VEERACHARYA BABASAHEB KUCHNURE ZILLA NAGARI SAHAKARI PAT SANSTHA LIMITED,SANGLI vs. INCOME TAX OFFICER 1(1), SANGLI

Aggrieved, the assessee filed an appeal before the Ld. CIT(A)/NFAC who sustained the addition of Rs.5,64,27,046/- made by the Ld. AO and dismissed the appeal of the assessee by observing as under :

“5. Finding and Decision: 5.1 I have carefully examined the assessment order passed under section 143(3) dated 12.04.2021, the grounds of appeal, the statement of facts, and the detailed written submissions filed by the appellant, along with the judicial authorities relied upon. The central issue for consideration is whether the appellant, being a credit co-operative society, is eligible to claim deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, in respect of interest income earned from fixed deposits placed with co-operative banks, or whether such interest falls outside the ambit of section 80P(2)(a)(i) in view of the ratio laid down by the Hon'ble Supreme Court in Totgars and the exclusionary provision contained in section 80P(4), which disentitles co- operative banks from the benefit of section 80P and correspondingly restricts the allowability of deduction on interest earned from such entities. 5.2 From the assessment order and the submissions on record, it is noted that the appellant is a credit co-operative society engaged in accepting deposits from its members and providing credit facilities to them in the normal course of its operations. There is no material on record to show that the fixed deposits placed with co-operative banks were required for any statutory purpose or that the earning of interest therefrom had a direct nexus with the day-to-day lending activity of the society. The appellant has not furnished evidence to demonstrate that the impugned deposits formed part of its circulating business funds. On the contrary, the assessment order shows that the interest has arisen from the placement of surplus funds with co- operative banks, and the appellant has not brought any material to establish that such interest was attributable to the core activity of providing credit facilities to members. 5.3 Section 80P(4), inserted by the Finance Act, 2006, restricts the availability of deduction under section 80P to co-operative banks, except for Primary Agricultural Credit Societies and Primary Co-operative Agricultural and Rural Development Banks. The Assessing Officer has invoked section 80P(4) only to the limited extent that co-operative banks are excluded from the meaning of "co-operative society for the purpose of section 80P(2)(d). Accordingly, interest received by a credit co-operative society from deposits placed with a co-operative bank does not fall within the ambit of section 80P(2)(d). There is no material on record to suggest that the appellant is itself a co-operative bank, and therefore section 80P(4) does not apply to the appellant on that footing. 5.4 The Hon'ble Supreme Court in Totgars Co-operative Sale Society Ltd. v. ITO (322 ITR 283) has categorically held that interest earned on surplus funds invested in deposits, which are not required for the day-to-day AYs 2018-19 & 2020-21 business of providing credit facilities to members, is taxable under the head "Income from Other Sources and does not qualify for deduction under section 80P(2)(a)(i). In the present case, the appellant has placed its surplus funds in fixed deposits with co-operative banks, and there is nothing on record to demonstrate that such deposits were a statutory or business necessity directly connected with its lending activity. The earning of interest from such deposits, therefore, represents independent income arising from the deployment of surplus funds, and the ratio of the Hon'ble Supreme Court in Totgars squarely applies. Accordingly, the impugned interest cannot be treated as income attributable to the business of providing credit facilities to members for the purpose of section 80P(2)(a)(i). 5.5 While the appellant has placed reliance on certain decisions of the Hon'ble ITAT wherein the facts were viewed as distinguishable from the judgment of the Hon'ble Supreme Court in Totgars Co-operative Sale Society Ltd., it is noted that the applicability of such distinctions depends entirely on the factual context of each case. In the present matter, the record does not show that the impugned fixed deposits formed part of the circulating capital of the lending activity or that they were maintained as an operational necessity. The consistent view taken by several High Courts, including the Hon'ble Gujarat High Court, the Hon'ble Punjab & Haryana High Court, and the Hon'ble Karnataka High Court in subsequent decisions, is that the ratio of Totgars is not confined to agricultural marketing societies but applies wherever interest is earned from surplus funds placed in deposits. These judicial pronouncements emphasise that interest arising from such surplus funds is assessable under the head "Income from Other Sources and does not qualify for deduction under section 80P(2)(a)(i). In the absence of material demonstrating a direct nexus between the deposits and the core credit activity, the factual matrix of the present case aligns with the principles laid down by the Hon'ble Supreme Court. Accordingly, the decisions of the ITAT relied upon by the appellant, being fact-specific, do not alter the outcome in the appellant's case. 5.6 In light of the above legal position, the alternative claim under section 80P(2)(d) also fails. Section 80P(2)(d) applies to interest or dividend derived from investments with "any other co-operative society". Co-operative banks, by virtue of section 80P(4), have been excluded from the benefit of section 80P, and the Assessing Officer has correctly held that interest received from deposits placed with such banks does not qualify for deduction under section 80P(2)(d). 5.7 Accordingly, the addition of Rs.5,64,27,046 made by the Assessing Officer by assessing the impugned interest under the head "Income from Other Sources" and disallowing the deduction claimed under section 80P is in accordance with law. The appellant has not brought any evidence on record to dislodge the factual findings of the Assessing Officer or to demonstrate that the impugned interest was attributable to the business of providing credit facilities to its members.

6. Decision In view of the legal position governing section 80P, the exclusion contained in section 80P(4), and the binding ratio of the Hon'ble Supreme Court in Totgars Co-operative Sale Society Ltd., the appellant's claim for deduction under section 80P(2)(a)(i) in respect of interest earned from fixed deposits placed with co-operative banks cannot be accepted. The interest income of Rs.5,64,27,046, being derived from investment of surplus funds with co- operative banks which are not members of the appellant-society, has been rightly held by the Assessing Officer to be in the nature of income from other sources not attributable to the business of providing credit facilities to members. The appellant has not brought any material on record to establish a direct and proximate nexus between the impugned interest and its lending activity. The Assessing Officer has therefore correctly added Rs.5,64,27,046 AYs 2018-19 & 2020-21 to the total income under section 56 and disallowed the corresponding claim under section 80P. On the facts and in law, the addition made by the Assessing Officer is upheld. In the result, the appeal is dismissed.”

4. At the outset, the Ld. AR submitted that the impugned issue is squarely covered in favour of the assessee by catena of decisions of various judicial forums including the decision(s) of the Pune Bench of the Tribunal. Placing reliance on the various decisions pronounced in favour of the assessee relating to the impugned issue, he further submitted that the assessee is duly eligible for its claim of deduction u/s 80P(2)(a)(i) of the Act. He also raised an alternate contention that the interest income earned from Co-operative Banks by the assessee during the relevant AY is eligible income for claim of deduction u/s 80P(2)(d) of the Act. In support thereof, the Ld. AR relied on the decision of Pune Bench of the Tribunal in the case of The Karad Urban Sevak Sahakari Patsanstha Maryadit Karad Vs. ITO in for AY 2020-21, order dated 03.02.2026.

9. Respectfully following the above referred decisions taking consistent view along with considering the facts of the case, where the appellant made investment with the Cooperative Banks we hold that the appellant is eligible for deduction u/s.80P(2)(d) of the Act for the interest income earned from Cooperative Banks at Rs.1,63,98,998/-. Findings of the ld. CIT(A) is set-aside and the Assessing Officer is directed to allow the claim made by the appellant. Effective grounds of appeal

raised by the appellant are allowed.”

6. Respectfully following the same, we hold that deduction of Rs.1,02,95,103/- u/s.80P(2)(d) of the Act claimed by the appellant on the interest earned from deposits/Investments with Cooperative Banks deserves to be allowed. Relevant finding of ld.CIT(A) on merits is set aside and grounds of appeal No.5 to 8 raised by the appellant are allowed.”

7. In light of the above decision and other judicial precedents consistently followed by this Tribunal, I hold that the assessee is eligible for deduction u/s.80P(2)(d) of the Act for the interest income of ₹39,69,439 earned from the investments held with Cooperative Banks. Ground No.2 raised by the assessee s allowed.”

8. In view of the above discussion and respectfully following the decision of the Pune Bench of the Tribunal in the case of The Karad Urban Sevak Sahakari Patsanstha Maryadit Karad (supra) and in the absence of any objection raised and/or contrary decision brought on record by the Ld. DR, we hereby set aside the impugned order of the Ld. CIT(A)/NFAC and allow the deduction claimed by the assessee u/s 80P(2)(d) of the Act. The effective grounds i.e. ground No. 2.1 to 2.6 of appeal raised by the assessee are accordingly allowed. The others grounds i.e. ground No. 1.1 to 1.5 raised by the assessee are thus rendered academic in nature requiring no adjudication. AYs 2018-19 & 2020-21