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Facts
The assessee, a cooperative society, had deposited demonetized currency of Rs. 60,32,500 and earned interest income of Rs. 6,48,075. The Assessing Officer made an addition for the demonetized currency and disallowed deduction under Section 80P for the interest income. The CIT(A) confirmed these additions.
Held
The Tribunal held that once it is established that the cash deposited belonged to the members, no addition can be made in the hands of the society. It further held, following various High Court decisions, that interest income earned from deposits in cooperative and nationalized banks is eligible for deduction under Section 80P.
Key Issues
Whether unexplained cash deposited by members in a cooperative society can be added to the society's income, and whether interest earned by a cooperative society on deposits in banks is eligible for deduction under Section 80P.
Sections Cited
143(3), 80P, 68
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
ORDER PER DR. DIPAK P. RIPOTE, AM: These two appeals filed by the Assessee are against the common order of ld.Commissioner of Income Tax(Appeal)[NFAC] passed under section 250 of the Income Tax Act, 1961 for A.Y.2017-18 and 2018-19, both dated 27.11.2024 emanating from separate Assessment Order u/s.143(3) of the I.T.Act, dated 15.12.2019 and 24.02.2021 respectively. 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.2017-18 as lead appeal. The Assessee for A.Y.2017-18 has raised the following grounds of appeal :
1. 1. 1. 1. On the facts and in the prevailing circumstances of the case and in law, the learned CIT Appeal, erred in disallowing the deduction of Rs.60,32,500/- on account of unexplained cash and Rs.6,48,075/on account of interest income earned out of Investments with Cooperative/Nationalized Bank and which is eligible for deduction u/s 80P(2)(d) or 80P(2)(a) (i) of the IT Act.
2. On the facts and in the prevailing circumstances of the case and in law, the learned CIT Appeal, erred in not following the jurisdictional ITAT Pune, decision on the similar issue which is binding on the lower Authorities as per the law laid down by Hon'ble Bombay High Court in the case of Bank of Barada vs H C Srivastava (256 ITR 385) and thus the total deduction of Rs. 66,80,575/- disallowed u/s 80P(2)(a) (i) or 80P(2)(d) of the IT Act was not justified.
3. The Appellate craves the right to add, amend, modify, alter, revise, substitute, delete any or all grounds of the appeal, if deemed necessary at the time of hearing of the appeal.” Delay :
2. There was a delay of 151 days in filing appeal before this Tribunal. Assessee filed an Affidavit for condonation of delay. We have perused the Affidavit and are convinced that there is reasonable and sufficient cause for delay. Hence, delay is condoned.
Findings & Analysis : 3. We have heard both the parties and perused the records. In this case, Assessee had filed Return of Income on 31.10.2017 for 2 & 1598/PUN/2025 [A] A.Y.2017-18 claiming deduction u/s.80P of Rs.26,28,869/-. Assessee’s case was selected for scrutiny.
3.1 During the scrutiny proceedings, Assessing Officer(AO) observed that Assessee had deposited Demonetized Currency of Rs.60,32,500/- during Demonetization Period in the bank account. Assessee submitted that the amount pertains to the Members of the Society. Assessing Officer in the assessment order accepted that the impugned amount pertains to the members of the Assessee Society. However, Assessing Officer made an addition of Rs.60,32,500/- under section 68 of the Act.
Assessing Officer held that the interest income of Rs.6,48,075/- earned by Assessee from State Bank of India and Bank of India is not eligible for deduction u/s.80P(2)(a)(i) of the Act. Therefore, Assessing Officer disallowed interest income of Rs.6,48,075/- and added back to the total income of the Assessee. It is important to mention here that total deduction claimed by Assessee under section 80P(2)(a) was of Rs.26,28,869/-. Thus, out of Rs.26,28,869/-, Assessing Officer has disallowed only Rs.6,48,075/- and allowed remaining deduction u/s.80P(2)(a) of the Act. 3
ITA Nos.1596 & 1598/PUN/2025 [A]
Aggrieved by the addition, Assessee filed appeal before ld.CIT(A). Ld.CIT(A) confirmed the addition following the decision of Hon’ble Supreme Court in the case of Totagar’s Co- operative Sales Society Ltd, 322 ITR 283 [2010] and Mavilayi Service Co-operative Bank Ltd., Vs. CIT 431 ITR 1 [2021]. Ld.CIT(A) also confirmed the addition made u/s.68 of the Act.
Aggrieved by the order of ld.CIT(A), Assessee filed appeal before this Tribunal.
In this case, admittedly assessee had deposited Demonetized Currency of Rs.60,32,500/- in the Bank Account. Assessing Officer in the assessment order has admitted that the said cash was received by the Assessee from its Members. Thus, once it is established that cash deposited belong to the members of the society, no addition can be made in the hands of the Assessee Society. We find support from the order of ITAT Pune in the case of Bhagur Urban Credit Co- operative Society Ltd. v. ITO [ITA No.561/PUN/2022, for A.Y. 2017-18, dated 03-01-2023].No contrary decision of Hon’ble Jurisdictional High Court has been brought to our notice by ld.DR for the Revenue. In these facts and circumstances of the case, we 4 & 1598/PUN/2025 [A] direct the ld.Assessing Officer to delete the addition of Rs.60,32,500/-. Accordingly, Ground No.2 of the Assessee is allowed.
It is an admitted fact that Assessee had earned interest income of Rs.6,48,075/- from State Bank of India and Bank of India. The Assessing Officer had not allowed deduction claimed under section 80P(2)(a)(i) of the Act, on the said interest income. This issue is squarely covered in favour of the Assessee.
8.1 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.
9. 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 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. 8.2 Thus, the Hon’ble High Court of AP & TS held that Interest Income earned by investing Income derived from Business of 6 & 1598/PUN/2025 [A] 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 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 7 attributable to the main business of the assessee. It is not as though the & 1598/PUN/2025 [A] 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 9.1 Thus, Hon’ble Kerala High Court has held that the character of income does not change. The Hon’ble Kerala High Court held that interest earned from deposits in permitted banks will be eligible for deduction u/s.80P of the Act. The Hon’ble Kerala High Court’s decision is dated 04.09.2024 means, after the decision of Hon’ble Supreme Court in the case of Totagar’s Co-operative Sales Society Ltd.
& 1598/PUN/2025 [A] 9.2 Accordingly, we hold that assessee is eligible for deduction u/s.80P of the Act, on the interest income earned by the assessee from Co-operative Banks and Nationalized Banks.
9.3 Respectfully following the judicial precedent, we direct the Assessing Officer to allow deduction u/sec.80P of the Act on the interest earned. Accordingly, Ground No.1 of the Assessee is allowed.
9.4 Ground No.3 is general in nature and does not need any adjudication, hence dismissed.
In the result, appeal of the Assessee for A.Y.2017-18 is allowed. for A.Y.2018-19 11. Assessee filed Return of Income for A.Y.2018-19 on 26.10.2018 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.9,40,516/- earned from State Bank of India and Bank of India.
& 1598/PUN/2025 [A] 12. Since we have decided the lead appeal i.e.main appeal in favour of the assessee above, the same shall apply mutatis-mutandis to 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 08th January, 2026.