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Facts
The assessee, a cooperative credit society, claimed a deduction of Rs. 12,44,674/- under Section 80P(2)(a)(i) on interest income earned from its investments. The Assessing Officer disallowed this deduction, treating the interest income as 'income from other sources' and not attributable to the society's business of providing credit facilities. The CIT (Appeals) also disallowed the deduction.
Held
The Tribunal held that interest income earned by the assessee society from its investments, which were not immediately required for lending to members, is attributable to the business of providing credit facilities. Therefore, it is eligible for deduction under Section 80P(2)(a)(i). The Tribunal followed the decisions of the Karnataka High Court in Tumkur Merchants and Principal Commissioner of Income-tax, Hubli.
Key Issues
Whether interest income earned by a cooperative society from its investments, when not immediately required for lending to members, is attributable to its business of providing credit facilities and thus eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
Sections Cited
139(1), 143(2), 80P, 80P(2)(a)(i), 80P(2)(d), 56, 2(24)(i)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “SMC” BENCH, Bangalore
Before: SHRI PRASHANT MAHARISHI
PER PRASHANT MAHARISHI, Vice President:
In this case assessee filed its Return as per provision of section 139(1) on date 19/10/2022 on total returned income Nil. As per ITR, the assessee has claimed deduction u/s 80P of Rs.12,44,674/-. Subsequently, the case was selected for Scrutiny assessment under the E-assessment Scheme, 2019 on issues of Claim of deduction u/s 80P by entities that have received large amount of interest from a Banking Company , Notice u/s 143(2) of the Act, 1961 was issued to the assessee on 02/06/2023 assessee was asked to submit the details of activities performed by it and deduction u/s 80P of the Income Tax Act claimed by it during the year under consideration.
Assessee submitted that assessee society is a primary society engaged in providing credit facility to members. The Society accepts deposits as provided by the by-laws and as permitted by the state cooperative laws applicable to it. The society provides credit facility to members. This is the only business activity of Assessee. With respect to the deduction u/s 80P, it was submitted that only business activity of society is that of providing credit facility to members. Entire income is attributable to the business activity of the Society and calculation of deduction was provided in computation of income submitted as attachment as per provisions of Sec. 80P(2)(a)(i), entire income attributable to the business of our society is eligible for deduction. Thus, deduction is claimed as per provisions of the Act. It was stated that society is not a Co-operative Bank, and it does not have any banking license. The objective of society is to provide credit facility to members and to encourage members for saving habits by accepting deposits in various forms as permitted by the by laws. From such funds society provides credit facility to members for their financial needs. Thus, Society has only one business activity i.e., providing credit facility to members. Thus, there is only one head of income i.e., income from business. Assessee society has claimed deduction u/s 80P(2)(a)(i) of the Act. There is no other claim of deduction.
The ld AO On perusal of the computation of income, observed that the assessee has declared income from business or profession of Rs.12,44,674/- which has been fully claimed as deduction as per provision of Section 80P(2)(a)(i) under chapter VI-A of the Income Tax Act. On verification of the details furnished by the assessee and ITR filed for the year under consideration, it was found that the income earned by the assessee included interest from the members to whom the loan was forwarded by the assessee. The source of money from which this loan was disbursed was received from the members as deposits. But in addition to it, the assessee had also received interest from its investment in Banks. The details of interest received during the year by the assessee are 1.
Page 2 of 13 Interest Income from Bank Rs. 3,86,146/- 2. Interest on investments Rs. 19,97,401/-. Further As per provisions of section 80P(2)(a)(i) of the Act, in the case of co-operative credit societies engaged in carrying out business of banking or providing credit facilities to its members, the whole of the profit and gains of business attributable to such activities shall be allowed as deduction. The assessee is engaged in business of providing credit facilities to its members, and therefore, the whole of the profit and gains of business attributable to such activities shall be allowed as deduction. However, earning of interest from Banks` cannot be an activity for which income would be deductible as envisaged in section 80P(2)(a)(i) of the Act. Further, as per provisions of section 80P(2)(d) of the Income Tax Act, any income by way of interest or dividend derived by a cooperative society from its investments with any other co-operative society is deductible. However, in the instant case the assessee received interest from nationalized and commercial banks. Therefore, it cannot be said to have derived income from its members by providing credit facilities to them. Accordingly, such interest earned cannot be said to be derived from the activities of the society viz. carrying the business of providing credit facilities to its members. Hence, such interest income cannot be said to be derived from activities mentioned in section 80P(2)(a)(i) of the Income Tax Act. According to him, In the instant case, the interest held not eligible for deduction under section 80P(2)(a)(i) is not the interest received from the members for providing credit facilities to them, what is sought to be taxed under section 56 is the interest income arising on the surplus invested in other financial institute and banks. Such interest income would come in the category of 'Income from other sources' and, hence, such interest income would be rightly taxable under section 56 of the Income Tax Act, 1961. He further held that the head note to section 80P indicates that the said section deals with deductions in respect of income of co-operative societies. Section 80P (1), inter alia, states that where the gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be Page 3 of 13 deducted from the gross total income in computing the total taxable income of the assessee society. An income, which is attributable to any of the specified activities in section 80P (2) would be eligible for deduction. The word 'income' has been defined under section 2(24)(i) to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically 'business profits' into the definition of the word 'income'. Therefore, one is required to give a precise meaning to the words 'profits and gains of business' mentioned in section 80P (2). Thus, according to him, In the instant case, the assessee-society regularly invested funds not immediately required for business purposes. Interest on such investments, therefore, could not fall within the meaning of the expression 'profits and gains of business' as held by Hon’ble Supreme Court in the case of Totgars, Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka. [2010] 188 Taxman 282 (SC). Such interest income could not be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members. Therefore, the interest income detailed at the table below is brought to tax under section 56 of the Income-tax Act, 1961.
1. Interest on SB accounts Rs. 3,86,146/- 2. Interest on investments Rs. 19,97,401/- 3. Total Rs. 23,83,547/- He further relied up on decision of The Hon’ble Supreme Court in the case of Totgars Co-operative sale society Ltd. Vs. Income-tax Officer, Karnataka (Supra) to hold that that the source of income is not relevant for deciding the applicability of section 80P would not be correct because one needs to give weight age to the words “the whole of the amount of profits and gains of business” attributable to one of the activities specified in section 80P(2)(a). The words ‘the whole of the number of profits and gains of business emphasize that the income, in respect of which deduction is sought, must constitute the operation income and not the other income which accrues to the society. In the instant case, the evidence showed that the assessee-society earned interest on funds which were not required for business purposes at the given point of time. Therefore, on the facts and circumstances of the Page 4 of 13 instant case, such interest income fell in the category of ‘other income’ which had rightly been taxed by the department under section 56” In view of the above legal position, the interest received of Rs. 23,83,547/- is not eligible for the deduction u/s.80P(2)(a)(i) of the Income Tax Act, 1961. He further alternatively held that , as it is submitted that the assessee’s case does not even fall under the provisions of section 80P(2)(d) of the Income Tax Act, 1961 in view of the latest decision of Hon’ble jurisdictional Karnataka High Court in the case of Principal Commissioner of Income tax, Hubbali Vs. Totagars Co-operative Sale Society, (2017) 83 taxmann.Comm.140 (Karnataka). Relevant extract of the decision in para 23 was relied to hold that The character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified clauses of section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under section 80P(2) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from scheduled bank or a cooperative bank and, thus clause (d) of section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. Interest income not arising from its business operations, which made it ineligible for deduction under section 80P of the Act. Accordingly, in view of the above discussion and considering the fact the issue involved in current year is identical to that in earlier year and to maintain the consistency of the stand taken by the department in the earlier Assessment Year 2022-23 in the assessee case, the interest income of Rs. 23,83,547/- received from investments made in other banks is not eligible for the deduction u/s.80P(2)(a)(i) of the Income Tax Act, 1961 and is taxed as income of the assessee from “Other Sources” under section 56 of the Income Tax Act, 1961. Thus, considering the discussion made in the preceding paragraphs, the interest income of Rs. 23,83,547- received from Page 5 of 13 investments made in other banks are ineligible for deduction under section 80P of the Income Tax Act, 1961 and restricted to the claim made u/s 80P of the I.T. Act i.e., Rs. 12,44,674/- and is taxed as income of the assessee from “Other Sources” under section 56 of the Income Tax Act, 1961 and the amount of Rs. 12,44,674/- claimed as deduction u/s 80P is disallowed and added to the total income of the assessee.
The assessee preferred an appeal before the learned CIT – A unsuccessfully wherein after considering the submissions of the assessee he relying on the decision of the honourable Karnataka High Court in case of principal Commissioner of income tax versus Totgars sales cooperative society (2017) 83 taxmann.com 140 has decided the issue against the assessee holding that assessee is not eligible for deduction under section 80 P (2) (a) (i) or alternatively under section 80 P (2) (d) of the act. Appeal filed by assessee was allowed partly but deduction on interest income of Rs 13,51,970/- was not allowed either u/s 80P (2)(a) (i) or (d), so assessee is in appeal.
The solitary ground in this appeal is with respect to the fact that assessee has not been allowed the deduction under section 80 P (2) (a) (i) of ₹ 13,51,970/-.
The learned authorised representative vehemently supported the claim of the assessee in the return of income and stated that assessee is entitled to deduction under section 80 P (2) (a) (i) of the act as the interest income received from the cooperative banks is business income of the assessee. He further submitted that there is no finding in the assessment order that such interest income is income from other sources. He submits that the case of the assessee squarely covered by the decision of the honourable Karnataka High Court by two decisions which have already considered the decision of the honourable Supreme Court which is relied upon by the learned assessing officer. Therefore, the assessee should be allowed the deduction. Ld AR also filed a paper book containing 33 pages and citing many judicial precedents.
The learned departmental representative advocate Mr Ganesh R Gale, vehemently supported the decision of the learned lower authorities and submitted that the issue is squarely covered by the decision of the honourable Karnataka High Court in case of Totgars credit cooperative societies wherein the honourable High Court after considering the decision of the honourable Supreme Court has categorically held that interest income earned by the assessee from the cooperative banks is income from other sources and not business income and therefore the income earned by the assessee from interest from cooperative societies are not allowable as deduction under section 80 P of the act in any of the clauses. He further stated that the recent decision of the honourable Karnataka High Court has also followed the decision of the Totagar credit cooperative societies and therefore the issue is squarely covered in favour 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 member's credit cooperative society who has earned interest from the cooperative societies 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 be 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. The stand of the assessing officer is 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 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.
9. We find that the decision of the honourable Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, 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:- 6. 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) to xx xx xx (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 Page 8 of 13 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.
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:
10. 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 honourable Supreme Court was also considered in paragraph no 9 of the decision.
11. 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. 8. 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'.
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 Principal Commissioner of Income-tax, 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 honourable 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 honourable 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 Page 11 of 13 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 us, 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 Honourable High court, which cannot stand together, present an issue before us and that in such circumstances the correct thing is to follow that judgment which appears t to state the law accurately or nearer to facts before us.
We find that the issue before us the facts of the case are more nearer to the decision of the Honourable Karnataka High court in case of Tumkur Merchants [ supra] and Decision of 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] as those decision deals with deduction u/s 80 P (2) (a) (i) of the Act.
In the case of the Decision of Honourable 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.
In view of above facts , respectfully following the decision of the honourable High Court Tumkur Merchants [ supra] and Decision of 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] we direct the learned assessing officer to allow the deduction to the assessee of the interest earned by the assessee from cooperative societies of ₹ 13,51,970/- under section 80 P (2) (a) (i) of the income tax act 1961, we reverse the orders of the learned lower authorities.
In the result the appeal filed by the assessee is allowed.
Order pronounced in the open court on 15/12/2025.