SHRI CHATRAPATI SHIVAJI VIVIDODDESHAGALA SAHAKARI SANGHA NIYAMITA HALIYAL,HALIYAL vs. PR. COMMISSIONER OF INCOME TAX, , HUBBALI

Per Laxmi Prasad Sahu, Accountant Member : This is an appeal filed by the assessee against the Order passed by the learned Pr.CIT, Hubli, vide DIN : ITBA/REV/F/REV5/2024- 25/1074296526(1) dated 10.03.2025. 2. Briefly stated facts of the case are that assessee filed return of income under section 139(1) of the Act on 29.12.2020 claiming deduction under section 80P(2)(a)(i) of the Act. The case was selected for scrutiny and statutory notices were issued to the assessee. The AO allowed claim of the assessee under section 80P(2)(a)(i) of the Act and upheld deduction under section 80P(2)(d) of the Act of Rs.3,34,410/- and completed assessment on 28.10.2021 determining the income at Rs.4,78,920/-. Later on, the learned Pr.CIT called for the records Page 2 of 11 and on examination of the records he found that assessee has received interest of Rs.2,23,88,559/- which includes Rs.3,34,410/- from KDCC Bank and interest on investment of Rs.10,73,933/-. The learned Pr.CIT has observed that AO has without making due enquiries or verification into the claim of interest income of Rs.10,73,933/- earned from FDs / reserve funds/liquidity assets with Co-operative Banks, has allowed as deduction under section 80P(2)(d) of the Act and he also relied on the judgment of Kerala State Co-operative Agricultural and Rural Development Bank Ltd., Vs. AO Trivandrum & Others reported in [2023] 154 taxmann.com 305 (SC) and directed to complete Assessment Order and that the interest income should be considered under section 56 of the Act. During the course of assessment proceedings, the AO added interest received from KDCC Bank of Rs. 3,34,410/-. However, the AO failed to add interest of Rs.10,73,933/- in the total income. Therefore the interest on investment of Rs.10,73,933/- is not eligible for deduction under section 80P(2)(a)(i) of the Act in the light of judgment of the Hon’ble Apex Court in the case Totgars Co-operative Sale Society Ltd., Vs. ITO reported in 322 ITR 283 (SC) that utilization of surplus funds / investments taxable are taxable under the head “income from other sources” and not under section 80P of the Act. Accordingly, show cause notice was issued to the assessee and in this regard assessee submitted reply on 26.11.2024 relying on the judgments and submitted that the judgments relied on by the learned Pr.CIT is not applicable to the present facts of the case. The assessee society is only in the business of providing credit facilities to its members and the amount deposited in KDCC Bank is from deposits received from members to comply with the requirements of Karnataka Co-operative Societies Act. The Karnataka Co-operative Societies Act has specifically directed that out of deposit received from members, to maintain liquidity, certain amounts have to be invested. The interest received on such deposits are attributable to the business of the assessee society. Therefore, interest received Page 3 of 11 on such investments is eligible for deduction under section 80P(2)(a)(i) of the Act. The submission of the assessee was considered and he did not accept and observed that Order passed by the AO is erroneous and prejudicial to the interest of the Revenue and directed to make fresh assessment and disallowed interest of Rs.10,73,933/- earned from FDs / reserve fund, liquidity assets with Co- operative Banks. 3. Aggrieved from the Order of learned Pr.CIT, assessee is in appeal before the Tribunal. The learned Counsel reiterated the submissions made before the AO and learned Pr.CIT and submitted that interests received are eligible for deduction under section 80P(2)(a)(i) of the Act since the FDs / investments were made for complying with the provisions of Karnataka Co-operative Societies Act to maintain the liquidity of the society. Without complying with the necessary provisions, the assessee cannot run its business. Therefore, it is business income of the assessee. In support of his argument, he relied on the following judgments:  Honorable Karnataka High Court decision in Tumkur Merchant Souhard Credit Co-operative Ltd (I.T.A. No 307 of 2014)  Honorable ITAT Bangalore Decision in Bangalore Credit Co- operative Society ltd (ITA Nos 2347 & 2348/BANG/2024)  Honorable ITAT Decision in M/s Jyoti Co-op Credit Society Ltd (ITA No 2057/BANG/2024) 4. The learned Counsel has also filed written synopsis which is as under: Page 4 of 11 Page 5 of 11 5. On the other hand, learned DR relied on the Order of learned Pr.CIT and submitted that there was no due enquiry conducted by the AO regarding interest received of Rs.10,73,933/- earned from FDs, how much was the requirement to maintain liquidity as per the Karnataka Co-operative Societies Act and how much fund was idle and how much idle/surplus funds were invested which were not part of the statutory requirement. Without making due enquiries he has allowed deduction under section 80P(2)(a)(i) of the Act on the interest. Therefore, this is a case of lack of enquiry. The learned DR also relied on the judgment of Hon’ble Apex Court as relied on by the learned Pr.CIT and stated that the ratio laid down in the above judgment is very much applicable to the assessee. The relevant para is quoted by the learned Pr.CIT. Therefore, the Page 6 of 11 revisionary power exercised by the learned Pr.CIT under section 263 of the Act is correct. 6. Considering the rival submissions and on perusal of the material available on record and Orders of authorities below, we noted that here the dispute is regarding Rs.10,73,933/- received from FDs on which the AO has allowed deduction under section 80P(2)(a)(i) of the Act. The learned Pr.CIT exercised his juri iction and held that the said interest is not eligible for deduction under sections 80P(2)(a)(i)/80P(2)(d) of the Act. It should be considered as income under section 56 of the Act. On going through the judgment relied on by the learned Pr.CIT in which it has been clearly decided that interest which accrues on funds not required immediately by the assessee for its business purpose and which have been only invested in the specified securities / investments and earned interest. Assessee submitted that interest received on the investments made are for complying with the mandatory investments for maintaining liquidity of the deposits as per Karnataka Co- operative Societies Act. In this regard, assessee has also relied on the judgment of Co-ordinate Bench in ITA Nos.2347, 2348/Bang/2025 in the case of ITO Vs. Bangalore Credit Co-operative Society Ltd., dated 03.06.2025 in which it has been held as under: GROUND No. 5 Deduction of interest on Reserve Fund Deposits:- Page 7 of 11 Page 8 of 11 7. As per 13.4 of the judgment as relied on by the learned Counsel which is placed at PB Page No. 17-60 in ITA No. 2347 & 2348/BANG/2024 & Co No. 5/Bang/25 in which it has been held that interest received from mandatory deposits requirement to mobilization of fund shall be treated as operational income and eligibility for deduction under section 80P(2)(a)(i) of the Act. We have gone through the Karnataka Cooperative Society Rules 28 which is as under:- Rule 28 Maintenance of liquidity resources;-– every co-operative society accepting deposits and granting cash credits shall maintain fluid resources in such form according to such standards as may be fixed by the