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Facts
The assessee, a co-operative society, claimed deduction under Section 80P for AY 2018-19 and AY 2020-21. The Assessing Officer (AO) disallowed the deduction, citing violation of mutuality principles and relying on High Court decisions. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the assessee, being a co-operative society engaged in borrowing and lending with its members, is entitled to deduction under Section 80P(2)(a)(i) of the Act. Relying on the Supreme Court decision in Mavilayi Service Co-op. Bank Ltd., the Tribunal found that Section 80P(4) does not apply to the assessee as it is not a co-operative bank licensed by the RBI.
Key Issues
Whether a co-operative society, not licensed as a bank, is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, notwithstanding Section 80P(4).
Sections Cited
143(3), 80P, 80P(2)(a)(i), 80P(2)(d), 80P(4), 56, 144B
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Income Tax Appellate Tribunal, “SMC” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI
These are two appeals filed by Yedapadavu Vyvasaya Sahakara Sangha Niyamitha (the assessee/appellant).
AY 2018-19 against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 30.6.2025 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Income Tax Act, 1961 [the Act] on 7.4.2021 by the ITO, Ward 2(1), Mangalore was dismissed. The only reason being that the profits & gains amounting to Rs.1,31,28,960 earned by the assessee cannot be said to be derived or earned from carrying on the business of providing credit facilities to its members and further deduction u/s. 80P of the Act cannot be allowed to the assessee.
Similarly for AY 2020-21 the assessee is in appeal against the appellate order passed by the NFAC, Delhi dated 27.6.2025 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Act dated 20.9.2022 passed by the Assessment Unit wherein amount of Rs.30,62,453 was added to the total income of the assessee disallowing the deduction u/s. 80P(2)(d) of the Act was confirmed.
First we take up the appeal AY 2018-19. The facts of the case show that assessee is a co-operative society who filed its return of income on 24.10.2018 showing gross total income of Rs.36,73,878 and claimed deduction u/s. 80P of the same amount. The return was selected for limited scrutiny for verifying the investments etc. and deduction under Chapter VIA of the Act. The assessee has claimed deduction of Rs.36,73,878 u/s. 80P of the Act. It supported with the certificate issued by the Registrar of Co-op. Societies, byelaws, details of membership, business of the assessee, etc. The assessee also explained that it has 3053 regular members and 2194 nominal members.
4. The ld. AO after examination of the details found that there is a violation of the principles of mutuality and therefore deduction u/s. 80P
has to be disallowed. He further found that assessee has earned interest income of Rs.31,99,604 from a co-operative bank and therefore following the decision of the Hon’ble Karnataka High Court dated 16.6.2017 in the case of PCIT v. Totagars Co-operative Sale Society, denied the deduction u/s. 80P of the Act.
5. The assessee preferred appeal before the ld. CIT(A) and it was explained that the assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act of the above sum in view of the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-op. Bank Ltd. v. CIT, 431 ITR 1. Further with respect to the deduction u/s. 80P(2)(d) of the Act the decision of the Hon’ble Supreme Court was once again relied upon. The ld. CIT(A) categorically held that assessee is not eligible for deduction u/s. 80P(2)(d) of the Act. In para 4.8 the ld. CIT(A) held that income earned by the assessee of Rs.1,31,28,960 cannot be said to be derived from the carrying on of business of providing credit facilities to its members and therefore the appeal of the assessee was dismissed.
For the AY 2020-21, the facts are also similar. The assessee filed its return of income on 10.2.2021 at a total income of Rs.3,940 after claiming deduction of Rs.40,20,722 as deduction u/s. 80P of the Act. The case was selected for scrutiny stating one of the reasons as examination of deduction u/s. 80P(2)(a)(i) of the Act and even otherwise on the bank interest income with other co-operative banks u/s. 80P(2)(d) of the Act. The ld. AO was also shown that South
Canara DCC Bank is also a co-op. society and further interest earned from the Axis Bank & Canara Bank falls under the deduction u/s 80P(2)(a)(i) of the Act. It was further shown that the total business carried on by the assessee is with the members of the society. The ld. AO examined the claim of the assessee and stated that in view of the decision of the Hon’ble Karnataka High Court in Totagars Co-op. Sale Society (supra), assessee is not entitled to deduction u/s. 80P(2)(a)(i) of the Act as well as u/s. 80P(2)(d) of the Act. He categorically held with respect to the interest and dividend income earned from different co-operative societies, banks and commercial banks are also not eligible for deduction u/s. 80P of the Act as it is other income u/s. 56 of the Act. Accordingly a sum of Rs.30,62,453 was disallowed by assessment order passed u/s. 143(3) r.w.s. 144B of the Act.
The assessee approached the ld. CIT(A) wherein the appellate order was passed on 27.6.2025. The ld. CIT(A) in para 4.9 held that in view of the above discussion and judicial decisions, profits & gains amounting to Rs.13,28,960 earned by the assessee society cannot be said to be derived from the business of providing credit facilities to the members. Further, the ld. AO also mentioned detailed discussion in the assessment order and arrived at a conclusion whether the benefits can be given or not in the light of the provisions of section 80P of the Act. The appeal of the assessee was dismissed.
In view of this, the assessee is in appeals before us for both the assessment years. The ld. AR submitted before us the factual paper
book for both these years as well as relied upon several judicial precedents. He further stated that the orders of the ld. CIT(A) are not sustainable for both the years as they have misread the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-op. Bank Ltd. (supra). Further the appellate order passed by the ld. CIT(A) in AY 2018-19. It was therefore stated that the assessee must be granted deduction u/s. 80P(2)(a)(i) of the Act itself and also even if it is held that bank interest earned from co-operative banks is to be taxed u/s. 56 of the Act, even then the provisions of section u/s. 80P(2)(d) of the Act applies to the assessee. It was further stated that the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-op. Bank Ltd. is a decision rendered by the 3 Judges and therefore it binds more than the decision of the Hon’ble Karnataka High Court.
The ld. DR vehemently supported that the decision of the Hon’ble Karnataka High Court in the case of Totagars Co-operative Sale Society in 395 ITR 611 dated 16.6.2017 squarely covers the issue. Therefore the decision of the jurisdictional High Court covers the issue against the assessee.
We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. Undisputedly the facts of the case show that assessee is a co-operative society carrying on the business of borrowing and lending with its members. It is also shown that it is registered under Karnataka Co-operative Societies Act and working according to the byelaws. Even the fair price shops maintained by the assessee are also sold to its members. It is also shown that it has 2 kinds of members namely nominal members and general members. It is not the allegation that has at all transacted with non-members. The assessee is also earned interest income from SCDCC Bank. It is claimed that such co-operative banks are co-operative societies. It further referred to the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-op. Bank Ltd.
On a careful consideration, I find that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-op. Bank Ltd., 431 ITR 1. As it is a fact that assessee has not dealt with any other person than the persons of the society, there is no question of denying the benefit of the provisions of section 80P(2)(a)(i) of the Act to the assessee. Para 45 of that decision clearly provides that the provisions of section 80P are benevolent provisions and further section 80P(4) is “out of harm’s way”. The decision of the Hon’ble Supreme Court also held that nominal members are also members. The decision has clearly held that all the assessees like the case before the Hon’ble Supreme Court are entitled to the benefit of deduction claimed u/s. 80P(2)(a)(i) of the Act.
Honourable Supreme court in The Mavilayi Service Cooperative Bank Ltd. & Ors [TS-12-SC-2021 that decision while analysing the decision
of Honourable supreme court in case of Citizen Cooperative bank Limited has held as under :-
" 21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment:
(I) That section 80P of the IT Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee;
(II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in subsection (2) of section 80P must be given by way of deduction;
(III) That this Court in Kerala State Cooperative Marketing Federation Ltd. and Ors. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied;
(IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co- operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so – which is not the case with section 80P(2)(a)(i);
(V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4)."
Further the Honourable supreme court also explained what is the purpose and intent of section 80 P (4) of the Act as under :-
"36. Coming to the provisions of section 80P(4), it is important to advert to speech of the Finance Minister dated 28.02.2006, which reflects the need for introducing section 80P(4). Shri P. Chidambaram specifically stated:
“166. Cooperative Banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income Tax Act. However, I propose to exclude all other cooperative banks from the scope of that section.”
Likewise, a Circular dated 28.12.2006, containing explanatory notes on provisions contained in the Finance Act, 2006, is also important, and reads as follows:
56“Withdrawal of tax benefits available to certain cooperative banks xxx xxx xxx
22.2. The cooperative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore section 80P has been amended and a new subsection (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions ‘co-operative bank’, ‘primary agricultural credit society’ and ‘primary co-operative agricultural and rural development bank’ have also been defined to lend clarity to them.”
A clarification by the CBDT, in a letter dated 09.05.2008, is also important, and states as follows:
“Subject: Clarification regarding admissibility of deduction under section 80P of the Income Tax Act, 1961. xxx xxx xxx 2. In this regard, I have been directed to state that subsection(4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub- section, co-operative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949.
3. In part V of the Banking Regulation Act, "Co-operative Bank” means a State Co- operative bank, a Central cooperative Bank and a primary Co- operative bank.
Thus, if the Delhi Co-op Urban T & C Society Ltd. does not fall within the meaning of "Co-operative Bank” as defined in part V of the Banking Regulation Act, 1949, subsection(4) of section 80P will not apply in this case.
Issued with the approval of Chairman, Central Board of Direct Taxes.”
The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks
After the decision of the Hon’ble Supreme Court, there is no doubt that the deduction is available to the assessee under the provisions of section 80P(2)(a)(i) of the Act itself.
As the issue has been decided by the 3 Judges Bench of the Hon’ble Supreme Court, we respectfully following the same, allow the appeals of the assessee and direct the ld. AO to delete the disallowance of deduction u/s. 80P of the Act in both the years.
In the result, both the appeals filed by the assessee are allowed.
Pronounced in the open court on this 29th day of October, 2025.