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Facts
The assessee, a co-operative society, claimed deduction under Section 80P(2)(a)(i) for interest earned on fixed deposits and investments. The AO initially allowed this deduction, but the Pr.CIT, invoking Section 263, revised the order, disallowing the interest income of Rs.10,73,933/-.
Held
The Tribunal held that interest earned on surplus funds invested, which were not immediately required for the society's core business of providing credit facilities, should be treated as income from other sources and not eligible for deduction under Section 80P(2)(a)(i).
Key Issues
Whether interest earned on surplus funds invested by a co-operative society, beyond the mandatory liquidity requirements, is eligible for deduction under Section 80P(2)(a)(i) or should be treated as income from other sources.
Sections Cited
139(1), 80P(2)(a)(i), 80P(2)(d), 56, 143(3), 263, 58
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI.LAXMI PRASAD SAHU & SHRI. KESHAV DUBEY
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.
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.
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)
The learned Counsel has also filed written synopsis which is as under:
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
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 jurisdiction 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 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:-
As per 13.4 of the judgment as relied on by the learned Counsel which is placed at PB Page No. 17-60 in & 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 Registrar from time to time by general or special order.
As per the above Rule, the assessee Society has to maintain fluid resource as per the direction of the Registrar of the Cooperative Society. The Assessee is directed to furnish monthly requirement to maintain the fluid resources . If any excess amount is found from the minimum requirement to maintain fluid resources and the same is invested as per section 58 of the Karnataka Co-operative Societies Act, 1959, this interest received on such excess investments shall not form part of the operational income. To understand better, we are giving example as under;- Suppose assessee receives deposit from members in the month of April Rs.10.00 Crs. and fluid resources to be maintained at 25% of the total deposit received from members then as per section 58 it has to invest Rs. Page 9 of 11 2.50Cr. and interest of Rs. 1,70,000/- will be treated as attributable to the operational income and assessee is eligible for deduction under section 80P(2)(a)(i) of the Act on such interest. Further in the next month (May) the members deposit was only Rs. 8.00Cr then in such circumstances the fluid resources will be reduced from Rs. 2.5 Cr to Rs. 2.00Cr but if investment was for longer period, then investment will not be liquidated and will remain as it is. The interest received for the month of May will be Rs. 1,70,000 in such circumstances the operational income will be Rs. 1,70,000 X 50,00,000 ------------------------------- = Rs.34,000 Rs.2,50,00,000 The above Rs. 34,000/- interest received on excess investments which were not required for the month of May but invested and not liquidated shall be treated as income from other source. The balance of Rs. 1,36,000(1,70,000-34,000) is eligible for deduction under section 80P(2)(a)(i) of the Act.. Because this amount was received towards surplus fund/immediately there was no taker of the Society as held by the Hon’ble Apex Court in the case of Totgars Co-operative sales Society Ltd. Vs. ITO (2010)188 Taxman 282. The above exercise may be done for all 12 months. The above is just an example. It should be calculated as per direction of the Registrar of the Co-operative Society.
Further we have gone through the section 57 of the Karnataka Co- operative Society Act 1959 which is as under;-
Net profits and their disposal.- (1) The net profits of co-operative societies shall be determined in accordance with such rules as may be prescribed and different rules may be made for different classes of co-operative societies. (2) A co-operative society shall, out of its net profit in any year transfer an amount not being less than twenty-five per cent of the profits to the reserve fund.
Page 10 of 11 [(2A) A Co-operative Society shall, from out of the balance of its net profits, contribute two percent to the Co-operative Education Fund to be administered by the Karnataka State Co-operative Federation Limited, Bangalore. [Provided, urban Co-operative Banks shall contribute one percent of its net profit to the Karnataka State Co-operative Urban Banks Federation in addition to the two percent as prescribed in sub-section (2A).] [Provided further that, out of the total contribution made by a Co-operative society to the account of the Co-operative education fund, every year one fourth shall be remitted to the account of the Sahakara Academy (Reg.), Mysore, registered under the Karnataka Societies Registration Act, 1960 and sponsored by the State Government for the purpose of carrying out co-operative education, training and research.]5 (2B) No Co-operative Society which has failed to contribute to the Co- operative Education Fund shall pay dividend to its members.] 3 (3) The balance of the net profits may 2 [x x x] 2 be utilised for all or any of the following purposes, namely:— 76 1 [(a) x x x (b) x x x] 1 (c) payment of bonus to members on the amount or volume of business done by them with the society to the extent and in the manner specified in the bye-laws: Provided that no bonus shall be payable to members in a credit society; (d) constitution of, or contributions to, such special funds as may be specified in the bye-laws; (e) donations of amounts not exceeding ten per cent of the net profits for any charitable purpose as defined in section 2 of Charitable Endowments Act, 1890 (Central Act VI of 1890); and (f) payment of bonus to employees of the society, to the extent and in the manner specified in the bye-laws: Provided that the bonus payable in any year to any employee shall not exceed two months’ pay. [(4) A co-operative society may pay dividend to its members from out of the balance of net profits available after making deductions as provided for under sub-sections (2), (2A) and (3) and the bye-laws of the society.
As per the above section it is clear that the assessee Society has to dispose off its funds as per the above section which is surplus fund . If any funds are created and invested in specified securities and any income is received will be considered as income from other source because the fund was created from its current year’s profit which is surplus fund. The Hon’ble High Court of Delhi in the case of Mantola Co-operative Thrift & Credit Society Ltd. vs CIT reported in (2014) 50 taxmann.com 278 (Delhi) in which it has been held that Page 11 of 11 interest received on surplus fund has to be treated as income from other source and not eligible for deduction under section 80P(2)(a)(i) of the Act. Further the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars Co-operative Sales Society Ltd reported in (2017) 83 taxmann.com 140 (Karnataka) a similar view has been expressed that surplus deposits kept with a co-operative bank is not eligible for deduction under section 80P(2)(d) of the Act. Accordingly the assessee is not eligible for deduction under sections 80P(2)(a)(i)/80P(2)(d) of the Act on such interest.
Considering the totality of facts and circumstances of the case and judgements cited supra, we hold that AO has granted deduction wrongly. Accordingly, the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. We uphold the Order of the learned Pr.CIT and dismiss the appeal of the assessee.
In the result, appeal filed by the assessee is dismissed.