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Facts
The assessee, Sikkim State Cooperative Supply and Marketing Federation Limited, a cooperative society, claimed Section 80P deduction for interest income received from deposits with Sikkim State Cooperative Bank Limited and Citizens Urban Cooperative Bank Ltd. The Assessing Officer disallowed this deduction, treating the income as 'Income from Other Sources' under Section 56. The Ld. CIT(A) subsequently deleted the addition, prompting the Revenue to appeal to the Tribunal.
Held
The Tribunal held that interest received by a cooperative society from investments with cooperative banks is not allowable as a deduction under Section 80P(2)(d) due to the express provisions of Section 80P(4) of the Income Tax Act. Cooperative Banks are treated at par with Scheduled Banks, and the deduction under Section 80P is applicable only to interest received from Cooperative Societies per se, not Cooperative Banks. Therefore, the Ld. CIT(A)'s order deleting the addition was set aside, and the AO's order was confirmed.
Key Issues
Whether interest income earned by a co-operative society from deposits with co-operative banks is eligible for deduction under Section 80P(2)(d) of the Income Tax Act, 1961, particularly in light of Section 80P(4) distinguishing co-operative banks from other co-operative societies.
Sections Cited
80P, 80P(1), 80P(2), 80P(2)(a)(i), 80P(2)(d), 80P(2)(e), 80P(4), 143(3), 143(3A), 143(3B), 144B, 250, 36(1)(va), 40(a)(ia), 56, 2(19), 36(1)(viia), 43D, 194A(3)(v)
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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: SHRI PRADIP KUMAR CHOUBEY & SHRI RAKESH MISHRA
order : 18-June-2025 ORDER PER BENCH: These appeals filed by the Revenue are against the separate orders of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as Ld. 'CIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AYs 2018-19 & 2020-21 dated 30.05.2024, which have been passed against the assessment orders u/s Page 2 of 45 Page 3 of 45 Page 5 of 45 Page 8 of 45 3.5 Thereafter he has held as under: “11.8 I have carefully considered the case laws relied upon by the AO. The Supreme Court judgment in the case of Totgars Co-operative Sale Society Ltd. Vs ITO (188 Taxman 282) (SC) deals with the claim of deduction under section 80P (2)(a)(i). In fact, Karnataka High Court in the recent case of Pr. CIT Vs Totagars Co-operative Sale Society (2017) (392 ITR 74) (Kar.) has distinguished the Supreme Court judgement in the said case, with the following observations, - “11. The learned counsel has relied on the case of Totgars Cooperative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC). However, the said case dealt with the interpretation, and the deduction, which would be applicable under Section 80P(2)(a)(i) of the LT. Act. For, in the present case the interpretation that is required is of Section 80P (2)(d) of the LT. Act and not Section 80P(2)(a)(i) of the I.T. Act. Therefore, the said judgment is inapplicable to the present case. Thus, neither of the two substantial questions of law canvassed by the learned counsel for the Revenue even arise in the present case.” 11.8.1 The Supreme Court judgment in the case of Mavilayi Service Co- operative Bank Ltd. Vs CIT (2021) (123 taxmann.com 161) (SC) also deals with the deals with the eligibility to claim deduction under section 80P (2)(a)(i), particularly in the wake of introduction of sub-section (4) to section SOP. On the facts of case, Hon’ble Apex Court held that where assessee1 was registered as primary agricultural credit society, it was entitled to benefit of deduction under section 80P(2)(a)(i) notwithstanding that it was also giving loans to its members which were not related to agriculture. 11.8.2 Hon’ble Bombay High Court, in the case of CIT Vs Common Effluent Treatment Plant (2010) (328 ITR 362) (Bombay) deals with the ‘principle of mutuality’. The assessee in that case was an association formed with an object of setting up an effluent treatment plant for its members, who ran industrial units in certain areas. In this context, Hon’ble High Court held that interest received on bank deposits, made out of surplus funds, does not Page 9 of 45 Page 10 of 45 “The allowability of interest from Co-operative Bank and other agencies is much debated issue as several observations have been made by different Courts and Tribunals both in favour of the Department as well as the assessee. However, the treatment of interest income from outside agencies out of the investments made from idle fund of the Society has been decided by the Apex Court. According to the Hon’ble Supreme court in the case of M/s Totgars Co-operative Sale Society Limited dated 08.02.2010, the interest income from outside agencies would fall within the ambit of Section 56 as income from Other Sources and not chargeable to business income u/s.
In the instant case, the assessee apart from its regular activity of providing loans to its members, made investment of its idle/surplus fund to Sikkim State Cooperative Bank Limited and Citizens Urban Cooperative Bank Limited. As per observation of the Hon’ble Apex Court, the financial activities of a co-operative society of providing loan to its members and earning interest thereon comes under the principle of mutuality as the relation between the Society and its members fulfils the conditions. However, the financial activities for the purpose of investment of surplus fund to any institution outside the Society do not come under the purview of principle of mutuality. This has been clarified in the Order of the Hon’ble Supreme Court in the case of Bangalore Club also. Investment of surplus in another Co-operative society which is not a member of the co-operative society also is not recognized as business activity of the Society. However, the Act proposed that the interest out of investment in a cooperative society also eligible for deduction u/s. 80P(2)(d) as both the co- operative societies are mutually covered by the principle of mutuality. In this respect the Income Tax Act, 1961 is very specific to allow benefit to a Society subject to the fulfilment of the concept of principle of mutuality only. The conflicts have been raised on the overriding effect of Central Act, being the Income Tax Act, 1961 on the State Act being The Co-operative Societies Act. Another view is that the Hon’ble Courts have taken a sympathetic view on the prospect of co-operative movement. Taxation of interest of any surplus fund may restrict to this prospect to an extent that the payable tax cannot be distributed to the members of the Society only keeping the interest on its regular financial activities outside the ambit of taxation. On this aspect, it is to be kept in mind that the intention of the Parliament/Law Makers are final as per Article 141 of the Indian Constitution, which has vehemently kept the Page 11 of 45 Page 12 of 45 Page 14 of 45 Page 17 of 45 Page 18 of 45 Page 19 of 45 Page 20 of 45 Page 21 of 45 Page 22 of 45 “The basic issue is whether the interest received by a co-operative society from a co-operative bank should be eligible for deduction under Section 80P(2)(d) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). At the time of the argument the following decisions were relied upon: (i) Danda Co-operative Credit Society Ltd. Vs ITO ITA No: 2980/MUM/2022, which relied on another decision of the Mumbai ITAT in for AY 2012-13. (ii) RBI Staff and officers Co-operative Society Ltd. Vs ITO in ITA No 3114/MUM/2023. (iii) Bhairabnala Samabay Krishi Unnayan Samity Ltd. Vs ITO in ITA No 111/Kol/2012. (iv) DCIT vs Bongaon Co-operative Credit Society Ltd. In (v) Kalidas Udyog Bhawan Premises Co-operative Ltd. Vs ITO in ITA No 6547/MUM/2017 Page 23 of 45 In the aforesaid judgments the Tribunals, including the jurisdictional Tribunal repeatedly held that a cooperative society is entitled to deductions u/s 80P(2)(d) of the Act on interest received from a cooperative bank. At this point the Ld. DR had cited the decision of Hon’ble Karnataka High Court in the case of Pr. CIT Hon’ble Vs Totgars’ Co-operative Sale Society reported in 395 ITR 61 l(Kar) where the Hon’ble Karnataka High Court held that by virtue of introduction of Section 80P(4) of the Act interest received from a co-operative bank will not be eligible for deduction u/s 80P(2)(d). In this background it is humbly submitted that- (i) Kind attention is drawn towards the decision of The Hon’ble Gujarat High Court in its recent decision on 3rd March 2025 in Principal CIT Vs Shree Aradhana Urban Co-operative Credit Society Ltd. in R/Tax Appeal No. 400 of 2024 (copy attached and marked as Annexure ‘A’). The Hon’ble Gujarat High Court had decided the identical issue in favour of the assessee. We humbly request the Bench to refer to Para No. 5 of the judgment. The Hon’ble Court relied upon this earlier decision of the Gujarat High Court in Pr. CIT Vs Ashwinikumar Arban Co-operative Society Ltd. (discussed separately hereinafter). In fact the Gujarat High Court is of the view that sub-section (4) of section 80P is in the nature of a proviso to the main provision contained in sub- sections (1) and (2) of Section 80P (page 8 of 12). (ii) Also please refer to the decision of Pr. CIT Vs Ashwinikumar Arban Co- operative Society Ltd. Gujarat High Court (R/Tax Appeal No. 538 of 2024 with R/tax Appeal No. 221 of 2022 with R/Tax Appeal No. 419 of 2023). Copy of the judgment enclosed and is marked as Annexure B. The Gujarat High Court had the occasion to consider the view of Karnataka High Court that interest earned from investment any bank not being a co- operative society is not deductible under Section 80P(2)(d). Your attention is drawn towards the Paragraph No. 15 in particular. Also please refer to paragraphs 28 & 30 in the decision section. The Paragraph No. 33 is very clear in this matter and it was clearly held that therefore the exclusion of applicability of Section 80P to Co-operative Banks by Section 80P(4) of the Act would not disentitle the respondent assessee from claiming deduction under Section 80P(2)(d) of Act in absence of any amendment in the said Section and that would not be sufficient and Page 24 of 45 Page 25 of 45 “CASE -1 Commissioner of Income Tax, Coimbatore vs M/s. The Nilgiris Co- operative Marketing Society Ltd., Sailing House, Ooty (Chennai High Court) (TAX CASE (Appeal) No.758 of 2016) CASE – 2 Danda Co-op Credit Society Ltd. vs ITO - ITA.NO.2980/MUM/2022 (Tribunal - Mumbai) Quoting from Coordinate Bench in case of the same assessee ITA.No. 3240/Mum/2019 for the A.Y. 2012-13 Pg 8 - Last paragraph CASE – 3 Reserve Bank Staff and Officers co-op credit society Ltd, vs ITO (Tribunal -Mumbai)
CASE – 4 Bhairabnala Samabay Krishi Unnavan Samity Ltd, vs ITO (Tribunal - Kolkata) CASE – 5 DCIT vs Bongaon Co Operative Credit Society Limited (Tribunal - Kolkata) I.T.A. No. 1101/Kol/2023 CASE – 6 Kaliandas Udyog Bhavan Premises Co-op Society Ltd, vs. ITO (Tribunal - Mumbai) ITA No. 6547/MUM/2017 CASE – 7 Thorapadi Urban Co-op Credit Society Ltd, vs. ITO (High Court - Chennai) (2024) 296 Taxman 250 CASE – 8 PCIT and Another vs. Totgars Co-operative Sale Society (High Court - Karnataka) (2017) 392 ITR 74 6. The Ld. DR also filed documents from the return of income of Citizens Urban Cooperative Bank Ltd. in which the status is Cooperative Bank other than Primary Agricultural Credit Society or a Primary Cooperative Agricultural and Rural Development Bank and also from the website of Citizens Urban Cooperative Bank Ltd. which is a Primary (Urban) Cooperative Bank registered under Sikkim Co-Operative Society Act, 1978 and licensed by the RBI, License No. being UBD-WB. 04/2001-2002 under the Banking Regulation Act 1949 (As applicable to Cooperative Societies). The Sikkim State Cooperative Bank Ltd., (SISCO Bank) was registered in the year 1996 and came into operation Page 26 of 45 Page 27 of 45 Page 28 of 45 Page 30 of 45
The aforesaid decision of the Hon'ble Supreme Court in the case of Totgar's Co-operative Sale Society Ltd. (supra) was followed by a Division Bench of the Gujarat High Court in the case of State Bank of India v. CIT [2016] 389 ITR 578/241 Taxman 163/72 taxmann.com 64 and the Division Bench of the Gujarat High Court has held as under: "(ii) That the assessee did not carry on any banking business and its objects did not contemplate investment of surplus funds received from its members. The business of a credit society like that of the assessee was limited to providing credit to its members and the income that was earned by providing such credit facilities to its members was deductible under section 80P(2)(a)(i). The character of interest was different from the income attributable to the business of the assessee-society providing credit facilities to its members. The interest income derived from investing surplus funds with the bank must be closely linked with the business of providing credit facilities for it to be held attributable to the business of the assessee. Therefore, the profits and gains could be said to be directly attributable to the business of providing credit facilities to its members if there was a direct and proximate connection between the profits and gains and the business of the assessee. There was no obligation on the assessee to invest its surplus funds with the bank. Investing surplus funds in a bank was no part of the business of the Page 31 of 45 Page 32 of 45 Page 33 of 45 Page 34 of 45 Page 35 of 45
Similar issue arose in the case of Gomati Co-Operative Milk Producers Union Limited Vs. ACIT-National-E-Assement Centre, New Delhi in ITA 136/GTY/2023 in which the decision in the case of Totagars Co-operative Sale Society (supra) has been relied upon. The relevant extracts from the order are as under:
11. We now refer to the provisions of Section 80P(2)(d) of the Act which are as under: “80P(2)(d) in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other co-operative society, the whole of such income . Thus, section 80P(2)(d) states that the income by way of interest or dividends derived from investments with any other co-operative society is eligible for deduction.