SHRI VIR TRANSPORT OPERTORS COPO CREDIT & SERVICE SOCIETY LTD.,DAHOD vs. THE DY. CIT, ANAND CIRCLE, AHMEDABAD

This appeal by the assessee arises from the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as the “CIT(A)”] dated 25.06.2025 for the Assessment Year 2020-21, which in turn emanates from the assessment order passed under section 143(3) read with section 144B of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] by the Assessing Officer on 23.09.2022.

During the course of assessment proceedings, the Assessing Officer noted that the assessee had earned interest income from deposits kept with co-operative banks amounting to Rs. 27,28,675/- and claimed deduction under section 80P(2)(d). The Assessing Officer treated such income as taxable under section 56 as income from other sources and held that the assessee was not entitled to deduction under section 80P(2)(d) on interest received from co-operative banks and consequently disallowed Rs. 27,28,675/-.

The Assessing Officer further observed from Schedule OS of the returned income that the assessee had shown interest income of Rs. 1,02,78,326/- and claimed deduction of Rs. 62,57,776/- under section 57 of the Act towards expenditure incurred for earning such income. The Assessing Officer called for complete details regarding nature of expenditure, its justification, genuineness, identity and Shri Vir Transport Opertors Copo Credit & Services Soc. Ltd. vs. DCIT Asst.Year –2020-21 - 3– creditworthiness of the recipients, and documentary evidence in support of the expenditure. The Assessing Officer recorded that despite opportunities, the assessee failed to substantiate the claim with supporting documentation. In absence of the said evidence, the Assessing Officer disallowed the expenditure of Rs. 62,57,776/- under section 57 and brought the entire interest income to tax under section 56. The Assessing Officer assessed the total income at Rs. 1,03,34,521/- and also initiated penalty proceedings under section 270A and levied interest under sections 234A, 234B and 234C of the Act.

Being aggrieved, the assessee preferred appeal before the CIT(A). The assessee submitted before the CIT(A) that it is a co-operative society engaged in collecting deposits and sanctioning loans to its members and to carry out such activities, the assessee incurs routine business expenditure such as staff salary, interest payment on deposits, administrative expenses, establishment expenses, repairs, electricity, stationery, audit fees and other overheads. It was contended that the entire activity of accepting deposits, maintaining liquidity as per statutory requirements and investing funds in specified securities is part of its banking and credit activity and therefore proportionate expenditure relatable to income assessed under the head income from other sources ought to be allowed. The assessee further submitted that in its own case for earlier years, the jurisdictional Tribunal had held that proportionate expenditure is allowable against income taxed under section 56.

The assessee is in further appeal before us and has raised the following grounds:

During the course of hearing before us, the learned Authorised Representative (AR) submitted that the entire disallowance sustained by the CIT(A) proceeds on an erroneous assumption that the assessee failed to furnish supporting documentary evidence. It was contended that throughout the assessment as well as the first appellate stage, the assessee had submitted all details called for. The assessee explained its nature of business as a co-operative credit society providing finance to its members and submitted copies of the audited balance sheet, profit and loss account, tax audit report under section 44AB of the Act, computation of income and detailed workings of allowable expenditure vis a vis income from members, interest income from scheduled banks and co-operative banks. It was further submitted that complete particulars of expenditure incurred were produced and it stood established that the expenditure was incurred wholly and exclusively for earning all income including interest income from co-operative and scheduled banks.

On this basis, the assessee worked out the expenditure ratio by applying the formula [Total Allowable Expenditure / Total Income X 100], resulting in a proportionate expense ratio of 61.04%. Applying this ratio, the assessee computed proportionate expenditure relatable to interest income from scheduled banks at Rs. 20,24,026/- and proportionate expenditure relatable to interest income from co- Shri Vir Transport Opertors Copo Credit & Services Soc. Ltd. vs. DCIT Asst.Year –2020-21 - 8– operative sector was computed at Rs. 42,33,750/-, resulting total expenses of Rs. 62,57,776/-.

It was submitted that the above ratio was consistently applied for determining eligible deduction under section 80P(2)(a)(i) and section 80P(2)(d) and for computing income taxable under the head income from other sources under section 56.

It was argued that the above computation was filed before the Assessing Officer as well as the CIT(A), supported by audited accounts, and demonstrates that the expenditure was incurred wholly and exclusively for the purposes of business operations of the society, including managing deposits, complying with statutory liquidity conditions, servicing members, earning interest income from banks and carrying on day-to-day lending activities. It was submitted that the authorities below failed to appreciate the said working and incorrectly concluded that no evidence was furnished.

In further support of the claim, the learned AR placed reliance on the recent order of the co-ordinate bench in Ashapura Co-op. Credit Society Ltd. v. DCIT in for A.Y. 2017-18, order dated 28.08.2025. The AR submitted that the present case stands on a stronger footing because the proportionate expenditure working, along with supporting ledgers, schedules and statutory audit records, was filed before both lower authorities, yet was summarily rejected without pointing out any inaccuracy or calling for further explanation. It was Shri Vir Transport Opertors Copo Credit & Services Soc. Ltd. vs. DCIT Asst.Year –2020-21 - 9– therefore urged that applying the ratio of the aforesaid co-ordinate bench decision, the disallowance sustained by the CIT(A) deserves to be deleted.

In response, the learned Departmental Representative supported the orders of the Assessing Officer and the CIT(A).

We have considered the rival submissions, perused the assessment order, the appellate order, the material placed in the paper book, including audited financial statements, computation of income, proportionate expenditure working, and the judicial precedents relied upon. The issue for adjudication before us is confined to whether the assessee is eligible for deduction of Rs. 62,57,776/- under section 57 of the Act against interest income brought to tax under the head income from other sources.

It is an undisputed position that the assessee is a registered co- operative credit society governed by the Gujarat Co-operative Societies Act and is engaged in accepting deposits from members and advancing credit facilities. The earning of interest income from deposits placed with scheduled banks and co-operative banks forms part of the assessee’s regular business cycle for maintaining liquidity, complying with statutory requirements and deploying idle funds. The audited financial statements placed before us indicate that during the relevant year, the assessee had total gross receipts of Rs. 3,41,06,842/- and total expenditure of Rs. 2,72,51,731/-. The assessee has further Shri Vir Transport Opertors Copo Credit & Services Soc. Ltd. vs. DCIT Asst.Year –2020-21 - 10– demonstrated, through a detailed reconciliation, that out of such expenditure, an amount of Rs. 72,02,233/- was disallowable and Rs. 7,68,535/- was required to be added back, thereby resulting in total allowable expenditure of Rs. 2,08,20,033/-. The working of proportionate expenditure has been scientifically computed by applying an expense-income ratio of 61.04 percent, leading to proportionate expenditure of Rs. 20,24,026/- relatable to interest earned from scheduled banks and Rs. 42,33,750/- relatable to interest earned from co-operative banks, aggregating to Rs. 62,57,776/-.

The assessee has also placed on record ledger extracts, audited statements, expenditure schedules, and computation workings filed before the Assessing Officer and the CIT(A). We find merit in the assessee’s contention that the authorities below have neither doubted the genuineness of the expenditure nor rejected the books of account maintained and audited under section 44AB. The disallowance has been confirmed merely on the premise that the assessee failed to establish one-to-one nexus between expenditure and income assessed under section 56. In our considered view, such an approach is not in accordance with section 57(iii), which requires the expenditure to have a proximate and reasonable nexus with the earning of income and not an exclusive or direct attribution. A co-operative credit society necessarily incurs various administrative, operational, managerial and financial expenses to carry on its statutory activities and earning of interest income is an integral part of such activities. Once the Revenue Shri Vir Transport Opertors Copo Credit & Services Soc. Ltd. vs. DCIT Asst.Year –2020-21 - 11– taxes such income under the head income from other sources, the corresponding expenditure incurred for earning the said income cannot be ignored.

We further note that on identical facts and comparable working of proportionate expenditure, the co-ordinate bench in Ashapura Co-op. Credit Society Ltd. v. DCIT, order dated 28.08.2025, has held that where the assessee earns interest from deployment of funds arising out of its business activities and such income is assessed under section 56, expenditure attributable to earning such income is allowable under section 57. Relevant paras are reproduced below for the sake of clarity –

It is a settled principle that deduction under section 57(iii) is admissible only in respect of such expenditure (not being capital expenditure) which is laid out wholly and exclusively for the purpose of making or earning such income. In the present case, it is evident that the funds placed in deposits with banks were sourced from interest-bearing deposits collected from members. The management of such funds, including decisions relating to their placement and maintenance, involves administrative effort and expenditure. Thus, there exists a reasonable nexus between the interest income earned and a portion of the overall administrative expenditure incurred by the assessee society.

The Departmental Representative has relied upon the findings of the lower authorities. However, no material has been placed before us to show that the expenditure claimed is fictitious, unrelated, capital in nature, or unsupported by records. There is also no finding that the working submitted by the assessee is erroneous, inflated or arbitrary. Therefore, the mere absence of a granular, transactional bifurcation cannot be a ground to deny deduction when the expenditure is otherwise established and audited.

In view of the factual matrix and the judicial position discussed above, we hold that the assessee is entitled to deduction of Rs. 62,57,776/- under section 57 of the Act against interest income assessed under the head income from other sources. We, therefore, set aside the order of the CIT(A) to that extent and direct the Assessing Officer to delete the disallowance.

Ground relating to levy of interest under sections 234A, 234B and 234C is consequential and does not call for separate adjudication. The ground challenging initiation of penalty proceedings under section 270A is premature and therefore dismissed with liberty to the assessee to contest the same, if and when penalty is levied.

In the result, the appeal of the assessee is partly allowed. This Order pronounced in Open Court on 27/11/2025