MALLAPPALLY SERVICE CO-OPERATIVE BANK LTD NO. A 155,PATHANAMTHITTA vs. ITO, WARD-1 & TPS, PATHANAMTHITTA

Brief facts of the case are that the appellant is a co-operative society registered under the Kerala State Co-operative Societies Act, 1969.The appellant filed the return of income for AY 2018-19 on 08.10.2018 declaring Nil income after claiming deduction u/s. 80P of the Income Tax Act, 1961 (the Act) of Rs. 1,02,70,000/-. Against the said return of income, the assessment was completed by the Assessing Mallappally Service Co-op. Bank Ltd. Officer (AO) vide order dated 05.04.2021 passed u/s. 143(3) r.w.s. 143(3A) & 143)(3B) of the Act. While doing so, the AO disallowed the claim for deduction u/s. 80P of the Act in respect of income received from co-operative banks and other scheduled banks

Aggrieved, who vide the impugned order confirmed the action of the AO. The CIT(A) held that the appellant is eligible to claim deduction u/s. 80P(2)(d) of the Act in respect of interest income earned from co-operative banks following the decision of the Hon'ble Jurisdictional High Court in the case of Pr. CIT vs. Peroorkada Service Co-op. Bank Ltd. [2022] 442 ITR 141 (Ker). However, confirmed the addition made on account of interest received from banks other than co-operative banks of Rs. 14,78,544/-.

Being aggrieved, the appellant is in appeal before us in the present appeal.

We have heard rival contentions and perused the material available on record.

Learned CIT- DR vehemently argued that such interest income could have hardly be held even derived from assessee’s regular credit facilities made available to the members concerned. He further relied on PCIT & Anr. v. Totagars Co-operative Sales Society reported in (2017) 395 ITR 611 (Kar.) and submitted that the impugned disallowance has been rightly made in assessee’s hand.

We have heard rival contentions and perused the material available on record. The issue in the present appeal is with regard to eligibility to claim deduction u/s. 80P(2)(i)(a) of the Act in respect of interest income received from Treasury, Scheduled Banks, etc. This issue is no longer res integra, as it is covered by 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 Mallappally Service Co-op. Bank Ltd. is entitled for deduction under sections 80P(2)(a)(i) of the Act on account of interest received from District Co-operative Bank and Treasury.

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