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Facts
The assessee, a cooperative society, declared NIL income after claiming deduction under Section 80P(2)(a)(i) on interest earned from statutory deposits. The AO disallowed this deduction, treating the interest income as income from other sources.
Held
The Tribunal held that the interest income earned from statutory deposits mandated by the Karnataka Cooperative Societies Act is operational income derived in the course of the assessee's business and qualifies for deduction under Section 80P(2)(a)(i).
Key Issues
Whether interest income earned from statutory deposits mandated by the Cooperative Societies Act is eligible for deduction under Section 80P(2)(a)(i)?
Sections Cited
80P(2)(a)(i), 80P(2)(d), 57
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 28/06/2024 in S/250/2024-25/1066184195(1) for the assessment year 2020-21.
The only issue raised by the assessee is that the learned CIT(A) erred in holding the interest income earned on statutory deposit with cooperative bank as well as commercial bank is not eligible for deduction under section 80(2)(a)(ia) or 80P(2)(d) of the Act.
The relevant facts are that the assessee is a cooperative society registered under The Karnataka Souhardra Sahakari Act 1997. The assessee is engaged in the activity of accepting deposits from the members and providing credit facility to the members. The assessee in the year under consideration declared income at NIL after claiming deduction under section 80P(2)(a)(i) of the Act for Rs. 72,78,017/- only.
During the assessment proceedings, the AO found that the assessee has shown interest earned from FDR maintained with cooperative bank and SB account with Scheduled bank which are detailed as under: S. No. Name of the Bank Nature Interest Amt. (Rs.) 1. Vikash Souharda Cooperative Bank Ltd FDR 7,66,011/- 2. Raichur District Central Cooperative Bank FDR 6,87,470/- 3. Manvi Pattina Souharda Sahakari Bank FDR 7,90,192/- A Total 22,43,673/- 4. IDBI Bank SB 13,654/- 5. Kotak Mahindra Bank SB 2,62,424/- 6. Axis Bank SB 2352/- B Total 2,78,430/- Total (A +B) 25,22,103/-
On question by the AO, the assessee explained that as per Rule 28 of the Karnataka Cooperative Societies Rules, 1960 and the order passed by the Registrar of Societies, the cooperative societies are required to keep not less than 3% of deposit received from the members in saving bank account and not less than 10% of deposit received in the form of short-term deposits. Accordingly, as per the statutory requirement, it (assessee) has kept the amount in the saving bank . account as well as in the FDR with cooperative bank as well as scheduled bank on which earned interest income. Therefore, the impugned interest income constitutes attributable to the business of accepting deposit and providing credit facility to the member and eligible for deduction under section 80P(2)(a)(i) of the Act. The assessee to buttress its argument further relied on the decision of Hon’ble Supreme court in the case of Karnataka State Co-operative Apex Bank reported in 251 ITR 194.
The assessee further referred to the decision of Hon’ble jurisdictional High court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd vs. ITO reported in 230 taxman 309 and in the case of Guttigedara Credit Society Ltd vs. ITO reported in 377 ITR 464 wherein it was held that the interest received by the assessee from the deposits made with cooperative bank and scheduled bank is attributable to the business of providing credit facility to the members and eligible for deduction under section 80(2)(a)(i) of the Act.
However, the AO rejected the submission of the assessee. The AO relying on the judgment of Hon’ble Supreme court in the case of Totagars Co-operative Sale Society vs. ITO reported in 188 taxmann.com 282, judgment of Hon’ble Karnatak High Court in case of PCIT vs. Totagars Co-operative Sale Society reported in 83 taxmann.com 140 and judgment of Hon’ble Delhi High court in the case of Mantola Cooperative Thrift and Credit Society Ltd vs. CIT reported in 50 taxmann.com 278 held that the interest earned on deposit of surplus fund which are not immediately required for the business of providing credit facility to the member is not eligible for deduction under section 80P(2)(a)(i) of the .
Act. Hence the AO disallowed the claim of the assessee for Rs. 25,22,103/- and added to the total income.
The aggrieved assessee preferred an appeal before the learned CIT(A) and reiterated its contention as made during the assessment proceedings.
9. The learned CIT(A) relying on the judgment of Hon’ble Supreme court in the case of Totagars Co-operative Sale Society vs. ITO (supra) and in case of Mavilayi Service Cooperative Bank reported in 431 ITR 1 held that the interest on deposit of idle fund with cooperative bank as well as scheduled bank is neither eligible for deduction under section 80P(2)(a)(i) nor under section 80P(2)(d) of the Act.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before me.
The learned AR before me submitted that the deposits in the cooperative bank and other banks were made under the guidelines of Karnataka Cooperative Societies Act. Accordingly, without making such deposit, it was not possible for the assessee to carry on the business of financing with the members. Thus, such interest income should be allowed as deduction under section 80P(2)(a)(i) of the Act.
11.1 Without prejudice to the above, the learned AR alternatively requested to grant the benefit of deduction as per the provisions of section 57 of the Act if the impugned interest income is classified income under the head “Other Sources”. For this purpose, the learned AR . requested that the matter can be set aside to the AO for necessary calculation of the deduction under section 57 of the Act as per the provisions of law.
On the other hand, the learned DR vehemently supported the order of the authorities below.
I have heard the rival contentions of both the parties and perused the materials available on record. From the preceding paragraphs, I note that the primary issue in 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 saving bank account interest from scheduled bank. The crux of the matter is whether such interest income is to be considered as "business income" eligible for deduction under section 80P(2)(a)(i) of the Act or to be classified as "Income from Other Sources" and taxed accordingly.
13.1 I note that the deposit in question was not voluntarily made by the assessee society for investment purposes but were instead mandated by the Karnataka State Co-operative Societies Act, 1959. As per section 57(2) of the said Act, every co-operative society is required to set aside at least 25% of its net profit each year as a reserve fund. Further, as per section 58 of said Act, such reserve funds must be mandatorily invested in specified institutions, including District Co- operative Banks. I 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 .
Page 6 of 9 business operations without prior approval from the Registrar of Co- operative Societies.
13.2 Given this statutory compulsion, I 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, I 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, I also draw support and guidance from the Judgment of Hon’ble Supreme Court in the 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.
13.3 However, I am 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 neither provided by the assessee nor 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 .
Page 7 of 9 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 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.
13.4 Therefore, in view of the above detailed discussion and judicial pronouncements, I, in the interest of justice and fair play, am 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 of corresponding interest income.
13.5 Furthermore, without prejudice to the above finding, I also considered the alternative plea raised by the assessee. In the event that the AO found any amount of investment 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, I 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" as per the provisions of law.
13.6 In light of the above reasoning, I hold that the assessee is entitled to deduction under Section 80P(2)(a)(i) 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 are allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in court on 21st day of April, 2025