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Facts
The assessee, a primary agricultural cooperative society, claimed deductions under Section 80P(2)(a)(i) for interest and dividend income earned from statutory deposits made with banks. The AO disallowed the deduction, treating the income as 'Income from Other Sources'. The CIT(A) upheld the AO's order.
Held
The Tribunal held that interest income earned from statutory deposits mandated by the Karnataka Cooperative Societies Act is operational income derived in the course of business and qualifies for deduction under Section 80P(2)(a)(i). The AO is directed to re-examine the quantum of deposits and allow the deduction.
Key Issues
Whether interest income earned from statutory deposits by a cooperative society is eligible for deduction under Section 80P(2)(a)(i) as business income, or taxable as 'Income from Other Sources'.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 57, 56
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
Both these appeals are filed by the assessee against the order passed by the NFAC, Delhi vide order dated 27/01/2025 & 10/02/2025 in DIN No.ITBA/NFAC/S/250/2024-25/1072571365(1) and No.ITBA/NFAC/ S/250/2024-25/1073078280(1) for the assessment years 2018-19 and 2020-21.
The effective issues raised by the assessee in the grounds of appeal are that the learned CIT(A), erred in confirming the disallowances of deduction claimed under section 80P(2)(a)(i) of the Act and alternatively under section 80P(2)(d) of the Act. Further erred in rejecting the alternative plea to allow proportionate cost under section 57 of the Act.
The facts in brief are that the assessee is a primary agricultural cooperative society and filed return of income for A.Y. 2018-19 declaring total income at ₹ 37,800/- after claiming deduction under section 80P(2)(a)(i) of the Act for ₹ 25,68,706/- only. The assessee was selected for scrutiny under CASS.
The AO noticed that the assessee during the year has made deposit/investment with cooperative bank and scheduled bank on which earned interest income of ₹ 22,74,519/- and earned dividend income of ₹ 5,79,500/- only. The impugned interest and dividend income aggregated to ₹ 28,54019/- were included in the profit for the purpose of deduction under section 80P(2)(a)(i) of the Act. The AO proposed to treat the same as income from other sources and tax the same as per section 56 of the Act.
The assessee in response submitted that interest income of ₹22,74,519/- was earned from investments made in bank and cooperative banks. These investments were from the society’s own funds, including capital & reserves and balance from fluid resources which was compulsory to maintain under rule 28 of the Karnataka State .
Cooperative Societies Rules. The assessee contended that these investments were made in order to carrying out the business of providing credit facilities to members, therefore income arising from such investment is attributable to the business of the society. Hence, the same is eligible for deduction under section 80P(2)(a)(i) of the Act. It was also clarified that the deduction is not claimed under section 80P(2)(d) of the Act. The assessee in support relied on the decision of ITAT Bangalore Bench in the case of Tumkur Grain Merchants Credit Souharda Credit Cooperative Society (ITA No. 1672/Bang/2012).
5.1 However, the AO held that the assessee has earned interest and dividend income by investing idle funds not immediately required for lending to members in the scheduled bank and district cooperative bank. Relying on the judgment of Hon’ble Supreme Court and Karnataka High Court the in the case of Totgars Co-op Sales Society Ltd reported in 322 ITR 283 and the judgment of Hon’ble Gujarat High Court in the case of State Bank of India vs. CIT 389 ITR 578, the AO held that interest income earned from the investment of idle fund cannot be treated as income from business of providing credit facilities to the member, therefore the assessee is not entitled to deduction under section 80P(2)(a)(i) of the Act for interest and dividends income of ₹ 28,54,019/- only.
5.2 The AO further held that interest & dividend income from deposit and investment with District cooperative is also not eligible for deduction under section 80P(2)(d) of the Act as deduction under section 80P(2)(d) is available only in case of deposit or investment made with cooperative societies only and not with cooperative bank.
5.3 Hence, the AO in view of the above held the interest and dividend income of the ₹ 28,54,019/- is taxable as per section 56 of the Act and added to the total income of the assessee under the head income from other sources.
The aggrieved assessee preferred an appeal before the learned CIT(A).
6.1 The assessee before the learned CIT(A) submitted that the deposits and investments were made with cooperative societies, cooperative bank and scheduled bank out of own fund. The impugned investment or deposit was made to fulfil the compulsory requirement of Karnataka Cooperative Societies Act. Therefore, the income arises from the statutory investment shall be treated as business income and deduction under section 80P(2)(a)(i) of the Act shall be allowed.
6.2 The assessee also submitted that the South Canara District Central Cooperative Bank Ltd (SCDCCB) is registered as cooperative society under Karnataka Cooperative Societies Act. Therefore, the interest income earned from SCDCCB shall be eligible for deduction under section 80P(2)(d) of the Act.
6.3 Alternatively, the assessee submitted that if deduction under section 80P(2)(a)(i) or 80P(2)(d) are not allowed then gross receipt of interest and dividend income cannot be taxed without providing corresponding cost.
6.4 However, the learned CIT-A concurred with view of the AO and confirmed the addition made by him by placing reliance on the judgment of Hon’ble Supreme Court in the case of Totgars Cooperative Sales Society (supra) and other judgment referred by the AO.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us submitted that the deposits in the cooperative bank were made under the guidelines issued by the Karnataka cooperative societies act which represents the statutory deposits and therefore there cannot be any disallowance on account of interest income earned therefrom. Without prejudice to the above, the learned AR submitted that if such interest income is treated as income under the head other sources then the benefit of section 57 of the Act should be allowed against such income by deducting the corresponding cost.
9. On the other hand, the learned DR before us vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding paragraphs, it is noted that the primary dispute pertains to the eligibility of deduction under section 80P(2)(a)(i) of the Act in respect of interest income earned from deposits made with the Co-operative Bank and scheduled bank. The crux of the matter is whether such interest income is to be considered as "business income" eligible for deduction under .
Page 6 of 11 section 80P(2)(a)(i) or to be classified as "Income from Other Sources" and taxed accordingly.
10.1 It is noted that the deposit in question is that the investment or deposits are claimed to be made not voluntarily but were instead mandated by the Karnataka State Co-operative Societies Act, 1959. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits, thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the Registrar of Co-operative Societies.
10.2 Given this statutory compulsion, we find that the interest income arising from these deposits cannot be equated with interest income derived from surplus funds voluntarily parked in banks for earning a return. Therefore, we hold that the interest income earned from such statutory deposits should be considered as operational income derived in the course of the assessee’s business and consequently qualifies for deduction under section 80P(2)(a)(i) of the Act. In holding so, we also draw support and guidance from the Judgement of Hon’ble Supreme court in case of CIT versus Karnataka State Cooperative Apex bank reported in 251 ITR 194 wherein it was held as under: There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)( i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
Page 7 of 11 10.3 However, we are also conscious to the fact that the detail of quantum of amount necessary to be deposited to comply with the Karnataka Cooperative Society Act is not provided by the assessee neither looked into by the lower authorities. In the identical facts and circumstances, the coordinate bench of this tribunal in case of Kalika Parameswari Co-operative Society Ltd vs. ITO reported in 159 taxmann.com 1466 has set aside the issue to the file of the AO to compute the amount necessary to be deposited. The relevant finding of the Tribunal reads as under: 10. As per the directions of Registrar of Karnataka Co-operative Societies which is placed at pages 52-53 of the Paper Book filed by the assessee, we find that all primary co-operative societies are to be mandatorily made to invest 25% of total deposits as liquid fund (SLR) and 3% of the total deposits as cash reserve (CRR) with the concerned Central District Co-operative Banks to run credit facilities by a primary agricultural credit co-operative society in the State of Karnataka. The CBDT Circular No.18/2015 dated 02.11.2015 has clarified that interest income from SLR/non-SLR investment by banking company and a cooperative society shall be chargeable under the head "profit and gains of business or profession". On identical factual situation, we find the Bangalore bench of the Tribunal in the case of M/s. Kachur Credit Co-operative Society Ltd., v. ITO in (order dated 26.09.2023), by following earlier orders of the Tribunal, had held as follows: "8. I have heard the rival submissions and perused the material on record. The solitary issue for adjudication is whether a sum of Rs.5,07,822/-can be allowed as a deduction under sections 80P(2)(a)(i) of the Act. Admittedly, the amount of Rs.5,07,822/- has been received by the assessee from South Canara District Central Co-operative Bank Ltd. It is the claim of the assessee that the amounts are invested in compliance with the relevant Acts and Rules. On identical facts, the Bangalore Bench of the Tribunal in the case of Bharat Co-operative Credit Society v. ITO (supra) by following the Co-ordinate Bench's order in the case of Vasavamba Co-operative Society Ltd. v. PCIT in (order dated 13.08.2021) had stated that if the investments made with the Central Co-operative Bank is out of compulsions under Karnataka State Co- operative Societies Act, 1959 and Rules, the income received from such investments would be entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Tribunal in the case of Bharat Co-operative Credit Society v. ITO (supra) reads as follows: "7.1 In the instant case, it was contended that majority of the interest income is earned out of investments made with Cooperative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka .
Page 8 of 11 Co-operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T. Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction."
In view of the above order of the Tribunal, I restore the issue to the files of the AO to examine whether interest income received amounting to Rs.5,07,822/- from South Canara District Central Co-operative Bank Ltd., is out of compulsions and in compliance with the Karnataka State Cooperative Societies Act, 1959 and the relevant Rules. If it is so, the same interest income is to be assessed as income from business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, I restore the matter to the AO. It is ordered accordingly."
11. In light of the above orders of the Tribunal, we direct the AO to examine whether the interest income received on investment with Central Co-operative Bank is out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is so, the same may be considered as 'business income' and entitled to deduction under section 80P(2)(a)(i) of the Act. In other words, if assessee society does not comply with the relevant provisions of the Act, and the Rules of Karnataka Co-operative Societies Act, 1959, it cannot carry on its cooperative activities, namely carry on the business of banking or providing credit facilities to its members. Therefore, if the investments are out of compulsion under the Act and relevant Rules, necessarily it is part of assessee's business activity entailing the benefit of section 80P(2)(a)(i) of the Act. It is ordered accordingly.
10.4 Therefore, in view of the above detailed discussion and judicial pronouncements, we in the interest of justice and fair play, are inclined to set aside the issue to the file of the AO with direction to compute the required quantum of amount needs to be deposited as per statutory requirement and allow the claim of the deduction under section 80P(2)(a)(i) of the Act on corresponding interest income.
10.5 Furthermore, without prejudice to the above finding, we also considered the alternative plea raised by the assessee. In the event that the AO found that the any amount of investment is over and above the required statutory limit and classify the interest income from such deposits as "Income from Other Sources," then it is imperative that the corresponding cost incurred in earning such income must be deducted . while computing taxable income. It is a well-established principle of taxation that only net income should be brought to tax, and any expenditure directly attributable to the earning of such income should be allowed as a deduction. Therefore, we direct the AO to grant a proportionate deduction of the corresponding cost, if any, while assessing the interest income under the head "Income from Other Sources."
10.6 In the light of the above reasoning, we hold that the assessee is entitled to deduction under section 80P(2)(a)(i) of the Act on the interest income earned from deposits made in compliance with statutory requirements. The AO is directed to re-examine the taxability of such interest income in accordance with this finding and grant appropriate relief to the assessee. Hence, the grounds of appeal of the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes. an appeal by the assessee for A.Y. 2020-21
The effective issue raised by the assessee in the grounds of appeal are that the learned CIT(A), erred in confirming the disallowances of deduction claimed under section 80P(2)(a)(i) of the Act and alternatively under section 80P(2)(d) of the Act. Further erred in rejecting the alternative plea for allowing the proportionate cost under section 57 of the Act.
12.1 At the outset, we note that the issues raised by the assessee in its grounds of appeal for the AY 2020-21 are identical to the issue raised by the assessee in 2018-
19. Therefore, the findings given in shall also be applicable for the assessment year 2020-21. The appeal of the assessee for the A.Y. 2018-19 has been decided by us vide paragraph S.No. 10 – 10.6 of this order in favour of the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2018-19 shall also be applied for the assessment years 2020-21. Hence, the ground of appeal filed by the assessee is hereby allowed for statistical purposes.
In the result appeal of the assessee is allowed for statistical purposes.
In the combined result, both the appeals of the assessee allowed for statistical purposes.