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Facts
The assessee, a credit co-operative society, declared Nil income and claimed deduction under Section 80P. The AO disallowed interest income from deposits with banks, citing issues with associate/nominal members and lack of mutuality. The CIT(A) upheld the disallowance.
Held
The Tribunal held that the presence of nominal members does not disentitle the society from claiming deduction under Section 80P(2)(a)(i). It also ruled that interest income earned from cooperative banks, which are a type of cooperative society, is eligible for deduction under Section 80P(2)(d).
Key Issues
Whether interest income earned from deposits with cooperative banks is eligible for deduction under Section 80P, and whether the presence of nominal members affects this eligibility.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 234A, 234B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the Ld.Addl/JCIT(A)-8, Mumbai dated 26/03/2025 in respect of the A.Y. 2017- 18 and raised the following grounds: “
1. The impugned order in the appeal is opposed to law and facts of the case for the contentions raised hereunder.
2. The Hon'ble CIT has erred in law by confirming the disallowances made by the Assessing Officer under section 80P(2)(a)(i) & 80P(2)(d) of the Income Tax Act, 1961.
3. The Hon'ble CIT has erred in law by levying Interest under section 234A & 234B of the Income Tax Act, 1961.
4. The appellant craves leave to add, to amend and/or alter any of the foregoing grounds and such other grounds as may be urged at the time of hearing. PRAYER For the grounds set forth herein above and such other grounds and arguments that may be submitted during the course of appeal proceedings, this Hon'ble court may be pleased to set aside this impugned order, and grant reliefs urged, as above.”
The brief facts of the case are that the assessee is a credit co-operative society and declared its income as Nil. The assessee had claimed the entire income as deduction u/s. 80P of the Act. The said return was selected for limited scrutiny for verifying the deduction claimed under Chapter VIA. Notice u/s. 143(2) was issued and subsequently notices u/s. 142(1) were issued calling for the details. The assessee also submitted all the details including the financial statements. The AO had treated the interest income earned by the assessee out of the deposits made with the banks as not eligible for deduction u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act. The AO had also considered the fact that the assessee is having associate members who are all not having the same right and facilities as that of regular members and therefore not to be treated the assessee as a co-operative society eligible for deduction u/s. 80P(2)(a)(i) of the Act. The AO had not accepted the plea since there is no mutuality exist between the regular members and the nominal members and therefore not eligible for deduction u/s. 80P(2)(a)(i) of the Act. The AO had also observed that the interest income earned by way of interest on the deposits in the co-operative banks and scheduled banks are to be treated as income from other sources. The AO had relied on some decisions of the Hon’ble High Court and made the assessment by disallowing the claim made u/s. 80P(2)(a)(i) as well as u/s. 80P(2)(d) of the Act. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had decided the appeal on merits since the assessee had not responded to the notices issued by him. The Ld.CIT(A) had relied on the order of the Coordinate Bench of this Tribunal and held that the assessee was not eligible for deduction u/s. 80P(2)(a)(i) or 80P(2)(d) of the Act on the interest income received from the co-operative banks.
As against the said order, the assessee is in appeal before this Tribunal.
At the time of hearing, the Ld.AR submitted that the assessee is entitled for claiming deduction on the interest income earned from the co- operative banks even though the assessee is having the nominal members. The Ld.AR further submitted that the assessee had received the interest income from the co-operative banks which are all the co-operative societies registered under the Karnataka Co-operative Societies Act and therefore the interest income earned from the said co-operative societies are eligible for deduction u/s. 80P(2)(d) of the Act. The Ld.AR also filed a paper book enclosing the written submissions as well as the judgments of the Hon’ble Supreme Court and Hon’ble High Court and prayed that the deduction u/s. 80P(2) should be granted.
The Ld.DR submitted that the Hon’ble Jurisdictional High Court had held that the societies are not entitled for deduction if the interest income has been earned from the co-operative banks and also the society is having the nominal members and prayed to dismiss the appeal.
We have heard the arguments of both sides and perused the materials available on record.
Even though the Ld.CIT(A) had decided the appeal on merits ex-parte, we are inclined to decide the appeal on merits instead of remitting the same to the Ld.CIT(A) for fresh consideration since the issue is quietly covered by the decision of the Hon’ble Jurisdictional High Court. Insofar as the disallowance made u/s. 80P(2)(a)(i) of the Act based on the finding that the assessee is having nominal members who are all not having equal rights than that of the regular members, the said issue has already been settled by the judgment of the Hon’ble Supreme Court reported in 431 ITR 1 in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT wherein the Hon’ble Supreme Court had held that the presence of the nominal members would
Page 4 of not disentitle the assessee’s societies from claiming the benefit of deduction u/s. 80P(2)(a)(i) of the Act. Respectfully following the above said judgment, we are allowing the claim of Rs. 5,85,755/- which was disallowed based on the finding that the assessee is having the nominal members also as members.
Insofar as the disallowance made u/s. 80P(2)(d) of the Act on the interest income earned out of the deposits made with the co-operative banks, we are of the view that the co-operative banks are nothing but the species of the co-operative societies and only after getting the registration under the provisions of the Karnataka Co-operative Societies Act, they would get the permission to have the banking activities. Therefore, the said co-operative banks are also to be treated as the co-operative societies and therefore interest income earned from the said co-operative banks / societies are also eligible for deduction u/s. 80P(2)(d) of the Act.
We have also considered the fact that the assessee had deposited the surplus funds with the co-operative banks on a short term basis, in order to utilise the funds instead of keeping it as idle and thereby earned the interest income. The activity carried out by the assessee could not be termed as an activity against the provisions of the Act. The interest income received by the assessee out of the said deposits in a co-operative bank would also be treated as income attributable to the business of the assessee and therefore the said interest income is also to be treated as profits and gains of business by the assessee society and thereby they are entitled for deduction u/s. 80P(2)(a)(i) or 80P(2)(d) of the Act. We have also perused the judgment of the Hon’ble Jurisdictional High Court reported in (2017) 392 ITR 74 (Karnataka) in the case of PCIT vs. Totagars Co-operative Sales Society in which the Hon’ble High Court has held that a co-operative society / bank would be included in the words “co-operative society” and therefore deduction would be allowed u/s. 80P(2)(d) of the Act on the interest amount earned from the co-operative societies / bank. In the said judgment, the Hon’ble High Court also distinguished the judgment of the Hon’ble Supreme Court reported in 322 ITR 283 in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO
Page 5 of since the Hon’ble Supreme Court had considered the deduction claimed u/s. 80P(2)(a)(i) of the Act and not 80P(2)(d) of the Act.
We have also considered the another order of this Tribunal in to 829/Bang/2023 dated 28/02/2024 in the case of NTI Housing Co- operative Society vs. ACIT wherein this Tribunal had followed the earlier judgment reported in 392 ITR 74 and held that the interest income received on the investments held with a co-operative bank would be eligible for claim of deduction u/s. 80P(2)(d) of the Act.
In the Mavilayi Service Co-operative Bank Ltd. v. CIT judgment, the Hon’ble Supreme Court had also distinguished an earlier judgment of the Hon’ble Supreme Court reported in 397 ITR 1 in the case of Citizens Co- operative Society Limited Vs. ACIT and therefore the decision would not be applicable to the facts of the present case. In view of the settled position of law that the co-operative society receiving interest from the co-operative banks / societies are eligible for getting deduction u/s. 80P(2)(d) of the Act, we are also allowing the claim made by the assessee for an amount of Rs. 12,02,276/-.
We therefore allow both the deductions claimed by the assessee u/s. 80P(2)(a)(i) as well as u/s. 80P(2)(d) of the Act.
In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 03rd March, 2026.
Sd/- Sd/- (PRASHANT MAHARISHI) (SOUNDARARAJAN K.) Vice – President Judicial Member Bangalore, Dated, the 03rd March, 2026. /MS /