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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI PRAKASH CHAND YADAV, JM
O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee cooperative society is directed against the order of the Learned Commissioner of income Tax (Appeals), National
Briefly the facts of the case are that the appellant, a cooperative society, is engaged in the business of accepting deposits from members and providing credit facilities to its members. The return of income for the AY 2018-19 was filed on 11/02/2022 declaring an income of Rs.61,340/- after claiming deduction of Rs. 2,79,34,109/- U/s. 80P(2)(a)(i) of the Act. Against the said return of income, the assessment was completed by the National Faceless Assessment Centre (in short “NFAC”) vide order dated 21/12/2022 passed U/s. 143(3) r.w.s 144B of the Income Tax Act, 1961 (in short “the Act”) at a total income of Rs. 1,69,14,524/-. While doing so, the AO disallowed the claim for deduction U/s. 80P(20(a)(i) of the Act in respect of the interest income earned on deposits, investments made out of the surplus funds with Scheduled Banks of Rs. 1,69,14,524/- by holding that the interest income so earned is assessable under the head “income from other sources”.
Being aggrieved by the above assessment order, an appeal was filed before the Ld. CIT(A) who vide impugned order dismissed the appeal filed by the assessee by placing reliance on the decision of the Hon'ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd vs. Income Tax Officer [2010] 188 Taxman 282 (SC).
Being aggrieved, the appellant is in appeal before us in the present appeal.
The Central Financial Credit and Investment Cooperative India Limited 5. When the appeal was called on, none appeared on behalf of the assessee despite issue of service of notice. Therefore, we dispose of this appeal after hearing the Ld. Sr. DR.
We have heard the Ld. DR and perused the material available on record. The issue that arises for our consideration is whether the interest income earned by the Cooperative Society on deposits made out of the surplus funds with Scheduled Banks qualifies for deduction U/s. 80P(2)(a)(i) of the Act. The issue is no longer res integra as it stands settled by the decision of the Hon'ble Jurisdictional High Court in the case of Principal Commissioner of Income Tax vs. M/s. Sahyadri Co-operativbe Credit Society Ltd in of 2017. For the sake of immediate reference, relevant paragraphs from the said decision of the Hon'ble High Court are extracted herein below:
“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 The Central Financial Credit and Investment Cooperative India Limited 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 .
8. We also find force in the submission of the learned Senior counsel, distinguishing the decision of the Supreme Court in M/s. The Totgars' Cooperative Sale Society Limited (supra), on the ground that the Court in that case had found that the Society concerned had appropriated amounts forming part of surplus receipts which were due to its members, and invested the same to earn interest during the period when the surplus receipts were in its hands. It was therefore that the court found that the interest earned by the Society through deposit of such receipts with banks in fact ought to have accrued to the benefit of the individual members and not to the Society itself; that in relation to the Society, it was to be treated as income from other sources since the interest income had lost its nexus with the principal income earned by the Society. The facts in the instant cases are entirely different and the investment concerned was of amounts that had already attained the character of surplus profits in the hands of the assessee. On this issue, therefore, we find ourselves in agreement with the view taken by the Andhra Pradesh and Karnataka High Courts respectively in The Vavveru Co- operative Rural Bank Ltd. (supra) and Tumkur Merchants Souharda Credit Co-operative Limited (supra).
As for the argument of the learned Standing Counsel for the Revenue, with reference to the provisions of Section 80P(2)(d) of the I.T. Act, we might only observe that, while it may be a fact that interest income of the nature specified therein is specifically allowed as a deduction in the case of Co- operative Societies in general, in the light of our discussion above as regards the nature of the interest income earned by the assessee Society in the instant cases, it would follow that the interest income dealt with by us in The Central Financial Credit and Investment Cooperative India Limited the instant cases is not akin to the one contemplated under Section 80P(2)(d). We are of the view that the latter provision deals with interest income other than what can be attributable to the main business of the Society. In the result, we dismiss these I.T. Appeals preferred by the Revenue, in so far as they relate to the question as to “whether or not the income received by the respondent Society by way of interest, on deposits of surplus profits earned by it, would qualify for the deduction contemplated under Section 80P(2)(a) of the I.T. Act, for profits and gains of business attributable to its activity of providing credit facilities to its members?” by answering the said question against the Revenue and in favour of the assessee.”
In the light of this decision and respectfully following the decision of the Hon'ble jurisdictional High Court in the case of M/s. Sahyadri Co- operative Credit Society Ltd (supra), we hold that the interest income earned by the appellant Cooperative Society qualifies for deduction/s. 80P(2)(a)(i) of the Act. Accordingly, the AO is directed to delete the addition of Rs.1,69,14,524/- made by the AO.
In the result, appeal of the assessee stands allowed.
Order pronounced in the open court on 24th June, 2025.