THE PALODE SERVICE CO OPERATIVE BANK LTD,THIRUVANANTHAPURAM vs. ITO, WARD-2(1), TRIVANDRUM

Brief facts of the case are that the appellant is co-operative society registered under the Kerala State Co-operative Societies Act, 1969. It is engaged in the business of accepting deposits from members and providing credit facilities to members. It is classified as a primary agricultural credit co-operative society. The return of The Palode Service Co-operative Bank Ltd. income for AY 2021-22 was filed on 07.03.2022 disclosing Nil income after claiming deduction u/s. 80P of the Income Tax Act, 1961 (the Act). Against the said return of income, the assessment was completed by the Assessment Unit, Department of Income Tax (hereinafter called "the AO") vide order dated 09.12.2022 passed u/s. 143(3) r.w.s. 144B of the Act at a total income of Rs. 1,15,76,530/-. While doing so, the AO denied deduction u/s. 80P(2)(d) of the Act, in respect of interest income earned from co- operative banks and commercial banks of Rs. 81,27,114 and miscellaneous receipts of Rs. 50,63,786/- on the ground that the same does not qualify for deduction u/s. 80P as the test of mutuality does not stand satisfied.

Being aggrieved, an appeal was filed before the CIT(A), who directed the AO to delete the addition on account of interest from co-operative bank following the decision of the Hon'ble Kerala High Court in the case of Pr. CIT vs. Peroorkada Service Co-op. Bank Ltd. [2022] 442 ITR 141 (Ker). However, confirmed the addition on account of miscellaneous income of Rs. 50,63,786/-.

Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.

The learned counsel for the assessee contends that the appellant is a primary agricultural credit co-operative society and the interest income earned from state treasury and other financial institutions and miscellaneous receipts also quality for deduction u/s. The Palode Service Co-operative Bank Ltd. 80P(2)(i)(a) of the Act in view of the decision of the Hon'ble Kerala High Court in the case of PCIT v. Sahayadri Co-operative Credit Society Ltd. in of 2019.

On the other hand, the learned Sr. DR has not disputed the above submission.

We have heard the rival contentions and perused the material available on record. The issue that arises for our consideration is whether the miscellaneous income earned by the co-operative society, which is eligible to claim deduction u/s. 80P(2)(i)(a) qualifies for deduction u/s. 80P(2)(i)(a) or not. The issue is no longer res integra as it stands settled by the decision of the Hon'ble Kerala High Court in the case of CIT vs. Sahyadri Co-operative Credit Society Ltd. in of 2019, wherein it was held as under: - “ 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 The Palode Service Co-operative Bank Ltd. 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.”

Respectfully following the above decisions of the Hon'ble Jurisdictional High Court, we hold that the assessee is entitled for deduction under sections 80P(2)(i)(a) of the Act in respect of interest received from Treasury, Scheduled Banks, etc.

In the result, the appeal filed by the assessee stands allowed.