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Facts
The assessee, a co-operative credit society, claimed deduction under Section 80P(2) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed Rs. 12,04,748/- of this claim, which represented interest income earned from deposits in a co-operative bank, arguing it was not eligible for deduction under Section 80P. The Ld. CIT(A) upheld the AO's disallowance.
Held
The Tribunal, relying on judicial precedents from various High Courts and the Supreme Court, held that interest income earned by a co-operative credit society from deposits in a co-operative bank is eligible for deduction under Section 80P(2)(a). It emphasized that the character of the income does not change if surplus funds are prudently invested in permitted banks.
Key Issues
Whether interest income earned by a co-operative credit society from deposits in a co-operative bank is eligible for deduction under Section 80P of the Income Tax Act, 1961.
Sections Cited
147, 144, 250, 80P, 80P(2)(a)(i), 80P(2)(d), 80P(4), 260A
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
आदेश/ ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by Assessee against the order of ld.Commissioner of Income Tax(Appeal)[[NFAC], passed under section 250 of the Income Tax Act, 1961 for the A.Y.2015-16 dated 01.08.2024, emanating from order u/s.147 r.w.s 144 of the Income Tax Act, 1961, dated 12.01.2024. The Assessee has raised following grounds of appeal :
“1. On the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in passing the order u/s 147 rw.s. 1448 dated 12/01/2024 for AY 2015-16, in view of the fact that Lid. AO has not made any addition on account of reasons recorded for escaped income, therefore the action of disallowing the deduction u/s 80P is impermissible and the order is void-ab-initio and shall be anvulled.
2. On the facts and in the circumstances of the case and in law, the leamed Assessing Officer erred in rejecting deduction uls 80P(2)(a)(i) for a sum of Rs 12.04.748-being part of the book profit of appellant society without appreciating the fact that earning of interest is an integral part of society's business and appellant prays for allowing such deduction
3. On the facts and in the circumstances of the case and in law, the leamed Assessing Officer erred in treating the interest received from investment a sum of Rs. 12.04.748/- as income from other sources by rejecting appellants contention that said interest income is integral part of business activity and your appellant prays for cancellation of Assessing officer's action.
4 Wienoul prejudice to above ground on the facts and in the circumstances of the case and in law the Learned Assessing Officer in not allowing the deduction under section 80P(2)(d) an interest income received from other co-operative society. Your appellants pray for allowing the same.
5. Without prejudice to above ground, on the facts and in the circumstances of the case and in the law Leamed Assessing Officer erred in treating entire interest income as interest income received from other co-operative society or bank without allowing deduction on account of interest expenses. Your appellant prays for such deduction
Your appellant prays for deletion of entire addition. Your appellant, craves for to add alter amend, modity delete any or all grounds of appeal before or during the course of hearing in the interest of natural justice.”
Findings and Analysis : 2. We have heard both the parties and perused the records.
2.1 In this case the Assessment order has been passed u/s.147 r.w.s. 144B of the Income Tax Act, 1961 for A.Y.2015-16 on 12/01/2024. The Assessing Officer in the Assessment Order observed that Assessee had claimed deduction u/s.80P(2) of the Act of Rs.23,65,046/- . The Assessing Officer(AO) in the Assessment Order allowed deduction u/s 80P of Rs.11,60,298/- and disallowed deduction of Rs.12,04,748/-. The AO has noted in the Assessment Order that Assessee has earned Interest of Rs.12,04,748/- from The Nasik Merchants Co Operative Bank Ltd. The AO held that the Interest of Rs.12,04,748/- is not eligible for deduction u/s 80P as it has been earned from a Co-operative Bank. The AO relied on the decision of Hon’ble Supreme Court in the case of Totagars Co- operative Sale Society Ltd Vs. ITO.
Aggrieved by the Assessment Order the Assessee filed appeal before the Ld.CIT(A) who confirmed the Assessment Order .
4. It is an admitted fact that the Assessee is a co-operative credit society registered under Maharashtra Cooperative societies Act. Its business is to accept Deposits and give Loan to members. This fact is mentioned in the Assessment Order.
Hence, the issue before us is whether the Interest of Rs.12,04,748/- is eligible for deduction u/s 80P of the Act or not !
The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd., [2017] 396 ITR 371 analysed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagars Cooperative Sale Society, and held as under : Quote,“8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub-section (2) of section 80P or not. 9. While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co- operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283. …………………… 34. The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co-operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.
But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to".
Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.”Unquote.
5.1 Thus, the Hon’ble High Court of AP &TS held that Interest Income earned by investing Income derived from Business of providing credit facilities, Loans by a Co-Operative Society was eligible for deduction u/sec.80P(2)(a) of the Act.
In the case of Sahyadri Co-operative Credit Society Limited, the Sahyadri Co-operative Credit Society had deposited excess funds in the Banks or Institutions permitted by the Co-operative Societies Act. In that context, the Hon’ble Kerala High Court in the case of Pr.CIT Vs. Sahyadri Co-operative Credit Society Ltd., [2024] 301 Taxman 36 (Kerala) vide order dated 04.09.2024 has held as under : Quote “7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T. Act for a Co-operative Society that is assessed to tax under the head of 'Profits and Gains of Business or Profession' is of the whole of the amount of profits and gains of business attributable to any one or more of its activities. Thus, all amounts as can be attributable to the conduct of the specified businesses by a Co-operative Society will be eligible for the deduction envisaged under the statutory provision. The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns interest on such deposits, such interest would cease to form part of its profits and gains attributable to its business of providing credit
facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount [the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co- operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members. Under those circumstances, if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.” Unquote 6.1 Thus, the Hon’ble Kerala High Court has held that the character of income does not change. The Hon’ble Kerala High Court held that interest earned from deposits in permitted banks will be eligible for deduction u/s.80P of the Act. The Hon’ble Kerala High Court’s decision is dated 04.09.2024 means, after the decision of Hon’ble Supreme Court in the case of Totagar’s Co-operative Sales Society Ltd.
The Hon’ble Supreme Court in the case of Pr.CIT Vs. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., 454 ITR 117 (SC) has held as under : Quote.“5. There are concurrent findings recorded by CITA, ITAT and the High Court that the respondent/Assesseecannot be termed as Banks/Cooperative Banks and that being a credit society, they are entitled to exemptionunder section 80(P)(2) of the Income-tax Act. Such finding of fact is not required to be interfered with by thisCourt in exercise of powers under Article 136 of the Constitution of India. Even otherwise, on merits also andtaking into consideration the CBDT Circulars and even the definition of Bank under the Banking RegulationAct, the respondent/Assessee cannot be said to be Co- operative Bank/Bank and, therefore, Section 80(P)(4)shall not be applicable and that the respondent/Assessee shall be entitled to exemption/benefit under section80(P)(2) of the Income-tax Act. 6. In view of the above and for the reasons stated hereinabove, the present appeal deserves to be dismissed and is accordingly dismissed, answering the question against the Revenue and in favour of the Assessee.” Unquote 7.1 The above order of Hon’ble Supreme Court was rendered in the context of the appeal filed by the Revenue against the order dated 14-10-2019 passed by the Hon’ble High Court ofJudicature at Bombay in by which the High Court has dismissed the said appeal preferred by the Revenue. The paragraph 1 and 2 at the Hon'ble Bombay High Court’s order are as under :
“1. This appeal under Section 260A of the Income Tax Act, 1961(Act) challenges the order dated 20th May, 2016 passed by the Income Tax Appellate Tribunal(Tribunal). This appeal relates to Assessment Year 2010-11.
The Revenue urges the following two questions of law for our consideration :-
(a) Whether on the facts and circumstances of the case and in law, the Tribunal is correct in holding that assessee is entitled to deduction u/s 80P(2)(a) and (d) of the IT Act, 1961?
(b) Whether on the facts and circumstances of the case and in law, the Tribunal is right to allow the relief to the assessee by holding that the assessee being Co-operative Credit Society is not a Co-operative Bank hence entitled for deduction u/s 80P(4) of the I.T.Act despite the fact that the assessee is carrying on the banking business and has been categorized as Co-operative Bank/other Bank?”
The Hon’ble Bombay High Court’s order in vide order dated 14.10.2019 in the case of Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., emanates from the ITAT order in dated 20.05.2016. The facts recorded in the ITAT order in ITA No.2515/MUM/2014 are that Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., is a Co-operative Credit Society registered under the Maharashtra Co-operative Society Act, had claimed deduction under section 80P(2)(d) of the Income Tax Act, 1961 as well as Rs.5,85,57,676/- claimed under section 80P(2)(a)(i) of the Act. The Assessing Officer disallowed the claim of deduction u/s.80P(2) in the case of Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd. The Revenue in the appeal filed before ITAT in has raised following questions: “(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the AO amounting to Rs.5,85,57,676/- u/s.80P(2)(a)(i) and Rs.1,39,23,333/- u/s.80P(2)(d) of the I.T. Act even though assessee was carrying on banking business.
(ii) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in not considering the fact that amendment to Sec.80P(4) inserted w.e.f. 1.4.2007 by Finance Act, 2006 clearly bans all the co-operative banks other than primary agricultural credit society or a primary co-operative agricultural and rural development banks from claiming exemption under this section”.
8.1 The appeal filed by Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., travelled up to Hon’ble Supreme Court and the Hon’ble Supreme Court has decided the appeal in favour of Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., regarding deduction u/s.80P(2) of the Act. Therefore, this issue has attained finality.
8.2 Hence, respectfully following the judicial precedence it is held the Assessee is eligible for deduction u/s80P(2)(a) of the Act on the Interest earned from The Nasik Merchants Cooperative bank Ltd.
Since we have decided the Ground No.2 and 3 raised by Assessee in favour of Assessee, the remaining Legal Grounds raised by the Assessee are left open as unadjudicated.
In the result, appeal of the assessee is Partly Allowed. Order pronounced in the open Court on 28 July, 2025.