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Facts
The appellant, a co-operative society providing credit facilities, claimed deductions under Section 80P(2)(a) and 80P(2)(d). The Assessing Officer disallowed the deduction for interest income from other co-operative societies by invoking Section 80P(4). The CIT(A) allowed the deduction for interest and dividend from other co-operative societies but denied it for interest from commercial banks.
Held
Following the Jurisdictional High Court's precedent, the Tribunal held that interest income earned by the co-operative society from depositing its surplus funds with commercial banks and treasury is attributable to its main business of providing credit facilities. This income, therefore, qualifies for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
Key Issues
Whether interest income earned by a co-operative society from investments held with commercial banks and treasury qualifies for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
Sections Cited
80P(2)(a), 80P(2)(d), 80P(4), 143(3), 144B, 80P(2)(a)(i)
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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 These appeals filed by the assessee are directed against different orders of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 29.03.2025 for Assessment Years (AY) 2020-21 & 2022-23.
Since identical issues and facts are involved in these appeals, they are heard together and disposed of by this common order.
For the sake of convenience and clarity the facts relevant to the appeal bearing for AY 2020-21 are stated herein.
& 404/Coch/2025 Nannambra Service Co-op. Bank Ltd.
Brief facts of the case are that the appellant is a co-operative society registered under the Kerala State Co-operative Societies Act, 1969. It is engaged in the business of providing credit facilities to members. The return of income for AY 2020-21 was filed on 12.02.2021 disclosing Nil income after claiming deduction u/s. 80P(2)(a) of the Income Tax Act, 1961 (the Act). Against the said return of income, the assessment was completed by the ITO, Ward- 2, Tirur (hereinafter called "the AO") vide order dated 23.09.2022 passed u/s. 143(3) r.w.s. 144B of the Act. While doing so, the AO disallowed the claim for deduction u/s. 80P(2)(d) in respect of interest income earned by the appellant society from other co- operative societies relying on the provisions of section 80P(4) of the Act and accordingly brought to tax Rs. 1,38,22,884/-
On appeal before the CIT(A), the CIT(A) directed the AO to allow deduction in respect of interest income and dividend received from entities registered under the Kerala State Co-operative Societies Act, 1969. The interest income earned from commercial banks is not allowed.
We have heard the rival contentions and perused the material available on record. The issue that arises for our consideration is whether the interest income earned by the co-operative society on investments held with banks and treasury qualifies for deduction u/s. 80P(2)(a)(i) of the Act. The appellant earned interest income on investment held with government treasury, State Bank of India, etc.
& 404/Coch/2025 Nannambra Service Co-op. Bank Ltd. of Rs. 28,55,749/- during the previous year relevant to the assessment year under consideration. Such income also qualifies for deduction u/s. 80P(2)(a)(i) of the Act in view the judgement of the Hon'ble Jurisdictional 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 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
In the result, the appeals filed by the assessee stand allowed.
Order pronounced in the open court on 9th June, 2025.