cost of fund and related administrative expenses in respect of earning such interest income should be allowed as deduction u/s 57 of the I.T.Act, 1961. We find an identical issue was considered by the Hon'ble jurisdictional High Court in the case of Totagars Cooperative Sales Society Ltd. v. ITO [2015] 58 taxmann.com 35/231 Taxman 794 (Karnataka) (judgment dated 25.03.2015). The relevant findings of the Hon'ble High Court, read as follows: -

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 15 of 17 "11. Having heard the learned counsel for the parties and perusing the records and in the light of the finding recorded by The Hon'ble Supreme Court that the interest income earned by the appellant falls within the category of "other income" what falls for consideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deduction in respect of proportionate costs incurred as permissible under Section 57. 12. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to Supra, the income earned on the interest is declared as "other income" falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from "other sources", the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the next income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. 13. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits."

9.17 The assessee has not raised the plea before the Income tax Authorities that it has to be given deduction u/s 57 of the Act, in respect of expenditure for earning the interest income. However, in spite of such plea not being raised before the lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only the net income has to be taxed (i.e., gross receipt minus allowable expenditure), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of the Hon'ble jurisdictional High Court in the case of Totagars Sale Co-operative Society Limited(supra). Accordingly, the issue of deduction u/s 57 of the I.T. Act is restored to the file of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head 'income from other sources. If so, the same shall be allowed as deduction u/s 57 of the Act. The assessee is directed to co-operate with the revenue and furnish all the necessary details/records/evidence.

9.18 In view of the above discussions/observations, we are inclined to remit the issue back to the file of AO for determining/computing the Business Income, Income from other sources, eligible deduction u/s 80P of the Act with the following Observations-

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 16 of 17 (i) The Interest received exclusively from the credit facilities provided to its members will be treated as operating Profit of the Co-operative society & eligible for deduction u/s 80P(2)(a)(i) of the Act. (ii) Further, the Interest income earned out of the Statutory deposits/maintain fluid resources are attributable to the business activity of the co-operative society & hence also eligible for deduction u/s 80P(2)(a)(i) of the Act irrespective of the fact that the interest is earned from the co-operative bank and/or scheduled bank. (iii) For an amount of interest earned on investment over and above the required statutory limits from such scheduled/cooperative banks that fall within the definition of "banking company' as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head 'income from other sources' & the deduction under section 80P(2)(d) is not available on such Interest on investment. However the cost of fund and related administrative expenses in respect of earning such interest income should also be allowed as deduction u/s 57 of the Act. (iv) In respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income is eligible for deduction u/s 80P(2)(d) of the Act. (v) In respect of interest earned on investment out of the surplus fund/idle funds over and above as required statutorily can not be said to be attributable to the business of the assessee & therefore deduction u/s 80P(2)(a)(i) can not be allowed on such interest income. Needless to say, a reasonable opportunity of being heard must be granted to the assessee. The assessee is also directed to submit all the relevant details as well as the breakups as per our observation above. 10. In the result appeal filed by the Revenue is partly allowed for statistical purposes.”

10.1 Respectfully, following the above decision of the coordinate bench, we are also inclined to remit this issue back to the file of the AO for determining/computing the Business Income, Income from other sources, eligible deduction u/s 80P of the Act as per the observations in the paragraph 9.18 of the above decision. Needless to say, reasonable opportunity of being heard must be granted to the assessee. Accordingly this ground of the appeal of the assessee is also partly allowed for statistical purposes.

ITA No.121/Bang/2026 Kalaburagi Souharda Pattina Sahakari Sangh Niyamita, Kalaburagi Page 17 of 17

Order pronounced in the open court on 19th June, 2026

Sd/- Sd/- (Prashant Maharishi) (Keshav Dubey) Vice President Judicial Member

Bangalore, Dated 19th June, 2026. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.