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Facts
The assessee, a Co-operative Credit Society, claimed a deduction under Section 80P of the Income Tax Act for Assessment Years 2017-18 and 2018-19, amounting to Rs.27,64,438/-. The Assessing Officer disallowed this claim, treating the society as a Co-operative Bank ineligible for Section 80P deduction and also denied the deduction on interest earned from deposits with other banks, citing a lack of mutuality. The CIT(A) confirmed the disallowance.
Held
Following judicial precedents, including the Supreme Court's decision in Pr.CIT Vs. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., the Tribunal held that the assessee, being a credit society and not a co-operative bank, is entitled to the deduction under Section 80P(2) of the Act on the interest earned. The Tribunal emphasized that the character of income does not change merely because surplus funds are deposited in permitted banks, and such income remains attributable to the main business for Section 80P purposes.
Key Issues
Whether a Co-operative Credit Society is eligible for deduction under Section 80P of the Income Tax Act for interest income earned from deposits in co-operative or other banks, and whether such societies should be treated as Co-operative Banks.
Sections Cited
80P, 80P(2), 80P(2)(a), 80P(2)(d), 80P(4), 250, 234A, 234B, 234C
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
Before: MS.ASTHA CHANDRA & DR.DIPAK P. RIPOTE
ORDER PER DR. DIPAK P. RIPOTE, AM: These two appeals filed by the Assessee are directed against the separate orders of ld.Commissioner of Income Tax(Appeals)[NFAC] passed under section 250 of the Income Tax Act, 1961, both dated 28.11.2024 for the Assessment Year 2017-18 and 2018-19 respectively. For the sake of convenience, these two appeals were heard together and are being disposed of by this common order. We treat appeal in as “lead case”. The Assessee has raised following grounds of appeal :
1. On the facts and in the circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals), NFAC was not justified in denying the claim of deduction claimed u/s 80P of the Act treating Co-operative banks are not co-operative societies. The deduction be allowed deleting the addition made by the AO.
2. On the facts and in the circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals), NFAC was not justified in holding that by making the investments of the surplus funds in Co-operative banks or other banks, those funds are removed from the arena of mutuality.
3. On the facts and in the circumstances of the case and in law the observations of the Learned Commissioner of Income Tax (Appeals), NFAC regarding interest on deposits with co-operative banks and/or other banks is outside the purview of deduction u/s 80P of the Income Tax Act, 1961 is unwarranted.
4. On the facts and circumstances of the case and in law the levy of interest u/s 234A, 234B and 234C is not justified.
5. The appellant craves to leave, add/amend, delete or withdraw any of the above grounds of appeal during the appellate proceedings in the interest of natural justice.” Findings & Analysis :
2. We have heard both the parties and perused the records. Assessee is a Co-operative Credit Society duly registered under Maharashtra State Co-operative Societies Act. Assessee had filed Return of Income for A.Y.2017-18 on 30.10.2017 declaring total income at Rs.NIL after claiming deduction u/s.80P of Rs.27,64,438/-. The Assessee’s case was selected for scrutiny.
& 434/PUN/2025 [A] Relevant paragraphs 9 and 10 of the assessment order are reproduced here as under : “9. Thus the conditions essential to qualify as a cooperative banks are satisfied by the assessee i.e. (1) the primary object or principal business of which is the transaction of banking business; (2) the paid up share capital and reserves of the assessee are not less than one lakhs of rupees. Therefore, it is clear that assessee society can be treated as a Co-operative Bank and also nature of the activity shows that it has taken the character of the Co-operative banks which are not eligible for deduction u/s 80P by virtue of share capital and surplus reserves and surpluses which are invested in banks other than mentioned in section 80P(2)(d).
The principle of mutuality cannot be invoked in the facts and circumstances of the case as the basic requirements of mutuality are missing.
11. The Appeal No. 100069 of 2016 dated 05-01-2017 in the case of Karnataka High Court.”
Assessing Officer also made reference to the decision of Hon’ble Karnataka High Court in the case of Totagars Co-operative Sales Society Limited. Assessing Officer disallowed assessee’s claim for deduction u/s.80P of the Act and made addition of Rs.27,64,438/-.
Aggrieved by the assessment order, assessee filed appeal before the ld.CIT(A) who confirmed the addition.
4.1 Aggrieved by the order of ld.CIT(A), Assessee filed appeal before this Tribunal. & 434/PUN/2025 [A] 4.2 Be it as it may be, the issue before us is whether assessee is eligible for deduction under section 80P(2)(a) of the Act, on the interest earned from Co-operative Banks or not! 4.3 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. ……………………
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 & 434/PUN/2025 [A] 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. 4.4 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 & 434/PUN/2025 [A] 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 & 434/PUN/2025 [A] 5.1 Thus, even 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/Assessee cannot be termed as Banks/Cooperative Banks and that being a credit society, they are entitled to exemption under section 80(P)(2) of the Income-tax Act. Such finding of fact is not required to be interfered with by this Court in exercise of powers under Article 136 of the Constitution of India. Even otherwise, on merits also and taking into consideration the CBDT Circulars and even the definition of Bank under the Banking Regulation Act, 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 6.1 The above order of Hon’ble Supreme Court was rendered in the context of the appeal filed by the Revenue against the order & 434/PUN/2025 [A] dated 14-10-2019 passed by the Hon’ble High Court of Judicature at Bombay in by which the High Court has dismissed the said appeal preferred by the Revenue.
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 ITA No.2515/MUM/2014 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.
ITA Nos.433 & 434/PUN/2025 [A]
(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”. 7.1 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.
Respectfully following the judicial precedents, we direct the Assessing Officer to allow deduction u/sec.80P(2) of the Act, on the interest earned. Accordingly, Grounds of appeal raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
: 10. Since we have already discussed and decided the same issue in the “Lead Case – shall apply mutatis-mutandis to this appeal also & 434/PUN/2025 [A] i.e.ITA No.434/PUN/2025. Therefore, grounds of appeal raised by the assessee are allowed.
In the result, appeal of the assessee in is allowed.
To sum up, both appeals of the assessee are allowed. Order pronounced in the open Court on 27 June, 2025.