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Facts
The assessee, a cooperative society, declared nil income for AY 2020-21 and claimed a deduction under Section 80P(2)(a)(i) for interest income totaling Rs. 9,16,302/- derived from deposits with Co-operative Banks and reserve funds. The Assessing Officer and CIT(A) disallowed this deduction, treating the interest as "income from other sources" under Section 56 and relying on certain judicial precedents, arguing that cooperative banks are commercial banks and not within the purview of a "Co-operative Society" for the purpose of Section 80P(2)(d).
Held
The Income Tax Appellate Tribunal (ITAT) reversed the lower authorities' decision. Relying on Karnataka High Court judgments in `Tumkur Merchants Souharda Credit Cooperative Ltd.` and `Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017]`, which were deemed more relevant to the assessee's claim under Section 80P(2)(a)(i), the Tribunal held that such interest income is attributable to the business of providing credit facilities to its members and is therefore eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
Key Issues
Whether interest income earned by a cooperative society from deposits with co-operative banks and from investments of free reserves is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, as business income or falls under "income from other sources" under Section 56.
Sections Cited
80P, 80P(1), 80P(2)(a)(i), 80P(2)(d), 56, 143(3), 144B
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Income Tax Appellate Tribunal, “SMC” BENCH, Bangalore
Before: SHRI PRASHANT MAHARISHI,
PER PRASHANT MAHARISHI, Vice President:
for assessment year 2020 – 21 is filed by Shree Jagadguru Mouneshwar Pattina Sahakari Sangh Niyamita (The Assessee/Appellant) against the appellate order passed by the National Faceless Appeal Centre, Delhi (the learned CIT – A) dated 27/05/2025 wherein the assessee is denied deduction under section 80 P of the act.
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 ₹ 7,25,871/-.
Briefly stated the facts for assessment year 2020-21 in this case, the return of income was e-filed on 30.03.2021 declaring total income at Rs. Nil. The case of the assessee was selected for LIMITED scrutiny under Page 1 of 10 CASS for the reason “High liabilities/low income in-comparison to high loans/advances/investments and to verify the deduction u/s chapter VI-A.” The assessee was questioned that assessee has earned interest from cooperative societies and which is not eligible for deduction u/s 80P as claimed.
Assessee submitted that that interest of Rs.7,25,971/- on deposits with Co-operative Banks and Interest on reserve fund deposits to the tune of Rs.1,90,331/- was received during the year under consideration. As regards deduction u/s 80P of the I.T. Act 1961, the assessee society has quoted various case laws as under:- “Deduction claimed U/s. 80P(2)(a)(i) as per the Case Laws The ITAT Bangalore Benches-A Order Dated 26-08- 2019 ITAT No.707/Bang/2019/A.Y.2016-17 of M/s. Kodavoor Vyavasaya Seva Sahakari Sangha Niyamiyha, Kodavoor, Udupi and Other V/s. ITO Ward-1 and TPS Udupi and others and (Kar-HC) 2015 ITL 152 (2015) 230 Taxman 309 Tumkur Merchants Souharda Credit Co-operative Ltd V/s Income-Tax Officer Ward-V, Tumkur and it is eligible for deduction.
The ld AO held that With regard to submission of the assessee that the co- operative banks are also cooperative societies and therefore interest earned therefrom is eligible for deduction u/s 80P(2)(d) of the I.T.Act, 1961 placing reliance is placed on the decision of the Hon’ble Karnataka High Court in the case of the Pr. Commissioner Of Income-tax vs. The Totagars Co- Operative Sale Society delivered on 16th June 2017. He further held that t is also pertinent to note that vide finance act 2006, deduction from income of co-operative bank u/s 80P has been withdrawn. In the Memorandum explaining the Provisions of the Finance Bill 2006, for insertion of Sub-section (4) restricting the deduction for Co-operative banks, following explanation has been given (281 ITR 178). Therefore the ld AO held that n view of the above discussion, it is clear that co-operative banks are commercial banks and does not fall under the purview of a “Co- operative Society” referred in section 80P(2)(d) of the Income tax Act, The assessee society has claimed interest of Rs.7,25,971/- on deposits with Co-operative Banks and Interest on reserve fund deposits to the tune of Page 2 of 10 Rs.1,90,331/- . The said interest income of Rs.9,16,302/- earned from cooperative banks cannot be treated in nature of profit and gains and is treated as income from other sources. Therefore, the interest income of Rs.9,16,302/- earned from co-operative bank is treated as income from other sources u/s 56 of the I.T. Act, 1961 and deduction claimed u/s 80P(2)(d) of the I.T. Act, 1961 is being disallowed. Assessment order u/s 143(3) read with section 144B of the Income tax Act was passed on 20/09/2022.
6. 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. Thus, the assessee is in appeal before us.
7. 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.
The learned departmental representative advocate Mr Ghale , 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 Page 3 of 10 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 bank to the tune of ₹ 28 lakhs 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.
10. 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:-
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."
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, Page 5 of 10 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.
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 Page 6 of 10 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:
11. 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.
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'. 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 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 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 ₹ 725871/- and interest income of investments of free reserve as per cooperative societies act of Rs 190331/- 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.