SRI VISHNU VILAS SOUHARDA PATTINA SAHAKARI SANGHA NIYAMITA ,BALLARI vs. INCOME TAX OFFICER, WARD-1 & TPS, , BALLARI

The brief facts of the case are that the assessee is a credit co-operative society registered under the provisions of the Karnataka Souharda Sahakari Act, 1997. The assessee filed the return of income and claimed the deduction under Chapter VIA of the Act on the interest income earned by it through the statutory deposits made with the banks. The said return was taken up for complete scrutiny and notice u/s. 142(1) was issued on 10/11/2021. The assessee also filed their detailed reply along with the documents on 28/11/2021. In the said reply, the assessee had given the details about the interest received from the co-operative banks as well as the scheduled banks and explained that the interest is on the short term deposits. In the said reply, the assessee also relied on 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). Before the issuance of notice u/s. 142(1), the AO had issued notice u/s. 143(2) on 29/06/2021 and the assessee also filed their reply on 13/07/2021 and also gave an explanation about the deduction claimed u/s. 80P(2) on the interest income earned by the assessee by relying on the three judgments of the Hon’ble Jurisdictional High Court and also one order of the Coordinate Bench of this Tribunal. Subsequently, the AO issued a show cause notice on 15/03/2022 for which also the assessee filed their reply on 18/03/2022. In the said reply, again the assessee explained the circumstances under which the assessee had claimed deduction u/s. 80P of the Act and also relied on the Hon’ble Jurisdictional High Court judgment cited supra. In the said reply, the assessee had explained the circumstances under which the Hon’ble Jurisdictional High Court had differentiated the judgment rendered by the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO reported in (2010) 322 ITR 283 and therefore submitted that the Page 4 of judgment of the Hon’ble Jurisdictional High Court would apply to the facts of the present case and prayed to drop the proposals.

The AO considered the various details furnished by the assessee and also considered the judgments of the Hon’ble Jurisdictional High Court and accepted the claim made by the assessee and granted the deduction claimed u/s. 80P(2)(a)(i) of the Act by passing an order u/s. 143(3) of the Act. From the facts as narrated above, the AO had completed the assessment by considering the detailed replies filed by the assessee to the notices issued u/s. 143(2), 142(1) and show cause notice. The AO had also considered the judgment of the Hon’ble Jurisdictional High Court Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO reported in (2015) 55 taxmann.com 447 (Karnataka).

Later on, the Ld.PCIT had proposed to initiate revision proceedings u/s. 263 of the Act against the assessment order dated 20/09/2022 in which the AO had accepted the claim of the assessee that the interest income earned on short term deposits are eligible for deduction u/s. 80P(2)(a)(i) of the Act. A show cause notice was issued by the Ld.PCIT in which the Ld.PCIT had stated that the interest income on investment in banks received by the assessee would be treated as income u/s. 56 of the Act as held by the Hon’ble Supreme Court in the case of Totgars Co- operative Sale Society Ltd. Vs. ITO reported in (2010) 322 ITR 283. Therefore the Ld.PCIT had concluded that the assessment order passed u/s. 143(3) by the AO is an erroneous one and also it is prejudicial to the interest of the revenue since the AO had failed to examine and verify the issue and failed to tax the income under the head income from other sources.

The assessee filed their response to the show cause notice issued u/s. 263 of the Act on 09/03/2025. In the response, the assessee had explained the interest income earned by the assessee is pursuant to the mandatory provisions in the Karnataka Souharda Sahakari Act, 1997 and therefore the interest income earned from the said short term deposits are in the nature

The Ld.PCIT had not accepted the reply filed by the assessee and arrived a conclusion that the AO had not made proper enquiries and therefore the interest income earned by the assessee would be treated as income from other sources. In the impugned order, the Ld.PCIT had relied on the another judgment of the Hon’ble Jurisdictional High Court in the case of PCIT, Hubballi vs. The Totagars Co-operative Society reported in (2017) 395 ITR 611 and held that the interest income earned by the assessee would be treated as income from other sources u/s. 56 of the Act. The Ld.PCIT had given a direction to the AO to pass orders accordingly.

The Ld.DR submitted that the order of the AO, without making proper enquiries is an erroneous one and therefore the Ld.PCIT had invoked the powers vested with him u/s. 263 of the Act and prayed to dismiss the appeal.

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

We have perused the various notices issued by the AO pursuant to the complete scrutiny proceedings and the notice issued u/s. 143(2) of the Act.

We have also perused the reply dated 28/11/2021filed by the assessee to the notice issued u/s. 142(1). The assessee had answered to question no. 5 which reads as follows: “Ans: Q5. The total interest received during the year is Rs. 8772484-00. The Details of interest received from the various Co Operative Banks and Scheduled Banks are as follows: Co Operative Banks:

We have also perused the reply filed by the assessee to the show cause notice dated 15/03/2022. In the reply dated 18/03/2022, the assessee had given the following objections. The relevant extract reads as follows: “Regarding Other incomes of Rs. 776770-00, I would like bring to your kind notice that, The assesse is a co operative society providing credit facilities to its members. While performing its main objectives it has earned some service charges on the services given to members. All the above services are related to main objective of the society. The 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 other 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 tis members by a co operative society and is liable to be deducted from the gross total income under section 80P of the Act. It is defined in the definition of Section 80P and it is also decided in the Judgement given by the High Court of Karnataka vide ITA 307/2014 , Tumkur Merchants Souharda Credit Co Operatives ltd Vs. ITO. Hence we claimed deduction u/s 80P accordingly. Kindly we request you to consider the above judgement and allow 80P in our case. And I would like to bring to your kind notice, you have quoted the Supreme court decision of Totagar Co Operative Sale Society Ltd Vs IT, the object of the society is purchase and sale of agriculture products from members. But our co-operative society objective is providing credit facilities to its members. While performing its main objectives it has earned some service charges on the services given to members. All the above services are related to main objective of the society. The income is attributable to the profits and gains of the business of providing credit facilities to its members only. Hence Page 10 of Totagar Co Operative Sale Society Ltd Vs IT is not applicable to our society objective.”

We have also perused the assessment order dated 20/09/2022 in which the AO had extracted the replies filed by the assessee and on that basis, the AO had accepted the objections filed by the assessee and therefore observed that no adverse reference has been drawn in this case and accepted the returned income and made the assessment u/s. 143(3) of the Act. From the above said facts, we find that the AO had made elaborate enquiries and considered the objections raised by the assessee and also considered 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) which was decided on similar set of facts and therefore concluded that the claim made by the assessee is in order. Therefore the AO had not blindly accepted the claim made in the return of income.

As stated by the assessee, the interest income was earned through the short term deposits in order to comply with the statutory provisions of the Karnataka Souharda Sahakari Act, 1997. The assessee had submitted that the interest income earned by the societies out of statutory compulsions could be treated as business income and therefore entitled for deduction u/s. 80P(2)(a)(i) of the Act. In the reply to the show cause notice issued by the Ld.PCIT, the assessee had narrated the facts of earning interest from the investments made in co-operative banks and scheduled banks, which are reproduced herewith for the sake of convenience. “4. Legal and Statutory Compliance of Investments: The Society is a registered Credit Co-operative Society under the Karnataka Souharda Sahakari Act, 1997, engaged in providing credit facilities to its members. The investments made in co-operative banks and scheduled banks are mandatory, as per the following statutory requirements:  Section 10(2)(xxi) & Section 18 of the Karnataka Souharda Sahakari Act, 1997, which mandates the Page 11 of placement of Reserves in specified investment avenues.  CRR & SLR requirements prescribed by the Registrar of Co-operative Societies/ Souharda Federal Co Operatives. 4.1 As per Souharda Act and Rules, and also as per the Guidelines issued by the by the Registrar of Co-operative Societies there under requiring credit cooperative societies to maintain not less than 3 percent of the deposits received from members in savings bank account and not less than 20 percent of such deposits in banks as short term deposits to meet the demands of customers. CRR & SLR Ratios). (Annexure-1) 4.2 Appropriation of Profit: 50% of the profits should be appropriated statutorily and kept it as reserves. The said Clause (xxi) of sub-section (2) of section 10 of the Souharda Act 1 9 9 7 is as under: “(xxi) appropriation of amount out of the net profit specifically for the following:- (a) twenty five percent towards the reserve fund constituted by the co-operative; (b) two percent towards the cooperative education fund to the Karnataka State Souharda Federal cooperative. provided that no cooperative which has failed to contribute to the Cooperative Education Fund shall pay dividend to its members. (c) twenty percent towards the operational reserve to meet unforeseen losses or contingencies; (d) five percent towards the Common Good Fund whose purpose is approved by the general body; (e) constitution of or contribution to, such special funds as may be specified in the bye-laws. (f) bonus not exceeding two months pay to be paid to the employees; (g) dividend to the members" ( Annexure-2 ) 4.3 Mode of Investments: Section 18 of the said Souharda Act, which stipulates that the investments are made in securities specified in section 20 of the Indian Trusts Act,

From the above said explanations offered by the assessee, we found that the assessee had not invested their surplus funds to earn interest but invested the reserves and the profits as mandated by the Karnataka Souharda Sahakari Act, 1997. The assessee also relied on 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). We have also perused the Division Bench judgment of the Hon’ble Jurisdictional High Court relied on by the assessee in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO cited supra in which the Hon’ble High Court had held as follows: “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 Page 14 of 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 and is liable to be deducted from the gross total income under Section 80P of the Act.

In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee- Cooperative Society, 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 which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society 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. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.

In the instant case, 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(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of COMMISSIONER OF INCOME-TAX III, HYDERABAD VS. Page 15 of ANDHRA PRADESH STATE COOPERATIVE BANK LTD., reported in (2011) 200 TAXMAN 220/12. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order: Appeal is allowed. The impugned order is hereby set aside. Parties to bear their own cost.”

The AO had relied on this judgement cited by the assessee and considered the facts are identical, had allowed the deduction claimed u/s. 80P(2)(a)(i) of the Act. Therefore, the order passed by the AO u/s. 143(3) of the Act could not be termed as an erroneous order.

Further, we have also perused the 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 wherein a Constitutional Bench of the Hon’ble Supreme Court had held as follows: “6. The question is whether we agree with the reasoning in M.P. Cooperative Bank Limited. There is no doubt, and it is not disputed, that the assessee- Cooperative 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 80- P(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. We are unable (o lake view that found favour with the Bench that decided the case of M.P. Cooperative Bank Limited that only income derived from circulating or working capital would fall within Section 80-P(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.”

In the above said judgment, the Hon’ble Supreme Court had made clear that the interest income earned by the assessee society out of the statutory deposits made with the banks are to be treated as business

Further, in the impugned order, the Ld.PCIT had relied on the judgment of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO reported in (2010) 322 ITR 283 to term the assessment order of the AO as erroneous. As argued by the Ld.AR, 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) had also considered the Hon’ble Supreme Court judgment relied on by the Ld.PCIT and differentiated the said judgment and held that the law laid down by the Hon’ble Supreme Court would not be applicable to the facts of the present case. Therefore, the reliance made by the Ld.PCIT on the Hon’ble Supreme Court judgment to revise the order of the AO is not correct. We have also considered the facts involved in the present case and also the details furnished by the assessee to the show cause notice issued u/s. 263, which was extracted in the earlier paragraphs, the assessee had an obligation to make short term deposits under the provisions of the Karnataka Souharda Sahakari Act, 1997. If the assessee had not followed the said mandate, then the authority could take action on the society and even the registration could have been cancelled by the authority. In such circumstances only, the assessee had deposited the said amounts and earned the interest income out of the said deposits. By considering the Division Bench judgment of the Hon’ble Jurisdictional High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd.

The Ld.PCIT had also relied on a later Division Bench judgment of the Hon’ble Jurisdictional High Court in the case of PCIT, Hubballi vs. The Totagars Co-operative Society reported in (2017) 395 ITR 611 which was not put on notice to the assessee while issuing the show cause notice. We have also perused the said judgment relied on by the Ld.PCIT and we found that in the said judgment, the Hon’ble Division Bench had considered the claim made u/s. 80P(2)(d) of the Act in the facts and circumstances of the said case. In the present case, the facts are different and also the assessee had demonstrated that the deposits are out of compulsion and therefore it could be treated as business income and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. We do not think that the said judgment would be applicable to the facts of the present case and therefore the reliance made by the Ld.PCIT on the said judgment is not correct. Further, the Ld.PCIT had also relied on the Hon’ble Supreme Court judgment in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO reported in (2010) 322 ITR 283 which was differentiated by the Division Bench of the Hon’ble High

Finally, we are also of the view that if the AO had relied on the Division Bench judgment of the Hon’ble Jurisdictional High Court and granted the deduction, it could not be treated as an erroneous order by citing an another order of the Hon’ble High Court. The AO had applied the facts of the present case to the facts of the Hon’ble Jurisdictional High Court judgment and allowed the claim made by the assessee. When there are two plausible views and the AO had followed one plausible view, then the said view or order would not be treated as an erroneous one. In the present case, we accepted that the view taken by the AO is not only a plausible one but also it is a correct view by considering the facts and circumstances of the present case.

We, therefore does not find any merit in the order of the Ld.PCIT to invoke the jurisdiction u/s. 263 of the Act. We have also agreed that the interest income earned by the assessee would fall under the head “Business Income” and not under the head “Income from other sources”.

With the above said observations, we are allowing the appeal filed by the assessee by setting aside the order of the Ld.PCIT.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 31st December, 2025.