YEDAMANGALA VYAVASAYA SEVA SAHAKARI BANK NIYAMITHA,YEDAMANGALA, SULLIA vs. INCOME TAX OFFICER WARD 1 PUTTUR, PUTTUR, DAKSHINA KANNADA

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

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.

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.

The aggrieved assessee preferred an appeal before the learned CIT(A).

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.

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.

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.

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.

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 ITA No.580 & 581/Bang/2025

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