AA520 VEERAMPALAYAM PACS LTD.,ERODE vs. ITO, WARD-2(1), ERODE

The brief facts of the case are that the assessee is a primary agricultural cooperative society under the Tamil Nadu Cooperative Societies Act, 1983. The society is engaged in the activity of lending credit facilities to its members, accepting deposits from members and borrowing from EDCC bank ltd. supplying seeds, fertilizers and other agricultural implements to its members. The assessee filed its return of income for the assessment year 2020-21 on 31.12.2020 declaring a Gross total income of Rs.42,82,436/- by claiming a deduction u/s.80P of the Act. Subsequently the assessee revised the return of income on 04.03.2021 declaring Gross total income of Rs.42,23,180/- by claiming the entire amount as deduction u/s.80P of the Act. The case was selected for complete scrutiny under CASS and accordingly the statutory notices were issued to the assessee. The AO found that during the financial year 2019-20, the assessee had earned an interest income of Rs.1,43,15,506/-, which includes Rs.53,94,339/- from investment and FDRs from cooperative banks and the balance amount of Rs.89,21,167/- from its :-4-: ITA. No:593/Chny/2025 members. The AO following the judicial precedent of the Hon’ble Supreme Court in the case of Totgars Cooperative Sale Society ltd Vs.ITO, Karnataka [2010] 188 Taxman 282 (SC), which has been followed by the State Bank of India (2016) 72 taxmann.com 64(Gujarat), Sri Basaveshwara Credit Co- operative Society ltd Vs.CIT(2014) 47 taxmann.com 189 (Bangalore Tribunal), National Coal Development corporation staff co-operative credit Society ltd Vs.DCIT, disallowed the claim of deduction u/s.80P(2)(d) of the Act and passed an order dated 20.09.2022 by holding as under: From the above judicial pronouncements and facts of the case, it is clear that the deduction u/s.80P(20(a)(i) is available only to the income which is attributable to the business operation of the assessee co-operative society, i.e., in this case providing credit facilities to its members. Depositing / investing funds in a co-operative bank / commercial bank are not part of the business but providing credit facilities to its members is the main object of the society for which the society is registered. Such an interest income is not the ‘operational income’ of assessee- society from providing credit facilities to its members only. Consequently, the interest income has to be treated as ‘income from other sources’ and also the assessee is not eligible for deduction u/s.80P of the Act. Respectfully following all of the aforesaid legal precedents. I hold that such interest income earned by the assessee is not eligible for deduction u/s.80P(2)(a)(i) of the Act. In view of the above, it is clear that during the F.Y.2019-20 relevant to the A.Y.2020-21, the assessee has earned interest income from the Co- operative banks of Rs.53,94,339/- on the investment/FDRs of surplus funds with Co-operative banks and claimed deduction u/s.80P(2)(a)(i) of Rs.42,23,180/- and the same is not allowable deduction. After considering business loss arrived by the assessee, the deduction claimed under chapter- VI-A of the act is disallowed to the extent of Rs.42,23,180/- and the same is considered as income from ‘other source’ u/s.56 of the Act 1956.

Aggrieved by the order passed by the AO, the assessee preferred an appeal before the ld.CIT(A), NFAC, Delhi.

The assessee reiterated the claim of deduction u/s.80P of the Act before the ld.CIT(A) by filing a detailed response to the notices issued during :-5-: ITA. No:593/Chny/2025 the appellate proceedings. However, the ld.CIT(A) has dismissed the appeal of the assessee stating that the assessee is not eligible for the deduction u/s.80P of the Act on the interest income earned from the investment made in the cooperative banks, as there is concept of mutuality and passed an order dated 31.12.2024 by holding as under: In the light of the above discussions, it held that once the surplus fund is removed from the arena of mutuality, and placed at the disposal of a Co- operative bank, where there is no restriction in the utilization by non-member general public, the privity of mutuality is lost. The Cooperative Bank has earned a higher interest and passed on a portion of such interest earned from general public to the appellant assessee. As such, the amount of interestis not generated on account of transactions by and within the members of Cooperative Society – the present appellant. Since the income is not earned by applying privity of mutuality, it is outside the purview of deduction u/s.80P of the IT Act, from both 80P(2)(a)(i) as well as 80P(2)(d). This amount of Rs.42,23,180/- cannot be permitted as deduction. The action of AO is upheld and the grounds of appeal are dismissed.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below along with case laws relied on. Admittedly, the assessee is a cooperative society registered under The Tamil Nadu Co-Operative Societies Act and the books of accounts are audited by the co-operative department, Government of Tamil Nadu. We find that the assessee had claimed deduction u/s.80P(2)(d) of the Act to the tune of Rs.42,82,436/- (as per the return of income) on account of interest income earned from the deposit / investment from EDCC Bank. The AO and the ld.CIT(A) have disallowed the claim stating that the assessee is not eligible for deduction as the interest income has been earned from the cooperative bank which is not a cooperative society.

We note that the assessee is a co-operative society formed by the Government of Tamilnadu through social welfare department. The Ld.AR filed a paper book before us consisting of 1 to 47 pages and drew our attention to the Circular No.722 of the CBDT dated 19/09/1995 (Page No.37 of the paper book), wherein the criteria for availing the benefits of Section 80P(2)(a)(ii) of the Act by a ‘cottage industry’ have been specified in para 3 (supra). According to Ld.AR the assessee is a cottage industry, since the criteria stated in the said circular are satisfied and eligible for claiming deduction U/s. 80P(2)(a)(ii) of the Act. According to the AR both the AO and Ld.CIT(A) have appreciated the fact that the assessee is a ‘cottage industry’ but still have disallowed the interest earned from the banks as not eligible for deduction U/s.80P(2)(d) against the claim of the assessee U/s.80P(2)(a)(ii) of the Act. It is observed that the interest income earned by the society is in its regular course of its operations and does forms part of the revenue ‘attributable’ to the operations of the society as a cottage industry and in our considered view the assessee is eligible for deduction 80P(2)(a)(ii) itself. On perusal of the decision of the Hon’ble High court of Karnataka in the case Tumkur Merchants Souharda credit Co-Op. Ltd Vs. ITO, Ward V, Tumkur (supra), relied by the Ld.AR is clearly explained that, the interest earned from the deposits made out of the idle funds of the assessee, the said interest income is attributable to the profits and gains of the business only. Therefore, respectfully following the decision of the court, we are of the view that the lower authorities have grossly erred in disallowing the said deduction U/s.80P(2)(d), without appreciating the fact that, the claim of the assessee as a cottage industry and the entire Income was claimed as deduction u/s. :-8-: ITA. No:593/Chny/2025 80P(2)(a)(ii). Therefore, considering the facts and circumstances of the present case, we are of the view that, the assessee is a cottage industry and the entire income is attributable to business of the society and hence eligible to claim Interest earned on deposit also as deduction U/s.80P(2)(a)(ii) of the Act and allow the appeal of the assessee.

Therefore, in the present facts and circumstances of the case, since the assessee also has earned interest from the EDCC bank, respectfully following the decision of the Tribunal (supra) and the consistent view taken by the bench, we are of the view that the assessee is entitled for deduction u/s.80P(2)(d) of the Act and hence, we set aside the order of the ld.CIT(A) and direct the AO to allow the deduction claimed in the return of income filed by the assessee. We order accordingly by allowing the grounds of appeal raised by the assessee.

In the result, the appeal filed by the assessee is allowed.