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Facts
The assessee, a co-operative society, claimed deduction under Section 80P on interest income earned from statutory investments. The AO disallowed the deduction, treating the income as not from business and also due to nominal members. The CIT(A) confirmed the disallowance for interest from commercial/nationalized banks but allowed for interest from co-operative banks/societies.
Held
The Tribunal held that if the assessee demonstrates that deposits in Scheduled/Commercial Banks were made pursuant to the mandatory provisions of the Karnataka Co-operative Societies Act, then such interest income is eligible for deduction under Section 80P(2)(a)(i) as business income. The matter was remitted to the AO for verification.
Key Issues
Whether interest income from statutory deposits in scheduled/commercial banks, mandated by the Karnataka Co-operative Societies Act, is eligible for deduction under Section 80P(2)(a)(i) as business income.
Sections Cited
80P, 80P(2)(a)(i), 143(2), 68, 80P(2)(d), 44AB, 57, 58
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 04/04/2024 in respect of the A.Y. 2017-18 and raised the following grounds: “1. The Learned CIT(A) erred: (i) In not appreciating that the interest income accruing on statutory investments made in compliance of the provisions of the Karnataka State Co-operative Societies Act, 1959 is eligible for the deduction u/s 80P(2)(a)(i) of the Act. (ii) In not appreciating that the ratio of the relied upon decisions of the Hon'ble Jurisdictional Tribunal
Page 2 of applies to the interest income accruing on scheduled/nationalised banks as long as the investments are made in compliance of the said State Co-operative Societies Act.
2. The Appellant craves leave to add or delete or modify or revise any ground at the time of hearing before the Hon'ble Tribunal. For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon'ble Tribunal may be pleased to allow the appeal in the interest of the equity and justice.”
The assessee filed this appeal with a delay of 10 days and also filed an application to condone the said delay. We have considered the reasons given in the said application and also considering the delay is only a minimal one, we condone the said delay and proceeded to decide the appeal on merits.
The brief facts of the case are that the assessee is a co-operative society registered under the provisions of the Karnataka Co-operative Societies Act. The assessee filed their return of income declaring a Nil income and claimed a deduction u/s. 80P of the Act. The books of accounts were audited u/s. 44AB of the Act and the audit report in form no. 3CA and 3CD were also filed along with the return of income. Thereafter the case of the assessee was selected for scrutiny and notice u/s. 143(2) was issued in which the AO had proposed to disallow the deduction claimed u/s. 80P of the Act as well as proposed to treat the SBN deposits during the demonetisation period as unexplained income u/s. 68 of the Act. The AO proposed to disallow the 80P deduction on the ground that the assessee is having nominal members and also the interest income earned from the investments from the banks are not to be treated as business income. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had confirmed the disallowance on the interest income earned from non-members, commercial banks / nationalised banks / treasury as income from other sources. The Ld.CIT(A) further held that the interest
Page 3 of earned from the co-operative banks / co-operative societies and from members including nominal members are eligible for deduction. Insofar as the addition made u/s. 68 of the Act is concerned, the Ld.CIT(A) had accepted the case of the assessee and remitted the issue for verifying the details. The assessee challenged the said order in which the Ld.CIT(A) had confirmed the disallowance of the interest income earned from the Scheduled / Nationalised banks.
At the time of hearing, the Ld.AR submitted that the authorities below had failed to consider the issue in its right perspective since the assessee had deposited the amounts in the Scheduled / Commercial Banks as per the mandate given in the Karnataka Co-operative Societies Act. Section 57 and section 58 of the Karnataka Co-operative Societies Act made it clear that the 25% of the profits is to be invested in anyone of the modes specified u/s. 58 of the Act and therefore the assessee is entitled for deduction on the said interest income earned from the Scheduled / Commercial Banks. The Ld.AR further stated that this issue was already covered in favour of the assessee by the judgment of the Hon’ble Jurisdictional High Court as well as the order of the Coordinated Bench of this Tribunal and prayed to allow the appeal.
The Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal.
We have heard the arguments of both sides and perused the materials available on record.
From the perusal of the assessment order, we found that the AO had disallowed the interest income earned by the assessee for the reason that the assessee is having nominal members and therefore there is no mutuality. To arrive such conclusion, the AO had also relied on the judgment of the Hon’ble Supreme Court in the case of Citizen Co-operative
Page 4 of Society Ltd. vs. ACIT reported in (2017) 84 taxmann.com 114 (SC). Further, the AO had also taken a plea that the assessee had deposited its funds with co-operative banks / scheduled banks and therefore they are not eligible for claiming the said deduction. The AO also stated that if the assessee had kept these deposits in any other co-operative societies, they are entitled for claiming deduction u/s. 80P(2)(d) also.
The Ld.CIT(A) after considering the several judgments, had arrived a conclusion that the presence of nominal members would not be a ground to disallow the deduction u/s. 80P(2)(a)(i) of the Act. But the Ld.CIT(A) had restricted the said claim and confirmed the disallowance in respect of the interest income earned from the Scheduled / Commercial Banks. Before us, the Ld.AR submitted that the authorities had failed to consider the fact that the assessee had deposited the said amounts in the Scheduled / Commercial banks as mandated by the provisions of the Karnataka Co- operative Societies Act. We have also perused section 57 and 58 of the Karnataka Co-operative Societies Act relied on by the Ld.AR. In section 57 (sub-clause (2)) it was specifically mentioned that a co-operative society shall transfer an amount from its net profits not being less than 25% of the profits to the reserve fund. Similarly, section 58 of the said Act permits the co-operative societies to invest or deposit its funds in the 5 modes mentioned in it. One of the mode is that the society may invest or deposit its funds with any co-operative bank or with any scheduled bank regulated by the reserve bank of its choice. Therefore, the Co-operative Societies Act mandates that 25% of its profits should be transferred to the reserve fund which should be deposited in any of the co-operative banks or scheduled banks approved by the Reserve Bank. The assessee also filed their written submissions before the Ld CIT(A) on 27/03/2023 in which it was clearly explained that the deposits are nothing but statutory deposits and therefore entitled for deduction but the Ld CIT had not considered the same.
In the present case, the assessee had contended that the interest income earned from the Commercial Banks / Nationalised Banks are in accordance with the provisions of the Karnataka Co-operative Societies Act and therefore the said interest income ought to be treated as business income and therefore they are entitled for deduction u/s. 80P(2)(a)(i) of the Act. If the deposits are statutory deposits, it can be treated as business income as held by the judgment of the Hon’ble Jurisdictional High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO reported in (2015) 55 taxmann.com 447 (Karnataka).
The above said view was also approved by the Constitutional Bench judgment of the Hon’ble Supreme Court in the case of CIT vs. Karnataka State Co-operative Apex Bank reported in [2001] 251 ITR 194. Therefore we are also following the Constitutional Bench judgment of the Hon’ble Supreme Court as well as the judgment of the Hon’ble Jurisdictional High Court and hold that if the assessee is able to demonstrate that the deposits are made pursuant to the mandatory provisions contained in the Karnataka Co-operative Societies Act, then the same is entitled for deduction u/s. 80P(2)(a)(i) of the Act as business income. In the order of the Ld.CIT(A), no specific bifurcation of the said interest incomes were given and therefore we are remitting this issue to the file of the AO for verifying the fact that whether the deposits are made pursuant to the statutory provision contained in the Karnataka Co-operative Societies Act and if found that the same has been made in accordance with the said provisions, we direct the AO to grant the deduction claimed by the assessee u/s. 80P(2)(a)(i) of the Act. Only for the limited purpose of ascertaining these facts, we are remitting this issue to the file of the AO. Insofar as the nominal members and the interest income earned from the co-operative banks and societies, we confirm the order of the Ld.CIT(A). With these observations, we are remitting this issue to the file of the AO for making proper verification and thereafter pass orders in accordance with law after granting an opportunity of being heard to the assessee.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 31st December, 2025.