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Facts
The assessee, a cooperative credit society, earned interest income from deposits made with cooperative banks and nationalized banks. The Assessing Officer disallowed this interest income from deduction under Section 80P(2)(a)(i) and Section 80P(2)(d) of the Income Tax Act, 1961, treating it as income from 'Other Sources'. The CIT(A) upheld this order.
Held
The Tribunal held that the interest income earned by the assessee from its surplus funds deposited in banks is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, as it is attributable to the principal business activity of providing credit facilities to its members. The Tribunal relied on various High Court judgments which distinguished the case of Totgars Co-operative Sale Society Ltd.
Key Issues
Whether interest income earned by a cooperative society on its surplus funds deposited in banks is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 250, 143(3), 144B
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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.2020-21 on 28.03.2025 emanating from the Assessment Order u/s.143(3) r.w.s 144B of the Act, dated 25.09.2022. The Assessee has raised the following grounds of appeal : “GROUNDS OF APPEAL
1. Disallowance of Deduction under Section 80P(2)(a)(1) Business Income and Principle of Mutuality Ignored: On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals), NFAC, erred in upholding the disallowance of 210,13,612/-, being proportionate interest income earned from deposits with Cooperative Banks, by wrongly holding that such income is not eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The authorities below failed to appreciate that the deposits were made out of working capital and operational funds in the normal course of business as a measure of commercial prudence, and the interest income thereon is directly attributable to the business activity of providing credit facilities to members. The lower authorities also ignored the principle of mutuality, which governs cooperative societies, and incorrectly assessed the income under the head "Income from Other Sources" instead of treating it as business income eligible for deduction under Section 80P(2)(a)(i).
2. Incorrect Interpretation of Cooperative Bank not as a Cooperative Society Denial of Deduction under Section 80P(2)(d): The learned CIT(A) erred in holding that interest income earned from deposits made with Cooperative Banks is not eligible for deduction under Section 80P(2)(d) of the Income Tax Act, 1961. The CIT(A) failed to appreciate that Cooperative Banks are basically registered as cooperative societies and after obtaining banking license from Reserve Bank of India, they start banking business. Hence, interest income earned from investments with such banks qualifies for deduction under Section 80P(2)(d). The authorities below did not consider that various judicial pronouncements, including decisions of the Hon'ble Bombay High Court and Pune Bench of ITAT, who have consistently held that interest earned from Cooperative Banks is eligible under Section 80P(2)(d), and the exclusion of Cooperative Banks from the benefit of deduction under this section is not legally tenable.
3. Failure to Follow Binding Precedents Misapplication of Totgars Case Law: The learned CIT(A) erred in not following binding judicial precedents, including the judgment of the Hon'ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. v. CIT [2021 (1) TMI 488-SC) and the jurisdictional Bombay High Court in Quepem Urban Co-operative Credit Society Ltd. [2021 (5) TMI 406 Bombay HC), which held that cooperative credit societies providing credit to members are eligible for deduction under Section 80P(2)(a)(i), including interest earned from statutory deposits. Further, the CIT(A) erred in misapplying the Supreme Court's ruling in Totgar's Co-operative Sale Society Ltd. [322 ITR 283 (SC)], which was based on distinguishable facts involving a marketing society dealing with agricultural produce and surplus investments. The appellant, being a credit cooperative society engaged in lending to members, earns interest income as part of its core business activity, and hence, the reliance on Totgar's decision is misplaced and inapplicable. The appellant craves leave to add, amend, modify, delete, or alter any of the above grounds of appeal
, at the time of hearing or thereafter, in the interest of justice.”
2. At the outset of hearing, no one appeared for the assessee. No adjournment letter was filed.
3. Ld.DR for the Revenue relied on the order Assessing Officer and ld.CIT(A).
We have heard ld.DR for the Revenue and pursed the records.
4.1 In this case, Assessment Order was passed on 25.09.2022 for A.Y.2020-21 U/s.143(3) r.w.s 144B of the Act. As per assessment order, Assessee has furnished Return of Income electronically on 30.12.2020 claiming deduction u/s.80P(2)(a)(i) of Rs.27,36,095/-. The Assessing Officer has accepted that Assessee is a Co-operative Credit Society. Certificate of Registration was filed during the assessment proceedings. Assessee’s Society was registered under Maharashtra Co-operative Societies Act, 1960 on 11.10.1984. The Assessing Officer in para 4.6 of the order noted as under :
“4.6 Conclusion drawn:- Issue of Deduction u/s 80P(2)(a)(i) / 80p(2)(d) :- It is verified from the Financial Statements filed during assessment proceedings that the assessee has earned income by way of providing credit facilities to its members and also earned interest income on investments with Co-op Banks. The interest earned from members is deductible under section 80P(2)(a)(i) of the I.T. Act, 1961 as the assessee society is providing credit facilities to its members only. However, the assessee has received interest of Rs.35,79,590 from investment with Co-op banks. The said interest earned from investment with Co-op Banks is not deductible either under section 80P(2)(a)(i) or section 80P(2)(d) of the I.T. Act, 1961. Further, in its reply dated 28-08-2022 which is filed in response to Show Cause Notice dated 22-08-2022, the assessee has filed the details of interest claiming that the said interest earned is from Short Term Investment. The submissions of the assessee are perused. On-going through the above details, it is seen that the Interest earned of Rs. 35,79,590/- is on Investments with Co- operative Banks. I have carefully considered the submissions of the assessee and the decision relied upon by the assessee. The main contention of the assessee is that the decision of Hon'ble Kamataka High Court in the case of The Pr.CIT Hubballi v. The Totagars Co-op Sale Society in to 100068 & 100051-100054 of 2016 dated 16.06.2017 reported in 395 ITR 611 (Karn) is not applicable to the case of the assessee in view of various decision of ITAT, Pune as well as CIT(Appeals), Faceless Appeal Centre in the case of Kunabi Vikas Sahakan Pat Sanstha Ltd. The Hon'ble High Court of Karnataka cited supra has been categorically held that the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a scheduled bank or a co-operative bank and that, clause (d) of section 80P(2) of the Act would not apply in the facts and circumstances of the present case. (Para-23 page 55). Therefore, the Hon'ble High Court of Karnataka further held that interest income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the I.T. Act, 1961.”
4.2 The Assessing Officer(AO) following the decision of Hon’ble Supreme Court in the case of Totagars Co-operative Sales Society Ltd., Vs. ITO 322 ITR 283(SC) held that Interest earned from Investments is to be taxed as Income from Other Sources. In the assessment order, AO allowed deduction at 37.05% and made an addition of Rs.10,13,612/-. Aggrieved by the Assessment Order, assessee filed appeal before ld.CIT(A) who upheld the Assessment Order.
4.3 Aggrieved by the order of the ld.CIT(A), Assessee filed appeal before this Tribunal.
Now, the issue before us is whether assessee is eligible for deduction under section 80P(2)(a) of the Act or not! 5.1 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. …………………… 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. 35. 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. 36. 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". 37. 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. 5.2 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 6.1 Thus, 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.
6.2 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.
6.3 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.