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Facts
The assessee, a cooperative society, claimed a deduction under section 80P for AY 2013-14. The assessment was reopened under section 147, disallowing the 80P deduction and assessing income. Subsequently, an order under section 263 directed the AO to consider the disallowance of interest expenses/provision of Rs. 7,04,188/-.
Held
The tribunal held that the provision for interest payable, not actually paid during the previous year, is not allowable as a deduction under Section 43B. Consequently, the addition made by the AO was sustained, and the assessee's alternative argument regarding enhanced deduction under Section 80P was also rejected.
Key Issues
Whether provision for interest payable, not actually paid, is allowable as a business expense under Section 43B, and its impact on Section 80P deduction.
Sections Cited
147, 143(3), 43B, 80P, 263, 234A
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:
The present appeal has been instituted by the assessee against the order of the NFAC, Delhi vide dated 08/10/2025 for the assessment year 2013-14.
The interconnected issue raised by the assessee is that ld. CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 7,04,188/ to the total income of the assessee.
The facts in brief are that the assessee is a primary cooperative society providing credit facility to its members, filed return of income for the A.Y. 2013-14 declaring NIL income after claiming deduction under section 80P of the Act for Rs. 10,48,167/- only. The assessment for the year was completed under section 147 r.w.s. 143(3) of the Act vide order dated 14-12-2018 wherein the deduction claimed under section 80P of the Act was disallowed and income was assessed at Rs. 11,64,663/- only. Against the said assessment, the assessee preferred an appeal before the learned CIT(A).
3.1 Subsequently, the order under section 263 of the Act was passed proposing to disallow/assess interest expenses/provision of Rs. 7,04,188/- which form the total interest expenses of Rs. 35,11,011/-. In order under section 263 of the Act, it was also directed to levy interest under section 234A for late filing of return.
3.2 During the assessment proceeding in pursuance to order under section 263 of the Act, the assessee submitted that its final accounts were prepared in accordance with the provisions of Karnataka Cooperative Society Act, 1959 and Rules made thereunder. The cooperative Act and rules require assessee to make adequate provision against the interest payable on deposit.
3.3 The assessee alternatively submitted that if the provision for interest payable be disallowed, the deduction under section 80P(2)(a)(i) of the Act shall be provided on the enhanced profit. The assessee in support of its claim relied on judgment of the Hon’ble Delhi High Court in the case of DCIT vs. Tata Power Delhi Distributor Ltd. 176 TR(A) 200.
Page 3 of 13 3.4 However, the AO dismissed the assessee’s explanation. The AO found that as per the provision of section 43B of the Act, any sum payable by way of interest on loans & advances from a schedule bank or cooperative bank shall be allowed as business expenses in the previous year in which such sum actually paid. The sum of Rs. 7,04,188/- being interest payable/provision debited in the profit and loss was not paid during the previous year under consideration and therefore, the same was liable to be disallowed.
3.5 The AO also dismissed the assessee alternative argument that in case the sum of Rs. 7,04,188/- is disallowed, deduction under section 80P(2)(a)(i) of the Act be provided on the enhanced profit. The AO found that the claim of the assessee for the deduction under section 80P of the Act was disallowed in the original assessment order under section 147 r.w.s. 143(3) of the Act. Against the said disallowance, the assessee is in appeal before the learned CIT(A). Further the present assessment proceeding is in pursuance to order under section 263 of the Act on the limited issue of disallowances of expenses not actually paid. Hence, the AO disallowed the interest payable/provision of Rs. 7,04,188/- and added the same to the total income of the assessee.
The aggrieved assessee preferred appeal before the learned CIT(A) who confirmed the disallowances made by the AO by observing as under: I have perused the Assessment order, Form-35, as well as the submissions and the documents tendered by the Appellant in these proceedings. The ground wise adjudication of the present appeal is as below,- a) The basic facts which are necessary for the purpose of adjudication of the present appeal, as emanating from the assessment order, are that the .
Page 4 of 13 appellant had filed its return of income for the relevant AY on 13.03.2018 at a returned income of nil and claiming the gross total income of Rs. 10,48,167/- as deduction u/s 80P of the Income tax Act, 1961 (“The Act”). The case was initially reopened u/s 147 of the Act and an order was passed on 14.12.2018 whereby the deduction u/s 80P of the Act was disallowed and total income was assessed at Rs. 11,64,663/-. b) Consequent thereto, an order u/s 263 of the Act was passed on 30.03.2021 wherein the Assessing Officer was directed to consider the issue of interest expense on deposits including the creation of interest payable provision amounting to Rs. 7,04,188/-. It was also directed that the AO was to be consider late filing of return of income and the Appellant’s liability to pay interest u/s 234A of the Act. c) The aforesaid has led to the impugned order to be passed by the AO whereby, after considering the response of the Appellant, an addition of Rs. 7,04,188/- was made due to the fact that a provision for any expense is only allowable in the year in which the sum is actually paid by the assessee as per section 43B of the Act. d) In the Form-35 as well as in the submissions of the appellant, it is stated in ground no. 1 that the AO erred in disallowing the deduction u/s 80P(2)(a)(i) of the Act as any disallowance of such a provision will only go to enhance the profits of the appellant and deduction u/s 80P would be available on such enhanced profits. The appellant has primarily relied on the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank ltd & Ors. Vs. Commissioner of Income Tax, Calicut & Anr. as well as on the decision of Delhi High Court in Dy. CIT vs. Tata Power Delhi Distribution Ltd. e) I have considered the aforesaid facts and submissions of the Appellant, the argument against disallowance of interest payable provisions is two fold as the appellant states that, in the very first instance, section 43B is not applicable to the appellant and secondly, even if such a provision is disallowed, then, the profits of the appellant would be enhanced and would be eligible for deduction 80P of the Act. This argument of the appellant is untenable as the very basic premise of the appellant’s argument is unsustainable and is against the settled position of law as well as the accounting standards whereby any provision for expense is not allowable as recognition of expense is only done when such an expense is actually incurred and no such provision for the same is allowable. Further, if the above argument of the assessee is considered then the decision of Delhi High Court in Dy. CIT vs. Tata Power Delhi Distribution Ltd. would not be inapplicable to the facts of the instant case. f) Insofar as the contention of the appellant that even if the addition is sustained, it would be added back to the profits of the appellant and would therefore be eligible for deduction u/s 80P of the Act is also untenable as even though the judgment quoted by the appellant titled Mavilayi Service Co- operative Bank ltd & Ors. Vs. Commissioner of Income Tax, Calicut & Anr. holds that section 80P is a benevolent provision, however the same is not at issue here as the addition of AO stems out of disallowance of the provision of interest payable which the appellant did not satisfactorily explain before the AO. In view of the aforesaid, the claim of the appellant cannot be allowed. It is also to be noted that the appellant while challenging the addition made by the AO has taken contradictory stands in the same ground which are prejudicial to each other and therefore, deserve to be dismissed on this count alone.
. g) In view of the above ground no. 1 is dismissed.
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 interest liability pertains to amounts payable to the members of the co-operative society and not to any scheduled bank, co-operative bank, or public financial institution. Therefore, the provisions of section 43B(e) of the Act are not attracted to the facts of the present case.
6.1 The learned AR further submitted that section 43B of the Act is a restrictive provision which governs only certain specifically enumerated liabilities and cannot be extended to all outstanding expenses. The section applies only to the items expressly mentioned in clauses (a) to (f) such as taxes, employer’s contributions to funds, interest payable to public financial institutions, State financial corporations, scheduled banks or co-operative banks, etc. Since the interest in the present case is payable to the members of the co-operative society who are neither scheduled banks nor co-operative banks within the meaning of the Banking Regulation Act. Hence, the statutory condition for invoking section 43B(e) of the Act is absent.
6.2 It was further contended that the AO has proceeded on an incorrect assumption that since the appellant is engaged in credit activities, the interest payable to its members is akin to interest payable on loans from banks. According to the learned AR, such an approach ignores the clear legal distinction between a co-operative society registered under the Karnataka Co-operative Societies Act and a co- . operative bank or scheduled bank governed by the Banking Regulation Act. The interest liability arises from mutual dealings between the society and its members and cannot be equated with borrowings from banking institutions.
6.3 The learned AR therefore submitted that the impugned disallowance under section 43B of the Act is wholly misconceived in law since the interest payable to members does not fall within any of the specified categories under section 43B(e) of the Act. Accordingly, the interest expenditure is allowable under the normal principles of accrual under section 37(1) of the Act and the addition made by the Assessing Officer deserves to be deleted.
6.4 Without prejudice to the above contention, the learned AR also submitted that even if the addition made by the AO is sustained, the same would result in enhancement of the business profits of the assessee which are eligible for deduction under section 80P(2)(a)(i) of the Act. Reliance in this regard was placed on CBDT Circular No. 37/2016 dated 02.11.2016 which clarifies that where additions are made while computing business income, the deduction under Chapter VI-A should be allowed on the enhanced profits. Reliance was also placed on the decision of the Tribunal in the case of Varanga Vyavasayika Sahakari Sangha Ltd. vs. ITO in dated 07.04.2025. The learned AR therefore prayed that the disallowance made by the Assessing Officer be deleted.
On the contrary, the learned DR supported the order of the Assessing Officer. It was submitted that the assessee is engaged in . accepting deposits from members and providing loans, and therefore the interest payable to members represents interest on funds used for business purposes. The learned DR contended that the objective of section 43B of the Act is to allow certain expenses only on actual payment basis. Since the assessee had claimed deduction of interest which remained unpaid at the end of the year, the Assessing Officer was justified in disallowing the same. Accordingly, the learned DR prayed that the order of the Assessing Officer be upheld.
We have heard the rival contentions of both the parties and perused the materials available on record. The short issue involved in the present appeal is regarding the disallowance of the provision made for the interest payable amounting to Rs. 7,04,188/- made by the AO by invoking the provisions of section 43B of the Act.
8.1 The undisputed facts of the case are that the assessee is a primary co-operative society engaged in providing credit facilities to its members. The assessee filed its return of income declaring NIL income after claiming deduction under section 80P of the Act. The assessment was originally completed under section 147 r.w.s. 143(3) of the Act wherein the deduction under section 80P was disallowed. Subsequently, in pursuance to the order passed under section 263 of the Act, the Assessing Officer examined the issue of interest expenses and disallowed a sum of Rs. 7,04,188/- representing provision for interest payable on deposits by invoking section 43B of the Act on the ground that the same was not actually paid during the year. The learned CIT(A) has confirmed the said disallowance.
8.2 The case of the assessee before us is that the interest liability relates to deposits received from its own members and not from any scheduled bank, co-operative bank or public financial institution. Therefore, according to the assessee, the provisions of section 43B(e) of the Act are not applicable. On the other hand, the Revenue authorities have proceeded on the premise that since the assessee is engaged in credit activities, the interest payable to members is akin to interest payable on borrowings from banks and therefore hit by the provisions of section 43B of the Act.
8.3 The provisions of section 43B of the Act is a special provision which regulates the timing of deduction of certain specified liabilities. The scope of the section is restricted only to the items specifically mentioned in clauses (a) to (f) of the said section. Insofar as interest expenditure is concerned, clause (e) of section 43B covers only interest payable on loans or advances from a scheduled bank, co-operative bank, public financial institution, State financial corporation or State industrial investment corporation. Thus, the applicability of the provision is clearly confined to the categories specifically enumerated in the statute.
8.4 In the present case, it is an undisputed position that the interest liability in question pertains to deposits received from the members of the assessee co-operative society. The members of the society are individuals forming part of the co-operative body and cannot be equated with scheduled banks or co-operative banks governed by the Banking Regulation Act. The Revenue authorities have not brought any material on record to demonstrate that the deposits on which interest is payable . were received from any of the institutions specified in section 43B(e) of the Act. Therefore, the basic statutory condition for invoking the provisions of section 43B(e) of the Act is absent in the facts of the present case.
8.5 In our considered view, the AO has proceeded on an incorrect assumption that because the assessee is engaged in credit activities, the interest payable to its members is similar to interest payable on borrowings from banks. Such an approach overlooks the clear legal distinction between a co-operative society registered under the Karnataka Co-operative Societies Act and a co-operative bank governed by the provisions of the Banking Regulation Act. The interest liability in the present case arises out of mutual dealings between the co-operative society and its members and therefore cannot be brought within the ambit of section 43B(e) of the Act.
8.6 Accordingly, we hold that the provisions of section 43B of the Act are not applicable to the interest payable by the assessee to its members. Once the said provision is held to be inapplicable, the allowability of the expenditure has to be examined under the normal provisions of the Act. Since the liability for interest has accrued during the year and the same has been accounted for in the books of account maintained in accordance with the governing co-operative laws, the said expenditure is allowable on accrual basis under section 37(1) of the Act. Therefore, the disallowance of Rs. 7,04,188/- made by the Assessing Officer and confirmed by the learned CIT(A) is not sustainable.
Page 10 of 13 8.7 Even otherwise, we find merit in the alternative contention raised by the assessee. The assessee had contended that in case the disallowance of interest provision is sustained, the same would result in enhancement of the business profits which are eligible for deduction under section 80P(2)(a)(i) of the Act. In this regard, it is relevant to note that the eligibility of the assessee for deduction under section 80P of the Act, which was earlier disallowed in the original assessment order, has already been decided in favour of the assessee by this Tribunal vide order dated 22-10-2025 in ITA No. 1222/Bang/2024. Therefore, the assessee’s entitlement to deduction under section 80P(2)(a)(i) of the Act stands affirmed. The relevant extract of the order is reproduced below:
“10. We have carefully perused the orders of the learned lower authorities and has also considered the arguments of both the parties.
The issue in this appeal is that assessee being a cooperative society did not file its return of income and therefore as the information was available that the assessee has deposited cash in its savings bank account of Z 4,291,630/—, notice u/s. 148 of the Act was issued to the assessee on 27th of March 2018. In response to the same the assessee filed its return of income showing the gross total income of Z 1,048,167/— claimed the whole of such sum as deduction u/s. 80P(2)(a)(i) of the Act and offered the income at Rs Nil. The return was assessed u/s. 143 (3) r.w.s. 147 of the Act on 14/12/2018 wherein the id. AO has disallowed a sum of Z 528,584/— comprising of the interest income earned by the assessee from SCDCC Bank of Z 519,962/— and interest from IDBI Bank of Z 8622/— u/s. 80P(2)(a)(i) of the Act holding that such income is not allowable as the nominal members of the assessee is 334 and A class member are 1555. The id. AO was of the view that assessee society received deposits from general public and also advanced loan to them without restricting its benefit to its members who are prescribed in the rules of the society. The AO was also of the view that assessee is not licensed to deal with public and deduction u/s. 80P of the Act shall be allowed in case of the cooperative society engaged in carrying on the business of banking or providing credit facilities to its members only. Thus, relying upon the decision of the Hon'ble Supreme Court in case of Citizen Cooperative Society Ltd (2017) 397 ITR 1, and as the assessee has accepted deposits from nominal members and advanced loan on maximum .
Page 11 of 13 returns further all the members do not have equal rights and therefore the deduction u/s. 80P(2)(a)(i) of the Act was denied. The AO also found that assessee had debited a sum of ? 140,065/— as provisions for audit fees and employees retirement benefit fund since the provision made is not an ascertained liability and same has been disallowed. Accordingly, the assessment order was passed determining the total income of the assessee at Z 1,164,663/—. It is apparent that the return of income for which it was reopened by issuing notice u/s. 148 of the Act of depositing the cash in the bank account of the assessee of 4,291,632/—, no addition was made on that account.
The id. CIT(A) has agreed that assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act as per the decision of the Hon'ble Supreme Court in case of 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 ], this has not been challenged by the learned AO. Therefore, now it is confirmed that the assessee is entitled to deduction under that section.
The Id. CIT(A) has categorically held that as the interest income is to be considered as income from other sources, relying upon the decision of the Hon'ble Karnataka High Court in case of Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/[2017] 395 ITR 611 - (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017], the income is required to be taxed u/s. 56 of the Act and therefore, the deduction u/s. 80P(2)(d) is also not allowed to the assessee. The learned DR has also supported this view by the further decision of the Hon'ble Karnataka High Court in case of Judicial Employee's House Building Cooperative Society Ltd (ITA No. 93 of 2024 dated 16 September 2025) wherein the decision of the Totagars Cooperative Sale Society has been confirmed and held that assessee is not entitled to claim deduction u/s. 80P(2)(d) of the Act. However, the Hon'ble court has specifically held that there are no distinguishable facts or law placed to take a different view.
Here the issue is not that the assessee is claiming deduction u/s. 80P(2)(d) of the Act, but the assessee is claiming deduction u/s. 80P(2)(a)(i) of the Act. Therefore, the decision of the Hon'ble High Court does not apply to the facts of the case. The decision of the Hon'ble Supreme Court as held by the id. CIT(A) applies to the facts of the case wherein the assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act. Therefore we are not in a position to confirm the orders of the Id. CIT(A) as well as the id. AO so far as the interest income of the assessee amounting to Z 519,962/— is denied to the assessee as deduction u/s. 80P(2)(a)(i) of the Act to the extent as such income is generated from deposits that are statutorily required to be maintained .
Page 12 of 13 under the Karnataka Co-operative Societies, Act, 1959. Further the interest income is also connected to the principal business operation and is chargeable to tax as business income. As the income is held to be chargeable under the head business income, the applicability of the decision of the Hon'ble Karnataka High Court before me does not apply to the facts of the case and further decision of the Hon'ble Supreme Court in of 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], is followed, we allow the claim of deduction of ? 519,962/— u/s. 80P(2)(a)(i) of the Act.
As the id. CIT(A) has not decided the issue about the deduction of provisional expenses of ? 140,065/— on account of the audit fees etc, we find that the audit fee is an ascertained sum and therefore audit fee should not have been disallowed by the learned assessing officer. However, as the assessee is required to prove before the Id. AO that this audit fee is provided based on the fees fixed by the Cooperative Societies Act or as per the invoice provided by the auditor, if the id. AO is satisfied that it is an ascertained liability, the disallowance deserves to be deleted.
In the result appeal filed by the assessee allowed.”
8.8 Once the deduction under section 80P is held to be allowable, any enhancement in the business income of the assessee arising on account of disallowance of expenditure would also qualify for deduction under the said provision. This position is also supported by CBDT Circular No. 37/2016 dated 02-11-2016 which clarifies that where additions are made while computing business income, the deduction under Chapter VI-A should be allowed on the enhanced profits.
8.9 In view of the above discussion, we hold that the disallowance made by the Assessing Officer under section 43B of the Act is not sustainable both on facts as well as in law. Accordingly, the addition of Rs. 7,04,188/- is directed to be deleted. The grounds raised by the assessee are allowed.
In the result, the appeal of assessee is allowed.
Order pronounced in court on 12th day of March, 2026