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Facts
The assessee, a co-operative credit society, claimed deduction under Section 80P(2)(a)(i) for interest income earned on fixed deposits held with co-operative and non-co-operative banks. The Assessing Officer and CIT(A) disallowed this deduction, re-characterizing the interest as income from other sources, leading to an addition and alleged double taxation.
Held
The Tribunal, following precedents from the Andhra Pradesh & Telangana High Court and Kerala High Court, held that interest income earned by a co-operative credit society from deposits in banks is attributable to its business of providing credit facilities to its members. Therefore, such income is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The appeals for both assessment years were allowed.
Key Issues
Whether interest income earned by a co-operative credit society from fixed deposits in co-operative and non-co-operative banks is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, as income attributable to its business.
Sections Cited
80P, 80P(2), 80P(2)(a), 80P(2)(a)(i), 80P(2)(c), 80P(2)(d), 143(3), 143(3A), 143(3B), 144B, 250
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Income Tax Appellate Tribunal, PUNE BENCHES “A” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
ORDER PER BENCH : These two appeals filed by the Assessee against the separate orders of ld.Commissioner of Income Tax(Appeal)[NFAC], passed under section 250 of the Income Tax Act, 1961 for A.Y.2022-23 dated 22.05.2025 emanating from the Assessment Order dated 18.03.2024 under section 143(3) r.w.s. 144B of the Income Tax Act, 1961 and order under section 250 of the Income Tax Act, 1961 & 1789/PUN/2025 [A] dated 22.05.2025 emanating from assessment order u/s.143(3) read with section 143(3A) & 143(3B) of the Income-tax Act, 1961 dated 25.03.2021 for A.Y.2018-19. For the sake of convenience, these two appeals were heard together and are being disposed of by this common order. We treat appeal for A.Y.2022-23 as lead appeal. The Assessee A.Y.2022-23 has raised the following grounds of appeal : “Wherever context so require, following grounds of appeal & prayers are without prejudice to one another and in alternative.
In view of the facts of the case, provisions of law, submissions made and the applicable case law -
On the basis of facts and in the circumstances of the case and as per law, the Commissioner of Income Tax (Appeals) is not justified in not granting deduction u/s. 80P(2) of the Act in respect of interest earned on fixed deposit held with non-co-operative banks, when the said investment was was made out of commercial expediency.
2. The appellant craves for the addition to, deletion, alteration, modification of the above grounds of appeal.”
1.1 The Assessee for A.Y.2018-19 has raised the following grounds of appeal :
1. On the basis of facts and in the circumstances of the case and as per law. the Commissioner of Income Tax (Appeals) is not justified in not granting deduction u/s. 80P(2) of the act of Rs. 9,02,524/- in respect of 2 & 1789/PUN/2025 [A] interest earned on fixed deposits held with non- Co-operative banks, when the said investment was made out of commercial expediency.
Without prejudice to above Ground of Appeal, the Assessing Officer may be directed to grant deduction of Rs. 50,000/- u/s. 80P(2)(c) of the Act. The CIT(A) is not justified in not admitting the additional ground of appeal containing plea to grant the deduction of Rs. 50,000/- u/s. 80P(2)(c) of the Act, particularly when the said ground of appeal was purely a legal ground of appeal.
3. The appellant craves for the addition to, deletion, alteration, modification of the above ground of appeal.”
Findings and Analysis : 2. We have heard both the parties and perused the records. In this case, Assessee had filed Return of Income on 03.10.2022 declaring total income at Rs.19,780/-after claiming deduction u/s.80P(2)(a)(i) of Rs.65,72,773/-. Assessee’s case was selected for scrutiny. Assessee is engaged in the business of providing credit facilities to its members. Assessee is a Co-operative Credit Society duly registered under Maharashtra Co-operative Societies Act, 1961. Assessee received interest from various Co-operative Banks on deposits kept with them.. The Assessing Officer observed that Assessee had claimed deduction u/s.80P(2)(a)(i) / 80P(2)(d) on the said interest income of Rs.1,38,11,929/-. 3 & 1789/PUN/2025 [A]
The Assessing Officer(AO) held that the interest income earned by Assessee needs to be assessed as income from other sources.
4. Assessing Officer held that Assessee is not eligible for deduction u/s.80P(2)(d) following the decision of Hon’ble Supreme Court in the case of PCIT Vs. Totagars Co-operative Sale Society. Accordingly, Assessing Officer made an addition of Rs.1,38,11,929/-. Aggrieved by the Assessment Order, Assessee filed appeal before the ld.CIT(A) who partly confirmed the addition. Ld.CIT(A) held in Para 6.12 that if any interest is earned by Assessee from non-co-operative banks, then it will not be eligible for deduction u/s.80P(2)(d) of the Act.
Aggrieved by the order of ld.CIT(A), Assessee filed appeal before this Tribunal.
4.1 Thus, in this case, Assessing Officer made an addition of Rs.1,38,11,929/- whereas, actual deduction claimed by Assessee u/s.80P(2)(a) was only Rs.65,72,773/-. This shows that Assessing Officer has not bothered to read the Income Tax Return Filed by the 4 & 1789/PUN/2025 [A] Assessee. The Assessing Officer in paragraph 3.4 of the Assessment Order has Recharacterized the Interest Income of Rs.1,38,11,929/- as Income from Other Sources, where as the Assessee had treated the said Interest Income as Business Income. However, while Recharacterizing the Interest Income of Rs.1,38,11,929/- the Assessing Officer forgot the most important fact that Assessee had already shown this Interest Income in the Income & Expenditure Account. The Assessee had shown the said Interest Income of Rs.1,38,11,929/- in the Income & expenditure Account and then claimed 80P of Rs. 65,22,773/- and then shown Total Taxable Income at Rs.19,780/- in the Return of Income. The Assessing Officer without Application of Mind merely added Rs.1,38,11,929/- to the Returned Income of Rs.19,780/- ignoring the basic fact the impugned Interest is already reflected in Income Expenditure Account of the assessee. If Assessing Officer wanted to Recharacterized the Interest Income of Rs.1,38,11,929/- then he should have Re-casted the Income & Expenditure Account to arrive at the correct profit. Thus, the Assessing Officer has taxed the same amount twice. The painful fact is that the ld.Commissioner of Income Tax(A) has also not bothered to look at these facts though 5 & 1789/PUN/2025 [A] the Assessee presented all these facts before ld.Commissioner of Income Tax(A) who has reproduced the same in the order at page no.11.
The Assessee had submitted before ld.CIT(A) that as per the Maharashtra Co-operative Societies Act, 1961 Assessee has to maintain certain fixed deposits to maintain “statutory liquidity ratio”. Assessee had also submitted that as per the Maharashtra Co- operative Societies Act, Assessee had to maintain CD Ratio around 45% to 70%. Assessee has submitted that Assessee also had to maintain the CD Ratio as per State Regulation. Assessee had filed the Form prescribed by State Authorities before ld.CIT(A). Assessee pleaded that thus, it is the business necessity of assessee. Assessee also relied on the decision of Hon’ble Supreme Court in the case of CIT Vs. Nawanshahar Central Co-operative Bank Ltd., [2007] 160 Taxmann 48 (SC) wherein, the Hon’ble Supreme Court held that “investments made by a banking concern are part of the business of banking”. Therefore, the interest income is attributable to business activity of assessee of providing credit facility to its members. Assessee also relied on the decisions of ITAT Pune. 6 & 1789/PUN/2025 [A]
The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371 analysed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagars 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 7 & 1789/PUN/2025 [A] 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 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 8 & 1789/PUN/2025 [A] income as something not allowable as a deduction under section 80P(2)(a), is set aside.”Unquote.
6.2 Thus, the Hon’ble High Court of AP &TS held that Interest Income earned by investing Income derived from Business of providing credit facilities, Loans by a Co-Operative Society was eligible for deduction u/sec.80P(2)(a) of the Act.
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 9 therefore is whether, merely because the assessee chooses to deposit its & 1789/PUN/2025 [A] 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.” Unquote 7.1 Thus, Hon’ble Kerala High Court has held that the character of income does not change. The Hon’ble Kerala High Court held that 10 & 1789/PUN/2025 [A] interest earned from deposits in banks will be eligible for deduction u/s.80P of the Act.
7.2 Thus, whether a Co-operative Credit Society is eligible for deduction u/s.80P(2)(a)(i) on the interest income earned from Co- operative Banks and other banks is decided in favour of assessee. Therefore, respectfully following Hon’ble AP & TS High Court and Hon’ble Kerala High Court, we hold that Assessee is eligible for deduction u/s.80P(2)(a)(i) of the Act, on the interest earned on Co- operative Banks and Other Banks. Therefore, for all the reasons discussed, we direct the Assessing Officer to allow the deduction u/s 80P(2)(a) on Interest Income of Rs.1,38,11,929/-. No contrary decision of Hon’ble Jurisdictional High Court was brought to our notice. Accordingly, Grounds of appeal raised by the Assessee are allowed.
In the result, appeal of the assessee is allowed.
A.Y.2018-19 : 9. Assessee is engaged in the business of providing credit facilities to its members. As per assessment order, Assessee 11 received an amount of Rs.91,90,296/- as interest on various fixed & 1789/PUN/2025 [A] deposits in Co-operative Banks. Assessee filed Return of Income for A.Y.2018-19 on 31.10.2018 declaring income at Rs.NIL and claiming deduction u/s.80P of the Act. The Assessing Officer disallowed Assessee’s claim for deduction u/s.80P(2)(a)(i) on the interest income of Rs.91,90,300/- earned from State Bank of India and Bank of India.
Since we have decided the lead appeal i.e.main appeal in favour of the assessee above, the same shall apply mutatis- mutandisto the present appeal qua deduction u/s.80P(2)(a)(i) of the Act, also. Accordingly, grounds of appeal raised by the assessee are allowed.
In the result, appeal of the Assessee for A.Y.2018-19 is allowed.
To sum up, both appeal of the Assessee are allowed. Order pronounced in the open Court on 20 January, 2026. VINAY BHAMORE Dr.DIPAK P. RIPOTE JUDICIAL MEMBER ACCOUNTANT MEMBER पपणे / Pune; ददिधंक / Dated : 20 Jan, 2026/ SGR 12 & 1789/PUN/2025 [A]