SHRI. BILURU GURUBASAVA SAHAKARI PATTINA SANGH NIYAMIT,BAGALKOT vs. INCOME TAX OFFICER, WARD-1, BAGALKOT

That the learned assessing officer erred in law and on facts in not allowing the interest income of Rs.7,57,88,895/- as deduction u/s 80P(2)(a)(i) of the Act even though the investmentswere made out of surplus fund and attributable to the business activity of the appellant.

That the learned assessing officer erred in law and on facts in not allowing the deduction of Rs.7,57,88,895/- claimed u/s 80P(2)(a)(i) on the ground that the income is earned from surplus funds investing in Nationalised and Private Banks.

That the learned assessing officer erred in law and on facts in not allowing expenditure incurred for earning the interest income from the investments.

Further, the assessee has raised following grounds of appeal in ITA No.418/Bang/2025 for the AY 2022-23: 1. That the order of the learned Commissioner of Income Tax (Appeals), in so far it is prejudicial to the interests of the appellant, is bad and erroneous in law and against the facts and circumstances of the case. 2. That the learned assessing lower authorities erred in law and on facts in not allowing the deduction of Rs.5,67,10,444/- claimed u/s. 80P(2)(a)(i) on the ground that the interest income earned is not attributable to the business activities of the appellant specified in section 80P(2)(a)(i) of the Act.

That the learned assessing officer erred in law and on facts in not allowing the interest income of Rs.5,67,10,444/- as deduction u/s 80P(2)(a)(i) of the Act even though the investmentswere made out of surplus fund and attributable to the business activity of the appellant.

That the learned assessing officer erred in law and on facts in not allowing the deduction of Rs.7,57,88,895/- claimed u/s 80P(2)(a)(i) on the ground that the income is earned from surplus funds investing in Nationalised and Private Banks.

Brief facts of the case are that the assessee is a co-operative society under the Karnataka Co-operative Societies Act,1959. The assessee filed its return of income for the Assessment year 2020-21 on 19/01/2021 u/s 139(1) of the Act declaring total income of Rs. NIL. Thereafter the case of the assessee was selected for complete scrutiny under CASS and accordingly notices u/s 143(2) of the Act, 142(1) of the Act along with the show cause notices were issued. The assessee made online submissions on 08/09/2022 and 14/09/2022. 4.1 The AO noticed that the assessee had made investments to the tune of Rs. 1,65,71,76,603/- as at 31/03/2020 and earned interest income of Rs.7,57,88,895/- on such investments with various commercial Banks/Co-operative Banks/Industries/ Developers and claimed the entire interest income as deduction u/s 80P(2)(a)(i) of the Act. The AO was of the opinion that the deduction u/s 80P(2)(a) of the Act is available only to the income which is attributable to the business operation of the assessee co-operative society i.e. providing credit facilities to its members. Further AO held that depositing/investing funds in a co-operative bank/ commercial bank/ other financial institutions is not a part of the business of providing credit facilities to its members. Further such an interest income is not the ‘operational income’ of the assessee society from providing credit facilities to its members. Consequently, the AO held that the interest income has to be treated as “income from other sources” not eligible for deduction u/s 80P of the Act. Accordingly, the AO concluded the assessment proceedings by treating the entire interest income earned amounting to Rs.7,57,88,895/- from co-operative bank/

Aggrieved by the order of AO dated 27/09/2022 passed u/s 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

The ld. CIT(A)/NFAC dismissed the appeal of the assessee by following the decision of the coordinate bench of the Tribunal in the case of M/s Vasavamba Co-operative Society Ltd. v. PCIT, ITA No.453/Bang/2020 dated 13.08.2021 and held that the assessee is neither entitled to deduction u/s 80P(2)(d) nor 80P(2)(a)(i) of the Act in respect of interest income earned from investment with banks.

Again being aggrieved by the order of the ld. CIT(A)/NFAC dated 16/01/2025, the assessee has filed the present appeal before this Tribunal.

Before us, the ld. A.R. of the assessee reiterated the submissions made before the lower authorities and vehemently submitted that interest income of Rs. 7,57,88,895/- earned from deposits held with Co-operative and commercial banks/ other financial institutions are made out of the funds contributed by members for the purpose of carrying on business which were not required immediately. It was also submitted by the ld. A.R. of the assessee that interest income earned from investments made was operational income attributable to business, which is deductible u/s 80P(2)(a)(i) of the Act. In the alternative, the ld. A.R. of the assessee also prayed that deduction u/s 80P(2)(d) of the Act may be allowed on the interest income earned from Co-operative banks in as much as co-operative banks are nothing but a co-operative society that possesses a license from RBI. Without prejudice, the ITA Nos.417 & 418/Bang/2025 Shri BiluruGurubasavaSahakari Pattina Sanha Niyamit, Bagalkot Page 5 of 17 assessee claimed that they are entitled for the benefit of deduction to such portion of interest from Co-operative banks/other banks in respect of mandatory maintenance of Statutory deposits/fluid resources as bound under the Karnataka Co-operative Society Act and only the balance of net interest over and above, the mandatory SLR is liable to be charged u/s 56 of the Act after allowing the deduction u/s 57 of the Act.

The ld. DR on the other hand relied on the orders of the Authorities below.

We have heard the rival submissions & perused the material available on record. It is an undisputed fact that the assessee is registered under Karnataka Co-operative Societies Act, 1959 and is carrying on the business of providing financial/credit facility to its members. The AO concluded the assessment proceedings by disallowing the interest on deposits held in cooperative banks/ commercial banks/ other financial institutions amounting to Rs. 7,57,88,895/- by holding that interest from depositing/investing funds in a co-operative bank/commercial bank/other financial institutions is not a part of the business of providing credit facility to its members and cannot be considered as the operational income of the assessee and accordingly, the AO assessed the interest income under the head “income from other sources” for which deduction u/s 80P of the Act was not allowed. We are of the considered opinion that under the similar facts & circumstances this Tribunal in the case of Income-tax Officer v. Gayatri Pattina Souharda Sahakari Sangha Niyamitha reported in [2025] 176 taxmann.com 897 (Bangalore-Trib.) has held as under-

3 Further the ld. CIT(A)/NFAC, heavily relied upon the decision of the Apex Court in the case of Totagar Sales Society Vs. ITO (2010) 322 ITR 283 and contended that the interest earned out of surplus funds kept by co-operative societies with banks are not eligible for deduction u/s 80P(2)(d) of the Act and the same are taxable as Income from Other sources u/s 56 of the Act. When we look at the decision of Hon’ble Supreme Court in case of Totgars Co-operative Sale Society's case (Supra), relied by the Ld.DR, Hon’ble Supreme Court was dealing with a case where the assessee therein, 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 payable to ITA Nos.417 & 418/Bang/2025 Shri BiluruGurubasavaSahakari Pattina Sanha Niyamit, Bagalkot Page 7 of 17 its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein 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. On these facts Hon’ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 as income from other sources of the Act.Hon’ble Supreme Court, also clarified that, they are confining the said judgment to the facts of that case alone.

4 Further the adjudication by the Hon’ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. vs. ITO(supra) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction under Sec.80P(2)(d) on the interest income on the investments/deposits parked with a cooperative bank. Therefore, reliance was placed by the Ld. CIT(A)/NFAC on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Now we will consider the secondargument raised by the AR of the assessee by contending that the assessee is entitled for the deduction under section 80P(2)(a)(i) of the act to such portion of the interest from co-operative banks in respect of mandatorily maintenance of fluid resources as compared under the assessee’s governing statute and only the balance of interest over and above the mandatory SLR was liable to be charged under section 56 of the Act.

6 We note that the primary issue in dispute pertains to the eligibility of deduction u/s 80P(2)(a)(i) of the Act/80P(2)(d) of the Act in respect of interest income earned from deposit made with co-operative banks and district co- operative banks/Scheduled banks. The crux of the matter is whether such interest income is to be considered as “business income” eligible for deduction u/s 80P(2)(a)(i) of the Act or 80P(2)(d) of the Act or to be classified as “income from other sources” and taxed accordingly.

7 We also take a note of the fact that the certaindeposits(FDs) in question as contended by the AR of the assessee was not voluntarily made by the assessee society for investment purposes but were instead statutorily mandated by the ITA Nos.417 & 418/Bang/2025 Shri BiluruGurubasavaSahakari Pattina Sanha Niyamit, Bagalkot Page 8 of 17 Karnataka State Co-operative Society Act, 1959/ Karnataka SouhardaSahakari Act,1997. As per section 57(2) of the Karnataka State Co-operative Society Act, 1959, 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. Further as per Rule 28 of the Karnataka Co-operative Societies Rules, 1960, every Co-operative Society accepting deposits and granting cash credits shall maintain fluid resources in such form and according to such standards as may be fixed by the