BHASKARA EMPLOYEES CREDIT CO-OPERATIVE SOCIETY LIMITED ,BENGALURU vs. INCOME TAX OFFICER, WARD-4(2)(2), BANGALORE

Income-tax Act, 1961 [the Act] dated 27.12.2019 by the ITO, Ward
4(2)(2), Bangalore [ld. AO] was dismissed.
2. Only grievance in the appeal is with respect to the denial of deduction u/s 80P (2) (a) (i) of ₹ 470,921/– being the interest income accruing on statutory investment in fixed deposits and cooperative banks and scheduled banks made in compliance of the provisions of the Karnataka Cooperative Societies Act, 1959. 3. The brief facts of the case show that assessee is a cooperative society whose membership is strictly confined to the employees of Indian space research Organisation. Society is extending credit facility to its members and registered under the Karnataka Cooperative Societies
Act, 1959. Therefore it has claimed that its income is exempt under section 80 P(2) (a) (i) of the Act.
4. The assessee filed its return of income on 24/10/2017 declaring nil income after claiming an amount of ₹ 3,406,263/– as deduction under section 80P of the Act. The learned assessing officer selected return of the assessee for scrutiny for the reason of examination of deduction under section 80 P of the Act.
5. On the assessment, the assessee was denied deduction u/s 80P (2) (a)
(i) of the Act on interest income earned by the assessee on investments made in pursuance of provision of The Karnataka State Cooperative
Societies Act, 1959 not treating it as business income attributable to the activities of the assessee. The ld assessing officer passed an Page 3 of 18

assessment order under section 143(3) of the Act on 27/12/2019
denying deduction under section 80P of the Act but determined the total income at Rs 470921/- against the returned income of rupees Nil.
Thus the assessee was denied deduction under section 80 P of the Act on the interest income earned by the assessee of ₹ 470,921/–. Main reason for disallowing the above claim is the decision of the Hon’ble
Karnataka High Court in case of Totagars’ Sales Cooperative Societies
(2017) 83 taxmann.com 140 (Karnataka). When the matter reached before the learned CIT – A, the order of the learned AO was upheld.
Therefore, assessee is in appeal before us.
6. Though the assessee has raised a ground before us in appeal that no show cause notice was issued, but crux of the argument is that the assessee is entitled to deduction under section 80 P of the Act of interest earned by the assessee on statutory investment made by it in compliance of The Karnataka Cooperative Societies Act, 1959, is allowable as business income and therefore the entitlement of deduction under section 80 P (2) (a) (i) of the Act cannot be denied.
7. Before us the assessee distinguished the decision of the Hon’ble
Karnataka High Court and further relied upon the decision of the Hon’ble Supreme Court in case of Kerala State Cooperative
Agricultural And Rural Development Bank Ltd (2023) 458 ITR 384
(SC) and as well as the decision of the case of Mavilayi Service
Cooperative Bank Ltd (2021) 123 taxmann.com 161 (SC). It submits that the issue is squarely covered in favour of the assessee by the Page 4 of 18

decision of the coordinate bench also (ITA No.1724/Bangalore/2019
dated 22/11/2021 for AY 2014 – 15) wherein it is held that interest income on statutory investment is eligible for deduction under section 80P of the Act.
8. The learned DR vehemently supported the order of the learned lower authorities and submitted that the Hon’ble Karnataka High Court has categorically held that the interest income could not be granted as deduction under section 80 P of the Act with respect to the interest income earned.
9. I have carefully considered the rival contention and perused the orders of the learned lower authorities. The simple issue involved in this appeal is that an assessee being an employee’s credit cooperative society of employees officer is eligible for deduction of interest income on statutory reserve fund which are deposited in terms of regulations of the Karnataka Cooperative Societies Act under section 80 P of the Act or not.
10. Hon’ble Supreme Court had an occasion to consider the issue of interpretation of provision of section 80 P of the Act in 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] wherein it was held as under:-
20. We now come to the judgment of this Court in Citizen Cooperative
Society Ltd. (supra). This judgment was concerned with an assessee
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who was established initially as a mutually aided cooperative credit society, having been registered under section 5 of the Andhra Pradesh
Mutually Aided Cooperative Societies Act, 1995. As operations of the assessee began to spread over States outside the State of Andhra
Pradesh, the assessee got registered under the Multi-State Cooperative
Societies Act, 2002 as well. The question that the Court posed to itself was as to whether the appellant was barred from claiming deduction in view of Section 80P(4) of the Income-tax Act - see paragraph 5. After setting out the findings of fact in that case, and the income tax authorities concurrent holding that the society is carrying on banking business and for all practical purposes acts like a co-operative bank, this Court then held as follows:
"18. We may mention at the outset that there cannot be any dispute to the proposition that section 80-P of the Act is a benevolent provision which is enacted by Parliament in order to encourage and promote growth of cooperative sector in the economic life of the country. It was done pursuant to the declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (see Bajaj Tempo Ltd. v. CIT [1992] 3 SCC 78]). It is also trite that such a provision has to be construed as to effectuate the object of the legislature and not to defeat it (see CIT v. Mahindra and Mahindra Ltd. [1983] 4 SCC 392. Therefore, it hardly needs to be emphasised that all those cooperative societies which fall within the purview of section 80-P of the Act are entitled to deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub- section (2) gives exemption of whole of the amount of profits and gains of business attributable to any one or more of such activities which are mentioned in sub-section (2).
19. Since we are concerned here with sub-clause (i) of clause (a) of sub-section (2), it recognises two kinds of cooperative societies, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members.
20. In Kerala State Coop. Mktg. Federation Ltd. v. CIT [1998] 5 SCC
48, this Court, while dealing with classes of societies covered by section 80-P of the Act, held as follows:
"6. The classes of societies covered by section 80-P of the Act are as follows:
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(a) engaged in business of banking and providing credit facilities to its members;

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7. We may notice that the provision is introduced with a view to encouraging and promoting growth of cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption."
21. In CIT v. Punjab State Coop. Bank Ltd. [2008 SCC OnLine P&H
2042], while dealing with an identical issue, the High Court of Punjab and Haryana held as follows:
"8. The provisions of section 80-P were introduced with a view to encouraging and promoting the growth of the cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The different heads of exemption enumerated in the section are separate and distinct heads of exemption and are to be treated as such. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax, then it has to be seen whether such income fell within any of the several heads of exemption. If it fell within any one head of exemption…It means that a cooperative society engaged in carrying on the business of banking and a cooperative society providing credit facilities to its members will be entitled for exemption under this sub-clause. The carrying on the business of banking by a cooperative society or providing credit facilities to its members are two different types of activities which are covered under this sub-clause.

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13. So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that Page 7 of 18

the condition of other heads of exemption are not satisfied. A reading of the provisions of section 80-P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the legislature wanted to restrict the exemption to a primary cooperative society, it was so made clear as is evident from clause (f) with reference to a milk cooperative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative society."
The aforesaid judgment of the High Court correctly analyses the provisions of section 80-P of the Act and it is in tune with the judgment of this Court in Kerala State Coop. Mktg. Federation Ltd. [(1998) 5
SCC 48]
22. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a cooperative bank. However, if it is a primary agricultural credit society or a primary cooperative agricultural and rural development bank, the deduction would still be provided. Thus, cooperative banks are now specifically excluded from the ambit of section 80-P of the Act.
23. Undoubtedly, if one has to go by the aforesaid definition of "cooperative bank", the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative to have a licence from Reserve
Bank of India, which the appellant does not possess. Not only this, as noticed above, Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a cooperative bank.
The appellant, therefore, would not come within the mischief of sub- section (4) of section 80-P.
24. So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under section 80-P of the Act is not sub-section (4) thereof.
What has been noticed by the assessing officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violation of the provisions of MACSA under which it is formed. It is pointed out by the assessing officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee
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had carved out another category of "nominal members". These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as cooperative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the