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Facts
The assessee, a cooperative society, claimed deduction under Section 80P for interest income earned from investments. The Assessing Officer allowed the deduction after inquiry. However, the PCIT passed a revisionary order under Section 263, holding the assessment order erroneous and prejudicial to revenue, citing a High Court decision that such income should be taxed under 'income from other sources'.
Held
The Tribunal held that the interest income earned by the assessee cooperative society from its surplus funds deposited in banks is attributable to its business of providing credit facilities and is eligible for deduction under Section 80P(2)(a)(i). Therefore, the PCIT's revisionary order was quashed.
Key Issues
Whether interest income earned by a cooperative society from its surplus funds deposited in banks is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, or if it should be treated as income from other sources under Section 56.
Sections Cited
143(3), 144B, 263, 80P, 80P(2)(a)(i), 80P(2)(d), 56, 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAIL
Per Prashant Maharishi, Vice President 1.
Pujya Sharanabasaveshwara Pattina Souharda Sahakari Sangha Ni Muski (the assessee/appellant) against the revisionary order passed by the Principal Commissioner Of Income Tax, Hubli (the learned PCIT) for assessment year 2020 – 21 on 22nd of March 2025 holding that the assessment completed under
1. section 143 (3) read with section 144B of The Income Tax Act 1961 (The Act) on 19 September 2022 determining the total income of the assessee at Rs. Nil is erroneous and prejudicial to the interest of the revenue.
2. The assessee aggrieved with the same is in appeal before us. Though assessee has raised seven grounds of appeal, but the main contention of the assessee is that the learned CIT – A has passed the revisionary order despite the decision of the Hon’ble Karnataka High Court in favour of the assessee, assessee has been rightly allowed the claim, therefore the revision of the order by invoking the provisions of section 263 of the Act is not correct.
Brief facts of the case shows that assessee is a member is cooperative society filed its return of income on 12 December 2020 declaring total income at rupees Nil. The case was selected for verification of deduction from total income under chapter VI A. The assessee was questioned about the claim of deduction under section 80 P (2) (a) (i) of ₹ 4,705,683/– as well as the amount of interest on investment from banks of ₹ 3,418,255/–. The learned assessing officer even after considering the explanation of the assessee, issued notices under section 1333 (6) of the Act to the banks to confirm the interest on banks. He further issued a show cause notice on 23 March 2022 to the assessee that why the claim of deduction under section 80 P should not be taxed as income from other sources under section 56 of the Act and added back to the total income of the assessee. The assessee
responded to the show cause notice in detail along with the supporting documents. On perusal of the submission of the assessee further clarification letter was issued on 1 September 2022 which was replied by the assessee on 9 September 2022 along with the documents in detail. The replies filed by the assessee were carefully considered by the learned assessing officer and based on this the income was assessed at Rs.Nil by assessment order passed under section 143 (3) read with section 144B of the income tax act on 19/9/2022.
The ld. PCIT examined the records of the assessment and he observed that the order passed by the learned assessing officer is erroneous for the reason that the society had earned interest income from cooperative and commercial banks at ₹ 3,418,255/– which the assessing officer has failed to examine properly and consider the total income under the head income from other sources in view of the decision of the Hon’ble Karnataka High Court in case of PCIT v. Totgars Co-operative Sale Society in dated 16/6/2017 wherein it has been held that that the interest income earned by the assessee is chargeable to tax under the head income from other sources under section 56 and no deduction under section 80 P (2) (a) (i) or under section 80 P (2) (d) of the Act is allowable. Thus the order stated to be erroneous and prejudicial to the interest of the revenue and a show cause notice was issued.
The assessee submitted a detailed reply submitting that assessee is a member cooperative society who has earned interest on loan from members of ₹ 21,515,901/– their interest on investment from cooperative banks and cooperative society is received of ₹ 3,418,255/–. The assessee further gave the details of each of the bank from which the assessee has received above interest. The assessee submitted that assessee claimed deduction under section 80 P (2) (i) of the Act. It was further stated that there are two decisions of the Hon’ble Karnataka High Court which are in favour of the assessee wherein it has been stated that the interest income earned by the assessee from cooperative banks is attributable to the business of the members credit cooperative society and therefore the assessee is eligible for deduction on them under section 80 P (2) (a) (i) of the Act. The assessee placed reliance on the decision of the Hon’ble Supreme Court and also the two decisions of Hon’ble Karnataka High Court. Thus it was submitted that the order is neither erroneous not prejudicial to the interest of the revenue and accordingly the assumption of jurisdiction under section 263 of the Act is not proper.
6. The learned PCIT stated that the Hon’ble Karnataka High Court vide decision dated 16 June 2017 has held that such interest income is income from other sources and deduction under section 80 P(2)(a) (i) as well as under section 80 P (2) (d) of the Act is not allowable to the assessee and therefore the order is erroneous and prejudicial to the interest of the revenue as the learned assessing officer has failed to treat the interest income earned from cooperative banks as income from other sources under the provisions of section 56 of the Act and therefore he gave a direction to the learned assessing officer to pass a fresh assessment order on the points discussed therein.
7. The assessee is aggrieved with the same and has submitted that according to the decisions of the Hon’ble Karnataka High Court the assessee is eligible to deduction under section 80 (P) (2)(a)(i) of the Act for the reason that both the decisions have considered the decisions of the Hon’ble Supreme Court. Further the decisions relied upon by the ld. PCIT has distinguished those decisions but has not overruled those decisions and therefore all the three decisions are binding at present. The learned assessing officer has followed the decision of the Hon’ble Karnataka High Court and therefore it cannot be said to be erroneous or prejudicial to the interest of the revenue. Even otherwise he submitted that if there are two views in existence and if the assessing officer accepts one of the view which is sustainable in law, the provisions of section 263 of the Act cannot be invoked.
8. The learned departmental representative CIT DR Shri Muthu Shankar vehemently supported the order of the learned PCIT and submitted that the later decisions of the Hon’ble Karnataka High Court has not been followed by the learned assessing officer and therefore the assessment order is erroneous and prejudicial to the interest of the revenue. He further relied upon the decision of the Hon’ble Karnataka High Court in case of PCIT v. T E connectivity India Pvt. Ltd. (2025) 175 taxmann.com 405 (Karnataka) wherein it has been stated that if the assessment order does not speak about how he has allowed the claim of the assessee, the order becomes erroneous and prejudicial to the interest of the revenue.
We have carefully considered the rival contention and perused the orders of the learned lower authorities.
We find that the assessee is a members’ credit cooperative society who has earned interest from the other cooperative societies or cooperative banks which was forming part of the business income arising to the assessee from the activities of the business was claimed as deduction under section 80 P (2) (a) (i) of the Act. We have carefully considered the decision of the learned assessing officer, we do not find any reason that why the interest income should not have been considered as business income of the assessee. Merely because the assessee has received interest income from cooperative societies it cannot be said that such income should always be taxed under the head income from other sources only.
11. The reasons for the revision is that the ld. PCIT was of the view that such interest income is income from other sources, not income from business, therefore, not eligible for deduction under section 80 P (2) (d) of the Act.
Claim of the assessee is accepted by the learned assessing officer after due enquiry from the assessee, issuing 133 (6) enquiry letters to the bank, thereafter issuing a clarification with letter which was replied by the assessee and thereafter holding that such interest income is attributable to the business of the assessee of borrowing and lending with members and therefore it is eligible for deduction u/s 80 P (2) (a) (i) of the Act.
We find that the decision of the Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] has categorically discussed this issue and held that assessee is eligible for deduction under section 80 P (2) (a) (i) of the act as under:-
From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1,77,305/- represents the interest earned from short-term deposits and from savings bank account. The assessee is a Cooperative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i): "Deduction in respect of income of co-operative societies: 80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: (a) in the case of co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) xx xx xx to (vii)
the whole of the amount of profits and gains of business attributable to any one or more of such activities."
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 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.' 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 and is liable to be deducted from the gross total income under Section 80P of the Act.
9. 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.
10. 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 CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66. 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:
In the above decision it is held that if the interest income is attributable to the business of the assessee cooperative societies, deduction u/s 80 P (2) (a) (i) of the Act cannot be denied to the assessee. Further the decision of the Hon’ble Supreme Court was also considered in paragraph no 9 of the decision.
In Principal Commissioner of Income-tax, Hubli vs. Totagars Co- operative Sale Society [2017] 78 taxmann.com 169 (Karnataka)/ [2017] 392 ITR 74 (Karnataka) [05-01-2017] it is held that:
7. However, the contention being taken by the learned counsel is untenable. For the issue that was before the ITAT, was a limited one, namely whether for the purpose of Section 80P(2)(d) of the Act, a Co- operative Bank should be considered as a Co-operative Society or not? For, if a Co-operative Bank is considered to be a Co-operative Society, then any interest earned by the Co-operative Society from a Co- operative Bank would necessarily be deductable under Section 80P(1) of the Act.
The issue whether a Co-operative Bank is considered to be a Co- operative Society is no longer res integra. For the said issue has been decided by the ITAT itself in different cases. Moreover the word "Co- operative Society" are the words of a large extent, and denotes a genus, whereas the word "Co-operative Bank" is a word of limited extent, which merely demarcates and identifies a particular species of the genus Co-operative Societies. Co-Operative Society can be of different nature, and can be involved in different activities; the Co- operative Society Bank is merely a variety of the Co- operative Societies. Thus the Co-operative Bank which is a species of the genus would necessarily be covered by the word "Co- operative Society".
9. Furthermore, even according to Section 56(i)(ccv) of the Banking Regulations Act, 1949, defines a primary Co-Operative Society bank as the meaning of Co-Operative Society. Therefore, a Co- operative Society Bank would be included in the words 'Co- operative Society'.
10. Admittedly, the interest which the assessee respondent had earned was from a Co-operative Society Bank. Therefore, according to Sec. 80P(2)(d) of the I.T. Act, the said amount of interest earned from a Co- operative Society Bank would be deductable from the gross income of the Co-operative Society in order to assess its total income. Therefore, the Assessing Officer was not justified in denying the said deduction to the assessee respondent.
The learned counsel has relied on the case of Totgars Co- operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC). However, the said case dealt with the interpretation, and the deduction, which would be applicable under Section 80P(2)(a)(i) of the I.T. Act. For, in the present case the interpretation that is required is of Section 80P(2)(d) of the I.T. Act and not Section 80P(2)(a)(i) of the I.T. Act. Therefore, the said judgment is inapplicable to the present case. Thus, neither of the two substantial questions of law canvassed by the learned counsel for the Revenue even arise in the present case.
12. For the reasons stated above, this Court does not find any merit in the present appeal. Hence, the appeal is dismissed.
Further in PCIT, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/ [2017] 395 ITR 611 (Karnataka)/ [2017] 297 CTR 158 (Karnataka) [16-06-2017] the Hon’ble High court was also drawn attention to both the above decisions and in Para no 19 it held as under: -
"19. In our opinion, it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Co-operative Bank. Therefore, the said decision of the Co-ordinate Bench is distinguishable and cannot be applied in the present appeals, in view of the binding precedent from the Hon'ble Supreme Court."
Thus, all the three decisions of the Hon’ble Karnataka High court considered the decision of Totgars Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC)/ [2010] 322 ITR 283 (SC)/ [2010] 229 CTR 209 (SC) [08-02-2010]. All the above three decisions are on the issue of deduction u/s 80 P of the Act in respect to interest income earned by the assessee from cooperative societies either u/s 80 P (2) (a) (i) or 80 P (2) (d) of the Act.
Before the learned assessing officer, the claim of the assessee is not u/s 80P (2) (d) of the Act but 80P (2) (a) (i) of the Act. In this case there are three decisions of the Hon’ble High court, which did not give clearcut answer what has interpreted the decision of the Hon’ble Supreme Court, present an issue before us and that in such circumstances the correct thing is to follow that judgment which appears which states the law accurately or nearer to facts before us. Thus,
We find that the issue before us the facts of the case are more nearer to the decision of the Hon’ble Karnataka High court in case of Tumkur Merchants [supra] and decision of PCIT, Hubli vs. Totagars Co-operative Sale Society [2017] 78 taxmann.com 169 (Karnataka)/[2017] 392 ITR 74 (Karnataka)[05-01-2017] as those decision deals with deduction u/s 80 P (2) (a) (i) of the Act. Therefore following these two decisions the learned assessing officer has allowed the claim of the assessee after due verification.
In the case of the decision of Hon’ble Supreme Court of Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC)[12-01-2021] has also held that Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally.
3. The order of the ld. PCIT does not state that what inquiries the learned assessing officer should have made which are not made by him.
4. When the assessing officer is following one of the plausible view which is sustainable in law, the order cannot be said to be erroneous or even prejudicial to the interest of the revenue. Thus in such a situation the assumption of jurisdiction under section 263 of the Income Tax Act is not proper.
5. Now we come to the decision of the Hon’ble Karnataka High Court in PCIT v. TE Connectivity India Private Limited (2025) 175 taxmann.com 405 (Karnataka) placed before us by the learned CIT DR wherein it is stated that where there is no express view of the assessing officer surely it cannot be said that the same is a plausible view. We find that in the case before us, the return of income was picked up for scrutiny for the purpose of verification of deduction under chapter VIA of the Act, the show cause notice was issued, which was replied by the assessee, thereafter notices under section 133 (6) of the Act were issued to the bankers. After that once again a query letter was issued by the assessing officer which was replied by the assessee and thereafter the learned assessing officer has taken a view that assessee is eligible for deduction under section 80 P (2) (a) (i) of the Act. In view of this it is apparent that all these facts are recorded in the assessment order and why the assessing officer is taking a particular view is also mentioned in the assessment order by not disallowing the claim of the deduction. Therefore there is an express view of the assessing officer in the assessment order.
6. In view of above facts we quash the revisionary order passed by the ld. PCIT holding that the assessment order passed by the learned assessing officer is erroneous and prejudicial to the interest of the revenue.
In the result appeal of the assessee is allowed.
Pronounced in the open court on this 29th day of December, 2025.