INCOME TAX OFFICER WARD 1 SATARA, SATARA vs. KARAD PATAN TALUKA PRATHMIK SHIKSHAK SAHAKARI SOCIETY LIMITEDTY , KARAD

The appellant craves leave to add to, amend, alter any of the above grounds of appeal.”

Aggrieved by the addition, Assessee filed appeal before the ld.CIT(A) who has partly allowed assessee’s appeal. The relevant paragraph of ld.CIT(A)’s order is as under : “4.3.5 Respectfully following the aforesaid judgments cited above, the appellant Credit Co-operative Society has made the investment/deposits in a Cooperative Bank only, which is a genus of a cooperative society, the dividends and interest income earned on investment/fixed deposits with co-operative bank/scheduled bank partakes character of the business income, which is eligible for deduction u/s 80P(2)(a)(i)/80P(2)(d) of the Act. Accordingly, the appellant is eligible for claim of deduction u/s.80P(2)(a)(i) amounting to Rs. 2,34,34,215/- on account of interest received from fixed deposits made with Satara District Co-operative Bank (SDCB) and u/s 80P(2)(d) amounting to Rs. 14,40,000/- on account of dividends received from Satara District Co- operative Bank (SDCB). In view of the above, the ground no.1, 2, 3 & 4 of appeal filed by the appellant stand allowed.”

Aggrieved by the order under section 250, Revenue filed appeal before the ITAT.

Ld.Departmental Representative(ld.DR) for the Revenue submitted that the Interest earned is not attributable to the business of the assessee of providing credit facility hence not eligible for deduction u/s.80P(2)(a) of the Act. Ld.DR also submitted that ld.CIT(A) has failed to consider the Section 80P(4) of the Act. Ld.DR submitted that deposits were kept with Co-operative Banks which are not cooperative societies, hence, 80P(2)(d) is also not allowable. Ld.DR relied on the decision of Hon’ble Supreme Court in the case of Totagars Cooperative Sale Society 395 ITR 611.

Ld.AR submitted that the Interest earned is during the business of providing credit facility hence it is attributable to business of the Assessee, Ld.AR relied on the decisions of ITAT Pune.

We will discuss Judicial pronouncements on this issue.

Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". A co-operative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.

Thirdly, the gross total income must include income that is referred to in sub-section (2).

Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being "engaged in" carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co- operative society must be "engaged in" the providing credit facilities to its members.

The High Court considered the following question of law "Whether on the facts and in the circumstances of the case and in law, the Tribunal is justified as claimed by the assessee on the ground that the assessee, a co-operative credit society and is not a bank for the purpose of Section 80P(4) of the Act?"

Apart from the fact that against the relied upon decision in the case of M/s.Quepem Urban Co-operative Credit Society Ltd. (supra),the Special Leave Petition has been dismissed, having heard learned counsel appearing on behalf of the respective parties, the issue involved in the present appeal is squarely covered against the Revenue in view of the decision of this Court in Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 123 taxmann.com 161/279 Taxman 75/431 ITR 1/[2021] 7 SCC 90. This Court, in the aforesaid decision has specifically observed and held that primary Agricultural Credit Societies cannot be termed as Co operative Banks under the Banking Regulation Act and, therefore, such credit societies shall be entitled to exemption under section 80(P)(2) of the Income-tax Act, 1961.

Ms. Aakansha Kaul, learned counsel appearing on behalf of the appellant/Revenue has tried to submit that the respondent/Assessee will fall under the definition of Co-operative Bank as their activity is to give credit/loan. However, it is required to be noted that merely giving credit 12 to its members only cannot be said to be the Co-operative Banks/Banks [A] under the Banking Regulation Act. The banking activities under the Banking Regulation Act are altogether different activities. There is a vast difference between the credit societies giving credit to their own members only and the Banks providing banking services including the credit to the public at large also.

There are concurrent findings recorded by CITA, ITAT and the High Court that the respondent/Assessee cannot be termed as Banks/Cooperative Banks and that being a credit society, they are entitled to exemption under section 80(P)(2) of the Income-tax Act. Such finding of fact is not required to be interfered with by this Court in exercise of powers under Article 136 of the Constitution of India. Even otherwise, on merits also and taking into consideration the CBDT Circulars and even the definition of Bank under the Banking Regulation Act, the respondent/Assessee cannot be said to be Co-operative Bank/Bank and, therefore, Section 80(P)(4) shall not be applicable and that the respondent/Assessee shall be entitled to exemption/benefit under section 80(P)(2) of the Income-tax Act.

In view of the above and for the reasons stated hereinabove, the present appeal deserves to be dismissed and is accordingly dismissed, answering the question against the Revenue and in favour of the Assessee.

The Appeal is accordingly dismissed. No costs. *In favour of assessee. ” Unquote.

Same proposition of Law has been laid down by The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371analysed the provisions of Section 80P, succinctly distinguished 14 [A] the decision of Hon’ble Supreme Court in the case of Totagar Cooperative Sale Society, and held as under : Quote,“8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub-section (2) of section 80P or not.

While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co- operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283. ……………………

The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co-operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee 15 [A] did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.

But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.

The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to".

Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.” Unquote.

In the case of Sahyadri Co-operative Credit Society Limited, the Sahyadri Co-operative Credit Society had deposited excess funds in the Banks or Institutions permitted by the Co-operative Societies Act. In that context, the Hon’ble Kerala High Court in the case of Pr.CIT Vs. Sahyadri Co-operative Credit Society Ltd., [2024] 301 Taxman 36 (Kerala) vide order dated 04.09.2024 has held as under : Quote “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 17 the interest earned on those deposits loses its character as profits/gains [A] 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.” Unquote

What emerges from the above referred decisions of Hon’ble Supreme Court and Hon’ble High Courts is that Interest earned by Cooperative Credit Society registered under state cooperative society Act, which is engaged in the business of providing credit facilities to its members, from funds deposited with Cooperative Bank or Bank is eligible for deduction u/s.80P(2)(a) (i) of the Act.

Similar view has been taken by ITAT Pune Bench in the case of ITO Vs. Dhanshri Multi State Cooperative Society Ltd., in Arth Nagari Sahakari Patsanstha Limited Vs. ITO Arth Nagari Sahakari Patsanstha.

The facts mentioned by Hon’ble Karnataka High Court in the case of PCIT Vs. Totagars Co-operative Sale Society 395 ITR 611 order dated 16.10.2017 are as under : “10. Admittedly and undoubtedly, the respondent assessee is a Co- operative Society engaged mainly in the activity of marketing of agricultural produces grown by its members. The assessee co-operative society also accepts deposits from its members and provides credit facility to its members, runs Kirana Stores, rice mills, live stocks, van section, medical shops, Areca-nut trading section, lodging, plying and hiring of goods carriage, etc.

The Assessment Years involved in the present batch of appeals are Assessment Years 2007-2008 to 2011-2012. The bone of contention is that the deduction under Section 80P(2) of the Act is now claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act. The reason is that now the investments and deposits after the Supreme Court's decision against the assessee Totgar's Co-operative Sale Society Ltd. (supra), the assessee has shifted the deposits and investments from Schedule Banks to Co- operative Bank and such Co-operative Bank is essentially a Co- operative Society also and Clause (d) allows deduction of income by 20 [A] way of interest or dividends derived by the assessee Co-operative Society from its investments with any other Co-operative Society.

In these facts which Hon’ble Karnataka High Court has mentioned in Para 10 and 11 above, Hon’ble Karnataka High Court decided the issued in para 23 as under : “23. Thus, the aforesaid judgments supports the view taken by this Court that character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to befalling in any of the specified Clauses of Section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under Section 80P(2) of the Act. The case in Udaipur Sahakari Upbhokta ThokBhandar Ltd. (supra) was that of Section 80P(2)(e) of the Act, whereas in the present case, itis under Section 80P(2)(d) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause

The proposition of law emanating from above decision is that Character of Income depends upon the nature of activity. The Character of Interest will not change depending on the body 21 [A] corporate or person from whom interest is received. In the case of Totagar’s Co-operative Sale Society in para 10, it is specifically mentioned that Totagar’s Cooperative Sale Society is engaged in the business of marketing of agricultural produce of its members, Areca-nut trading section, lodging, plying and hiring of goods carriage, etc.

Since in the case of Totagars Cooperative Sales Society(supra), it has been held that interest income is not arising from business of providing credit facility, which made it ineligible for deduction u/s.80P(2)(a)(i) of the Act. In the case of Totagars Co-operative Sale Society Ltd., Vs. ITO, Karnataka [2010] 322 ITR 283(SC)vide order dated 08.02.2010, Hon’ble Supreme Court noted the fact that Assessee markets the agricultural produce of its members and retains the sale proceeds for some time. This sale proceeds pertaining to sale of agricultural produce was invested for a short period in fixed deposits. The dispute was regarding the interest accrued on said fixed deposits which were pertaining to sale proceeds of agricultural produce payable to members but retained for some time by the Society. In this context, Hon’ble Supreme 22 [A] Court held that the Totagars Co-operative Sale Society Ltd., is not eligible for deduction u/s.80(2)(a)(i) of the Act.

In the case of the Assessee, it is an admitted fact that Assessee is a Co-operative Credit Society. Its business consists of providing credit facilities to its members. It has been submitted by Assessee before Assessing Officer and ld.CIT(A) that as per the Maharashtra Co-operative Society Act and Reserve Bank of India Guidelines, Assessee has to maintain certain fixed deposits. Therefore, in these facts and circumstances of the case, the interest earned by assessee on the fixed deposits is business income and hence, eligible for deduction u/s.80P(2)(a)(i) of the Act. Therefore, we do not find any merit in the Revenue’s Ground No.4. Accordingly, Ground No.4 raised by the Revenue is dismissed.

In the result, Revenue’s Appeal is dismissed. Order pronounced in the open Court on 23rd January, 2026. VINAY BHAMORE Dr.DIPAK P. RIPOTE JUDICIAL MEMBER ACCOUNTANT MEMBER पपणे / Pune; ददिधंक / Dated : 23 Jan, 2026/ SGR 23 [A]