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Facts
The assessee, a credit cooperative society, filed a nil return claiming deduction under section 80P(2) of Rs. 3,53,11,443. The Assessing Officer determined a total income of Rs. 2,95,71,620 by disallowing interest income from cooperative banks (Rs. 2,94,11,786) and Axis Bank (Rs. 23,497) under section 80P(2)(d), a delayed payment of employees' PF contribution (Rs. 58,631) under section 36(1)(va), and other additions under section 28. The CIT(A) partly allowed the appeal, granting deduction for cooperative bank interest but denying it for nationalized bank interest and upholding the disallowance under section 36(1)(va).
Held
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s allowance of deduction under section 80P(2)(d) for interest earned from cooperative banks, relying on Supreme Court and High Court precedents that primary credit cooperative societies are entitled to such exemption. It partly allowed the assessee's cross-objection, directing the AO to allow the deduction of Rs. 58,631 (employee PF contribution) under section 80P(2)(a)(i) by applying CBDT Circular No. 37/2016, which permits profit-linked deductions on enhanced business profits due to specific disallowances. The assessee's claim for deduction on interest from Axis Bank was dismissed as not pressed.
Key Issues
Whether a primary credit cooperative society is eligible for deduction under section 80P(2)(d) on interest income earned from cooperative banks, and whether a disallowance for delayed employee provident fund contributions under section 36(1)(va) can subsequently be allowed as a deduction under section 80P(2)(a)(i) based on CBDT circulars regarding enhanced profits.
Sections Cited
80P(2), 80P(2)(d), 36(1)(va), 143(3), 28, 80P(2)(a)(i), 80P(4), 32, 40(a)(ia), 40A(3), 43B
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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the Revenue is directed against the order dated 05.08.2025 passed by Ld. CIT(A)/NFAC for the assessment C.O. No.49/PUN/2025 year 2018-19. The assessee is also in cross objection against the appeal of the Revenue.
2. Facts of the case, in brief, are that the assessee is a credit co- operative society duly registered under the Maharashtra Cooperative Societies Act engaged in the activity of providing credit facilities to its members and also accepting deposits from them. The return of income was furnished on 08.10.2018 by declaring income of Rs.Nil after claiming deduction u/s 80P(2)of the IT Act of Rs.3,53,11,443/. The return was selected for scrutiny and after considering the submissions of the assessee, the Assessing Officer completed the assessment proceedings u/s 143(3) of the IT Act and vide order dated 23.03.2021 determined total income at Rs.2,95,71,620/- as against the Nil income returned by the assessee. The above assessed income includes addition of Rs.2,94,35,283/- (Rs.2,94,11,786/- interest earned from cooperative banks + Rs.23,497/- interest earned from Axis Bank) disallowance on account of deduction u/s 80P(2)(d) of the IT Act and addition of Rs.58,631/- being delayed payment of employees’ contribution to Provident Fund u/s 36(1)(va) of the IT Act and addition of Rs.77,708/- (Rs.58,134/- + Rs.19,574/-) u/s 28 of the IT Act.
C.O. No.49/PUN/2025 3. Being aggrieved with the above assessment order, the assessee preferred an appeal before Ld. CIT(A)/NFAC. After considering the written submission furnished by the assessee, Ld. CIT(A)/NFAC partly allowed the appeal filed by the assessee by observing as under :- “7.6 The appellant stated that as per the bylaws of the society, it was required to keep certain funds as deposits with co-operative banks. Further, the appellant has stated that the appellant society is not the bank but that its nature of business was coupled with that of banking. In this regard, the appellant has placed heavy reliance on certain case laws decided by various ITATs including jurisdictional ITAT, Pune wherein the said matter has been discussed in detail and it is given in the favour of the appellant. In all these cases the Hon’ble ITATs has held that a credit co-operative society is one which is authorised by the register of co-operative society for accepting deposits and lending money to its members as the main objective of providing credit facility to its members while also carrying the business of banking activity. Such societies are eligible for deduction u/s 80P(2)(d) of the Act. Therefore, it is concluded that the funds which were invested with the co-operative banks were an integral part of the business activity of the appellant business and hence any income arises out of such business activity was clearly allowed as a deduction as per the above decisions. 7.7 Further, it is observed that the appellant has earned interest of Rs.23,497/- from nationalised banks i.e. Axis Bank. The interest income earned from nationalised banks is not covered u/s 80P(2)(d) of the Act, therefore, the appellant is not eligible to claim deduction u/s 80P(2)(d) of the Act related to interest earned from the nationalised banks. Therefore, the AO is directed to calculate the deduction related to the interest income earned from nationalised banks and the same may be assessed as income from other sources. Therefore, the AO is directed to allow deduction u/s 80P(2)(d) in respect of interest income earned from cooperative banks of Rs. 2,94,11,786/- and grant relief to the appellant. The appellant has raised the objection on the denial of deduction u/s 80P(2) of the Act through ground nos. 1, therefore, ground nos. 1 of appeal filed by the appellant is partly allowed. 7.8 Ground no. 2 and 3 are on the issue on non-offering the interest income of Rs.58,134/- from Deepak VasantraoSuryavanshi and Rs.19,574/- from Laxman Dinakar Patil. The appellant has furnished the supporting documents which proves that the interest income of C.O. No.49/PUN/2025 Rs.58,134/- and Rs.19,574/- was offered as the income. Therefore, ground no. 2 and 3 are decided in favour of the appellant. 7.9 Ground no. 4 is on disallowing Rs.58,631/- u/s 36(1)(va) of the Act. The appellant has received the employees contribution of Rs.58,631/- for payment of provident fund and the same should be credited to the employees account on or before the due date whereas the appellant has not paid the employees contribution on or before the due date. As per section 36(1)(va) of the Act, if the employees contribution is not paid to the government account on or before the due date, the same is not allowable deduction. Therefore, ground no. 4 is decided against the appellant. 8.0 In the result, the appeal of the appellant is partly allowed.”
4. It is the above order against which the Revenue is in appeal and the assessee is in Cross Objection before this Tribunal.
5. First, we shall take up the Cross Objection filed by the assessee for adjudication. C.O. No.49/PUN/2025 : 6. The assessee raised the following grounds in its cross objection :-
1. Under the facts and circumstances of the case and in law, appellant is eligible for deduction u/s 80P(2)(a)(i).
2. Under the facts and circumstances of the case and in law, the Ld Commissioner of Income Tax (Appeals) has erred in not allowing deduction u/s 80P in respect to interest of Rs. 23,497/- from nationalized bank i.e. Axis Bank.
3. Under the facts and circumstances of the case and in law, the Ld Commissioner of Income Tax (Appeals) has erred in not allowing deduction u/s 80P of Rs. 58,631/- being employees' contribution towards Provident Fund by invoking the provisions of Section 36(1)(va) of the Income-tax Act, 1961, on the alleged ground that the said contribution was not deposited on or before C.O. No.49/PUN/2025 the statutory due date. Despite of the fact that appellant is eligible for deduction U/s 80P(2)(a)(i).
4. Under the facts and circumstances of the case and in law, the Ld Assessing Officer has erred in making disallowance of Rs.58,631/- being employees' contribution towards Provident Fund by invoking the provisions of Section 36(1)(va) of the Income-tax Act, 1961, on the alleged ground that the said contribution was not deposited on or before the statutory due date. Which is beyond the scope of "Limited Scrutiny".
5. Under the facts and circumstances of the case and in law, Ld Assessing Officer has erred in issuing Notice of Demand without passing Assessment Order.
6. The appellant craves the permission to add, amend, modify, revise, substitute, delete or alter any/all of the above grounds of appeal
if deemed necessary at the time of hearing of the appeal.”
7. We have heard Ld. counsels from both the sides and perused the material available on record including the written submissions furnished by the assessee.
8. Ground no.1 & 2 raised by the assessee in its cross objection which relates to allowability of Rs.23,497/- interest income earned from Axis Bank u/s 80P(2)(a)(i) of the Act is not pressed by the counsel of the assessee, Accordingly, the same are dismissed as not pressed.
9. With regard to ground no.3 & 4 raised by the assessee in its cross objection which relates to not allowing the deduction of Rs.58,631/- u/s 80P(2)(a)(i) of the IT Act, we find that after disallowance of Rs.58,631/- being delayed payment of employees’ C.O. No.49/PUN/2025 contribution to PF u/s 36(1)(va) of the IT Act the business profit of the assessee has increased. In this regard, it was the contention of the assessee that CBDT has issued Circular No.37/2016 dated 02.11.2016 which allows the benefit of deduction under Chapter VIA on enhanced profit. The relevant circular is reproduced below :- “CIRCULAR NO. 37/2016 F.No.279/Misc./140/2015/ITJ Government of India Ministry of Finance, Department of Revenue Central Board of Direct Taxes ****** New Delhi, Dated 2nd November 2016 Subject: Chapter VI-A deduction on enhanced profits- Reg. Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions III respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a )(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.
2. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However ,the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed ,the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: (i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40 (a)(ia) of the Act would quality for deduction under section 80-18 of the Act. This view was taken by the courts in the following cases:
C.O. No.49/PUN/2025 • Income-tax Officer - Ward 5(1) vs. Keval Construction, Tax Appeal No. 443 of 2012, December 10, 2012, Gujarat High Court. • Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambhamath Tiwari, IT Appeal No.2 of 2011, September 11, 2015, Bombay High Court. (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-18 of the Act. This view was taken by the court in the following case: • Principal CIT, Kanpur vs. Surya Merchants Ltd., IT. Appeal No. 248 of 2015, May 03,2016, Allahabad High Court. The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.
3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia ), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed ,result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/ Tribunals may be withdrawn/ not pressed upon. The above may be brought to the notice of all concerned.”
In the light of above circular supra, we are of the considered opinion that the disallowance of Rs.58,631/- u/s 36(1)(va) of the IT Act, has only increased/enhanced the business profit of the assessee which qualified for deduction under Chapter VA i.e. u/s 80P(2)(a)(i) of the IT Act. Accordingly, we direct the Assessing Officer to allow further deduction of Rs.58,631/- u/s 80P(2)(a)(i) of the IT Act. Accordingly, the ground no.3 & 4 raised by the assessee in its cross objection are allowed.
C.O. No.49/PUN/2025 11. With regard to ground no.5 nothing was pleaded by the counsel of the assessee at the time of hearing of appeal, hence dismissed.
In the result, the Cross Objection filed by the assessee is partly allowed.
Now, we come to the appeal of the Revenue in : 14. The Revenue has raised the following grounds of appeal :- “i) Whether on the facts and in circumstances of the case and in the Law the Ld CIT A is justified in holding that the co operative banks are also another specie of a cooperative society and therefore interest income earned on investments and on deposits made with order cooperative banks qualifies for deduction under section 8P 2 d of the Income Tax Act 1961. ii) Whether on the facts and in the circumstances of the case and in Law the Ld CIT A is justified in not following the ratio decedendi of the Honble Karnataka High Court in the case of Pr CIT v/s Totagars Co Operative Sale Society 2017 395 ITR 611 Karn which was rendered on similar facts in respect of claim of deduction under section 80P 2 d of the Income Tax Act, 1961, duly relying upon the decision of the Honble Apex court in the case of Totagars Co Operative Sale Society Ltd v ITO 2010 322 ITR 283-188 Taxman 282 SC and has also distinguished in favour of revenue its earlier decision Tumkur merchants Souharda Credit Cooperative Ltd. Vs ITO reported in 55 taxmann dot com 447. iii) Whether the Ld CIT A is justified in allowing deduction under section 80P 2 d despite the fact that with effect from 01.04.2007, section 80P 4 has been inserted in the Income Tax Act which clearly states that provisions of Section 80P shall not apply in relation to any Co operative bank other than primary C.O. No.49/PUN/2025 agricultural society or a co operative primary agricultural and rural development bank. iv) Whether on facts and in the circumstances of the case and in Law the Ld CIT A is justified in holding that even though the income earned by cooperative bank was not exempt from tax it does not bar in treating cooperative bank as a cooperative society. v) The appellant craves to add, amend, alter or delete the above ground of appeal
during the course of appellate proceedings before the Hon’ble Tribunal.”
15. We have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that all the grounds raised by the Revenue revolves around the issue of allowability of deduction u/s 80P(2)(d) of the IT Act to primary credit cooperative society. In this regard, we find that in number of decisions passed by coordinate benches of this Tribunal it has been held that a primary credit cooperative society is eligible to claim deduction u/s 80P(2) of the IT Act on interest and dividend income earned from its investment with other cooperative banks which are also cooperative societies duly registered under Maharashtra State Cooperative Societies Act. In this regard, following decisions are relevant :- (i) Gurudatta Gramin Bigersheti, order dated 28-07-2025.
C.O. No.49/PUN/2025 (ii) Pune JilaMadhyawarti Sahkari Bank Sevakanchi Sahkari Patsanstha Maryadit, order dated 23-06-2025. (iii) Sharadchandra Nagari Sahakari Patsanstha Maryadit, order dated 04-06-2025.
We further find that the core issue of allowance of deduction u/s 80P(2) of the IT Act to a primary credit cooperative society was also decided by Hon’ble Jurisdictional Bombay High Court in the case of Annasaheb Patil Mathadi Kamgar Sahkari Pathpedhi Ltd. in ITANo.933/2017 order dated 14-10-2019 wherein deduction u/s 80P(2) of the IT Act was allowed to a primary credit cooperative society. Subsequently, this Judgement was also approved by Hon’ble Supreme Court in Civil Appeal No.8719 of 2022 order dated April 20, 2023 by observing as under :- “1. Feeling aggrieved and dissatisfied with the impugned order dated 14-10-2019 passed by the High Court of Judicature at Bombay in by which the High Court has dismissed the said appeal preferred by the Revenue, relying upon its earlier decision in the case of Quepem Urban Co-operative Credit Society Ltd. v. Asstt. CIT [2015] 58 taxmann.com 113/232 Taxman 510/377 ITR 272 (Bom.), the Revenue has preferred the present appeal.
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 C.O. No.49/PUN/2025 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. AakanshaKaul, 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 to its members only cannot be said to be the Co-operative Banks/Banks 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.”
Respectfully following the above latest decision passed by Hon’ble Supreme Court cited supra, we are of the considered opinion that the issue of allowance of deduction u/s 80P(2) of the IT Act in favour of primary credit cooperative society has attained