VSS BANK MAKKANDUR,KODAGU vs. INCOME-TAX OFFICER, WARD -1, MADIKERI, MADIKERI

ITA 378/BANG/2026Status: DisposedITAT Bangalore28 September 2026AY 2020-217 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the interest income of ₹2,510,475 earned by the assessee is attributable to its business of providing credit facilities to its members. Applying the decision of the Hon'ble Karnataka High Court in *Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO*, the Tribunal reasoned that funds not immediately required for lending cannot remain idle, and depositing them to earn interest does not constitute a separate business. The interest income bears the same characteristics as the income considered by the Karnataka High Court, and the distinguishing features of the Supreme Court decision in *Totgars Co-operative Sale Society Ltd. v. ITO*, relied upon by the lower authorities, are absent in this case. Therefore, the interest income is eligible for deduction under Section 80P(2)(a)(i). The Tribunal noted that the assessee made no claim under Section 80P(2)(d), so that provision is not applicable. Consequently, the AO is directed to grant the assessee a deduction under Section 80P(2)(a)(i) for the interest income of ₹2,510,475. Grounds 2 and 3 of the assessee's appeal are allowed. Grounds 1, 4, 5, 6, and 7, being general or alternative grounds, are dismissed.

What were the facts?

The assessee, VSS Bank Makkandur, a co-operative society, filed its return for Assessment Year 2020-21, declaring a total income of ₹421,240 after claiming a deduction of ₹2,560,475 under Section 80P of the Income-tax Act, 1961. The Assessing Officer (AO) denied this deduction, disallowing ₹2,510,475, and assessed the total income at ₹2,931,715. The AO treated interest income of ₹9,443,908 (reported in P&L) and ₹4,963,090 (reported in Form 3CD) earned on deposits with Canara Bank and Syndicate Bank as income from other sources, not eligible for deduction under Section 80P(2)(a)(i). The assessee's appeal to the Commissioner of Income-tax (Appeals) [CIT(A)] was dismissed. The assessee is now appealing to the Income Tax Appellate Tribunal (ITAT).

What were the issues?

1. Whether the interest income earned by the assessee, a co-operative society, on deposits made with banks is eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961, as business income, or if it should be taxed as income from other sources. - Assessee's contention: The interest income earned on deposits with banks is part of its business of providing credit facilities to members and should be allowed as a deduction under Section 80P(2)(a)(i). The department had allowed this deduction in earlier years. Reliance is placed on the Karnataka High Court's decision in *Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO*. - Revenue's contention: The interest income is not derived from providing credit facilities to members but from surplus funds invested in non-co-operative banks, hence it is income from other sources and not eligible for deduction under Section 80P(2)(a)(i). Reliance is placed on the Karnataka High Court's decision in *Principal Commissioner of Income Tax v. Totagars Cooperative Society*. 2. Whether, alternatively, the interest earned from co-operative banks is eligible for deduction under Section 80P(2)(d) of the Act. - Assessee's contention: Not explicitly argued as a primary ground, but raised as an alternative. The assessee states it has never claimed a deduction under Section 80P(2)(d). - Revenue's contention: Not recorded. 3. Whether, if the interest income is assessed under the head 'Other Sources', the assessee is entitled to a deduction for the cost of funds. - Assessee's contention: If income is assessed under 'Other Sources', a deduction for cost of funds should be allowed, reducing the taxable income. - Revenue's contention: Not recorded.

Which sections of the Income-tax Act were involved?

Section 80P,Section 80P(2)(a)(i),Section 80P(2)(d),Section 56,Section 143(3),Section 144B,Section 234B,Section 58

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, BANGALORE BENCHES, BANGALORE

Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAILSHRIVALLI BUJILKDING,

PER SHRI PRASHANT MAHARISHI, VICE PRESIDENT

1.

This appeal is filed by the Assessee against appellate order passed by the Commissioner of income tax appeal being National faceless appeal Centre Delhi for assessment year 2020 – 21 No. 2025 wherein the appeal filed by the assessee against the assessment order passed on 19 September 2022 passed under section 143 (3) read with section 14

The order continues below.

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