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Facts
The assessee, a cooperative society, claimed deduction under Section 80P for interest income earned from deposits in nationalized banks and cooperative banks. The Assessing Officer disallowed this claim, treating the income as 'income from other sources' taxable under Section 56, and not eligible for deduction under Section 80P.
Held
The Tribunal held that the interest income earned by the cooperative society from deposits in nationalized and cooperative banks is eligible for deduction under Section 80P. Following judicial precedents, the Tribunal directed the Assessing Officer to allow the deduction.
Key Issues
Whether interest income earned by a cooperative society from deposits in banks is eligible for deduction under Section 80P of the Income Tax Act.
Sections Cited
147, 148, 143(3), 250, 80P, 80P(2)(a)(i), 80P(2)(d), 56
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
Before: MS.ASTHA CHANDRA & DR.DIPAK P. RIPOTE
आदेश/ ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by the Assessee against the order of ld.Commissioner of Income Tax(Appeal)[NFAC] passed under section 250 of the Income Tax Act, 1961 for A.Y.2014-15 on 04.03.2025 emanating from the Assessment Order u/s.147 of the Act, dated 19.08.2021. The Assessee has raised the following grounds of appeal :
1. The Ld. AO erred in (CIT-A erred in confirming) making the disallowance of claim of Rs.13,62,260/- u/s 80P(2)(a) (i) of the IT Act.
2. The Ld. AO and CIT-A failed to appreciate that the appellant is a Cooperative Society and engaged in activities directly related to its objects, as defined under Section 80P of the Income Tax Act, 1961, and the interest income earned on bank deposits (including interest from nationalized banks) is incidental to the carrying on of its business activities.
3. On without prejudice basis, the Ld. AO and CIT-A ought to have appreciated the fact that interest income earned from Co-operative banks of Rs. 13,62,260/- may be allowed u/s 80P(2)(d).
4. The appellant craves for to leave, add, alter, modify, delete above grounds of appeal before or at the time hearing, in the interest of natural justice.” Findings & Analysis :
2. We have heard both the parties and perused the records. In this case, assessment for A.Y.2014-15 was reopened vide notice dated 11.02.2020 u/s.148 of the Act. The assessment order u/s.147 was passed on 19.08.2021. The facts mentioned in the assessment order are reproduced here as under : “The assessee, is a Co-operative Society registered under the Maharashtra Cooperative Societies Act, 1960 vide Registration No. NBR/SDA/RSR(CR)/57/2001-02, dated 25.01.2002. The main activity of the society is to give loan to its members with simple rate of interest, accepting deposits recover loan from its members. During the year the assessee had also received interest on investments held in various Nationalized banks other than cooperative societies. The assessee e- filed its return of income on 26.08.2014 declaring total income of Rs. Nil after claiming exemption of Rs. 13,62,262/- u/s 80P(2)(a)(i) of the I. T. Act. The case was selected under complete criteria of CASS for scrutiny u/s 143(3) of the Act for examination of “Large deduction claimed under Chapter VIA and the assessment was complete at the returned income. Later on, it came to the notice that the assessee derived interest income from the nationalized bank i.e. from Bank of Maharashtra and Dena Bank. Since the interest earned by society in not from the cooperative sector deduction u/s 80P(2)(a)(i) and 80P(2)(d) is not allowable to the assessee society. The same is taxable u/s 56 of the I. T. Act, 1961j) Therefore, the proceedings u/s 147 of I. T. Act, 1961.
Sr.No. Bank Name Interest received 1 Dena Bank 5,29,127/- 2 Bank of Maharashtra 5,12,480/- 3 Central Bank of India 33,492 4 The Hasti Cooperative Bank Ltd 6,26,572/- 5 Dhule Nandubar Distt. Coop Bank 3,81,960/- 6 Dhule Distt. Cooperative Bank 1,34,421 7 The Shirpur People Coop Bank 1,25,950 Total 22,44,002/- The above amount of Rs.22,44,002/- was earned by assessee on account of Interest receipts out of their surplus fund deposited with various Nationalized Bank/Coop. banks. The income by way of interest earned by a Co-operative society through deposit or investment of fund from a Scheduled bank or a Co-operative bank or a person or Body Cooperate (other than Co-Operative Society) will be in the nature of income from other sources (not arising from the business operations) chargeable u/s 56 of the IT Act and ineligible for deduction u/s 80P of the Act.”
2.1 Aggrieved by the assessment order, assessee filed appeal before ld.CIT(A) who upheld the assessment order.
2.2 Aggrieved by the order of the ld.CIT(A), Assessee filed appeal before this Tribunal.
At the outset of the hearing, ld.AR submitted that in assessee’s own case for A.Y.2018-19, ITAT in has allowed the deduction u/s.80P(2)(a) of the Act.
We have perused the ITAT Order in and noted that the facts are identical.
4.1 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.
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 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.
4.2 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 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.
5.2 Accordingly, we hold that assessee is eligible for deduction u/s.80P of the Act, on the interest income earned by the assessee from Co-operative Banks and Nationalized Banks.
5.3 Respectfully following the judicial precedent, we direct the Assessing Officer to allow deduction u/sec.80P(2)(a)(i) 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. Order pronounced in the open Court on 18 June, 2025.