Sirwar Pattina Sahakara Sangha Niyamita Vs ITO (ITAT Bangalore)
Rules of procedure are handmaid of justice.-537-Day Delay Condoned & ₹29.08 Lakh Section 80P Addition Deleted
Procedure Is the Handmaid, Not the Mistress, of Justice: 537-Day Delay Condoned & ₹29.08 Lakh Section 80P Addition Deleted
The Bangalore Bench of the ITAT has condoned an extraordinary delay of 537 days in filing an appeal by a co-operative credit society after finding that the delay arose from misappropriation allegations against its former CEO, successive management changes, death of the officer entrusted with compliance and notices being sent only to an email account controlled by the former tax consultant.
After admitting the appeal, the Tribunal decided the controversy on merits and deleted an addition of ₹29,08,301, holding that interest earned from deposits with co-operative banks & scheduled banks out of funds temporarily surplus in the credit business was eligible for deduction u/s 80P(2)(a)(i).
Misappropriation, Death & Management Changes Delayed Appeal
Sirwar Pattina Sahakara Sangha Niyamita was a co-operative credit society engaged in providing credit facilities to its members. Its appeal before the ITAT was delayed by 537 days.
The society explained through an affidavit of its Chief Executive Officer that the earlier CEO had absconded from 25-07-2020 amid allegations of misappropriation of approximately ₹30.60 lakh. Complaints and an FIR were lodged regarding the alleged irregularities.
The official subsequently entrusted with managing the society’s day-to-day affairs and statutory compliance died on 19-04-2021. Between 2019 & 2026, the management underwent several changes, but the incoming office-bearers were not informed about the pending income-tax assessment or appellate proceedings.
The notices, intimations and orders were sent to an email address created and exclusively controlled by the society’s erstwhile tax advisor. The Board of Management and other officials allegedly had no knowledge of the proceedings.
The pendency of the tax dispute came to light only after the present President was elected on 07-01-2026. A new Chartered Accountant was thereafter appointed and the appeal was filed.
Substantial Justice Preferred Over Limitation
The ITAT accepted that the delay was unintentional and resulted from circumstances beyond the society’s control. It relied upon the Supreme Court’s decision in Collector, Land Acquisition v. Mst. Katiji & Others [1987] 167 ITR 471 (SC).
The Tribunal reiterated that procedural rules are the handmaids of justice. When substantial justice and technical considerations compete, the former ordinarily deserves preference. A litigant does not stand to benefit by deliberately filing an appeal late.
Since sufficient cause had been established, the entire delay of 537 days was condoned and the appeal was admitted for adjudication on merits.
₹29.08 Lakh Bank Interest Denied Deduction
For AY 2020-21, the society filed its return declaring gross total income of ₹43,53,503 and nil taxable income after claiming deduction u/s 80P.
During scrutiny, the AO noticed that out of the total interest and dividend income of approximately ₹43.53 lakh, an amount of ₹29,08,301 represented interest from deposits maintained with co-operative banks & scheduled banks. According to the AO, these deposits were made out of surplus funds and the interest was not attributable to the business of providing credit facilities to members.
Relying on Totagars’ Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC), the AO treated the interest as income from other sources, denied deduction u/s 80P(2)(a)(i) and assessed the society’s total income at ₹29.08 lakh.
The CIT(A) dismissed the appeal for non-prosecution without deciding the grounds on merits.
Temporarily Surplus Business Funds Remain Business Funds
The Tribunal found it undisputed that the assessee was engaged solely in providing credit facilities to its members. It was also undisputed that the deposits were made from funds not immediately required for advancing loans.
Following the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO [2015] 55 taxmann.com 447 (Karn.), the ITAT held that money arising from a credit society’s business does not lose its business character merely because it is temporarily placed in bank deposits.
A credit society cannot be expected to keep temporarily surplus money idle until members require fresh loans. Placing such funds in fixed deposits or other short-term bank accounts is a commercially prudent deployment of its circulating capital.
The interest earned from such deposits is therefore attributable to the business of providing credit facilities to members and qualifies for deduction u/s 80P(2)(a)(i).
“Attributable To” Is Wider Than “Derived From”
The Tribunal emphasised that section 80P(2)(a)(i) uses the expression “profits and gains of business attributable to” the specified activity. The phrase “attributable to” has a wider reach than “derived from”.
Consequently, deduction is not restricted only to interest received directly from loans advanced to members. It also covers income having a proximate and commercial connection with the society’s credit business, including interest on temporary deployment of business funds.
Totagars Decision Distinguished
In the Supreme Court’s Totagars ruling, the society retained sale proceeds payable to its members for agricultural produce marketed on their behalf. Those retained sums were liabilities and did not belong to the society. Interest earned from investing such liabilities was therefore taxable as income from other sources.
In the present case, the deposited funds were not sale proceeds payable to members or another person’s money temporarily retained by the society. They were funds arising from its own credit operations and were not immediately required for lending.
The Department also relied on PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karn.). The ITAT distinguished that ruling because it concerned deduction u/s 80P(2)(d), whereas the assessee’s claim arose u/s 80P(2)(a)(i).
ITAT Decides Merits Instead of Ordering Another Remand
Although the CIT(A) had not examined the merits, the Tribunal found that the controversy was squarely covered by the binding judgment of the Karnataka High Court. It therefore declined to prolong the litigation through another remand.
The AO was directed to delete the addition of ₹29,08,301 and allow deduction u/s 80P(2)(a)(i). The appeal was allowed in full.
Author’s Comments
The order provides relief on two fronts. First, it confirms that a substantial delay may be condoned where the assessee establishes genuine organisational disruption through an affidavit and supporting chronology. The length of delay is important, but the quality of the explanation is decisive.
Second, the judgment again separates business funds temporarily deposited from liabilities payable to members. Totagars does not automatically make every rupee of bank interest earned by a credit society taxable.
The order describes the society as registered under the Karnataka Co-operative Societies Act, though one ground refers to the Karnataka Souharda Sahakari Act. Societies should clearly establish the governing enactment because their statutory obligations and eligibility analysis may depend upon it. The practical lesson is equally clear: control of the registered email and income-tax portal must remain with the institution, not exclusively with an outgoing employee or consultant.
Cases Discussed
- Collector, Land Acquisition, Anantnag v. Mst. Katiji & Others [1987] 167 ITR 471 (SC)
- Totagars’ Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC)
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, Ward-V, Tumkur [2015] 55 taxmann.com 447 (Karn.)
- Principal Commissioner of Income-tax, Hubballi v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karn.)
- Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE
The assessee has filed the present appeal against the impugned order dated 23/07/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2020-21.
2. At the outset, it is noticed from the appeal record that there is a delay of 537 days in filing the appeal before the Tribunal. In the application seeking condonation of delay, supported by an affidavit of the Chief Executive Officer of the assessee society, it has been submitted that the then Chief Executive Officer of the assessee society had absconded from 25/07/2020 amidst allegations of misappropriation of funds to the tune of about Rs.30,60,000/-, in respect of which complaints and an FIR came to be lodged. It is further submitted that the official who was thereafter assigned the responsibility of managing the day-to-day affairs and statutory compliances of the society passed away on 19/04/2021. Further, the management of the society underwent successive changes during the period 2019 to 2026, with none of the incumbent office-bearers or the in-charge Chief Executive Officers being made aware of the pendency of the assessment and appellate proceedings. It is submitted that all notices, intimations and orders, including the impugned order, were served only on an e-mail ID which had been created and was solely accessed by the society’s erstwhile tax advisor, without the knowledge of the Board of Management or its officials. It has further been submitted that it was only upon the election of the present President on 07/01/2026 that the pendency of the appeal came to light, pursuant to which the present Chartered Accountant was engaged under a power of attorney to file and prosecute the present appeal. Thus, the assessee has sought the condonation of delay in filing the present appeal on the basis that the delay is completely unintentional and has occurred due to the circumstances beyond the control of the assessee.
3. We find that the reasons stated by the assessee for seeking condonation of delay fall within the parameters for grant of condonation laid down by the Hon’ble Supreme Court in the case of Collector Land Acquisition, Anantnag vs. MST Katiji and others, reported in 1987 SCR (2) 387. It is well-established that the Rules of procedure are handmaid of justice. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. In the present case, the assessee does not stand to benefit from the late filing of the present appeal. In view of the above and having perused the application/affidavit filed by the assessee, we are of the considered view that there was sufficient cause which prevented the assessee from filing the present appeal within the limitation period. Therefore, we condone the delay in filing the appeal and proceed to decide the same.
4. In this appeal, the assessee has raised the following grounds of appeal: –
1. On facts and circumstances of the Appellants case, the impugned order of the lower authorities are opposed to law, equity, weight of evidence and probabilities.
2. On facts and circumstances of the Appellants case, the learned authorities erred grossly by rejecting and ignoring the facts that the status of the appellant is a Co Operative society, carrying on the business of lending of money for providing credit facility to its members, registered under Karnataka Souhardha Sahakari Act 1997 and any Co Operative society registered under Karnataka Souhardha Sahakari Act 1997 would fit into definition of Co Operative societys appearing in section 2(19) and subject to all just exceptions, would be entitled to claim benefit of section 80P of the Act which is not a Co Operative bank falls within the exclusion of section 80P(4).
3. On facts and circumstances of the Appellants case, the appellant denies himself liable to be assessed on a total income of Rs.29,08,301 determined by the learned assessing officer as against the returned income by the appellant of Rs. NIL after claiming eligible deduction under section 80P(2)(a)(1) of the Act. The AO grossly erred in denying and the CIT(A) grossly erred in confirming the denial of benefit of deduction under section 80P(2)(a)(i) towards the interest earned on short term deposits in banks were only investment in the course of activity of providing credit facility to members and that the same cannot be considered as investment made for the purpose of earning interest income and consequently passed a perverse order.
4. On the facts and circumstances of the appellant case and in law the Ld.AO and the CIT(A) grossly erred in treating the interest income of Rs.29,08,301 earned from banks on short term deposits to comply with statutory compliance as income from other sources. The investments being made in the regular course of business and in compliance with statutory to be treated as income from business and consequently deduction under section 80P, which otherwise is held allowable to the appellant ought to have been extended to this interest income as well as per law.
5. On the facts and circumstances of the appellant case, the learned authorities ought to have analysed and assessed the word attributable used in section 80P as opposed the word derived from, the word attributable to, being of wider import, was used by the legislature whenever they intended to gather receipt from sources other than actual conduct of the business as per the law laid down by the Honble Apex Court.
6. On the facts and circumstances of the appellant case, the learned authority have failed to appreciate that short term investment made by the banking concern are part of the business of banking more so the interest income so earned from members, if not immediately required to be lent to members, cannot kept ideal as money is stock in trade OR circulating capital for credit society and its normal business to deal in money and make investment in short term deposits in such a manner that it may readily available to meet the demands of members, if and when it arises, is a legitimate mode of carrying on of business, which are part of business of banking.
7. On facts and circumstances of the Appellants case, the learned assessing Officer ought to have taken cognizance of rule 23(2) of the Karnataka Co-operative Societies Rules, 1960 which requires co-operative societies to invest the Reserve Fund in any co operative bank OR scheduled bank and accordingly, ought to have held that interest received by the appellant aggregating to Rs.29,08,301 on deposits with co operative banks and scheduled banks made out of Reserve Fund constituted its income from the business of providing credit facilities to the members and, therefore, eligible for deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961.
8. On facts and circumstances of the Appellants case, the learned assessing officer ought to have taken note of section 58 of the Karnataka Co-operative Societies Act, 1959 requiring cooperative societies to deposit their funds with any co-operative bank OR scheduled bank and accordingly, ought to have held that the interest received by the appellant aggregating to Rs.29,08,301 on deposits with co-operative banks and scheduled banks made in compliance of statutory provisions constituted its income from the business of providing credit facilities to the members entitled to deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961.
9. On facts and circumstances of the Appellants case, the learned assessing Officer ought to have taken cognizance of rule 28 of the Karnataka Co-operative Societies Rules, 1960 and the order passed by the Registrar of Co-operative Societies there under requiring credit cooperative societies to maintain not less than 3 percent of the deposits received from members in savings bank account and not less than 10 percent of such deposits in banks and accordingly, ought to have held that the interest received by the appellant aggregating to Rs.29,08,301 on deposits with co-operative banks and scheduled banks made incompliance with statutory provisions to enable it to carry on business constituted its income from the business of providing credit facilities to the members and therefore, eligible for deduction under section 80-P(2)(a)(i) of the Income Tax Act 1961.
10. On facts and circumstances of the Appellants case, the learned assessing officer failed to appreciate that the facts of the case of the appellant were not in perimetria with those in Totagars Co Operative Society IN ITA No.100066/2016 dt 16/6/2017 and Mavilayi services Coop Bank Ltd & Ors V/s CIT Civil Appeal No.7343-7350 of 2019(Supreme Court) and, therefore, ratio was not applicable to the case of the appellant.
11. On facts and circumstances of the Appellants case, the learned assessing Officer erred in not allowing deduction under section 57 (iii) towards cost of funds, management cost, administrative cost etc from the interest of Rs.29,08,301/-on deposits with Co Operative societies and scheduled banks assessed as income from other sources. The appellant having utilised the deposits received from its members for making deposits in co-operative banks and scheduled banks, the learned Income Tax Officer ought to have allowed deduction of the proportionate interest paid by the appellant on such deposits to the members under section 57(iii) of the Act.
5. The sole issue that arises for our consideration, in the present case, pertains to the disallowance of deduction claimed under section 80P(2)(a)(i) of the Act, in respect of interest earned from deposits with Co-operative Banks and Scheduled Banks
6. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a co-operative credit society registered under the Karnataka Co-Operative Societies Act, 1959, and is engaged in providing credit facilities to its members. For the year under consideration, the assessee filed its return of income on 05/11/2020, declaring a gross total income of ₹ 43,53,503 and a total income of ₹ Nil after claiming ₹ 43,53,503 as deduction under section 80P of the Act. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the course of assessment proceedings, it was observed that out of the total interest income of ₹ 43,53,546 earned by the assessee on fixed deposits, savings deposits, recurring deposits and dividend, an amount of ₹ 29,08,301 was earned from deposits maintained with Co-operative Banks and Scheduled Banks out of the surplus funds.
7. The Assessing Officer (“AO”), vide order dated 12/09/2022 passed under section 143(3) read with section 144B of the Act, following the decision of the Hon’ble Supreme Court in Totgars’ Co-operative Sale Society Ltd. vs. ITO, reported in 322 ITR 283 (SC), held that the said interest income of ₹ 29,08,301 was not attributable to the business of providing credit facilities to members and disallowed the corresponding deduction claimed under section 80P(2)(a)(i) of the Act, thereby assessing the total income of the assessee at ₹ 29,08,301 as against the returned income of ₹ Nil. Though the assessee carried the matter in appeal, the learned CIT(A), vide impugned order, dismissed the appeal solely for non-prosecution, without rendering any finding on the grounds raised on merits. Being aggrieved, the assessee is in appeal before us.
8. We have considered the submissions and perused the material available on record. It is undisputed that the assessee is a co-operative credit society registered under the Karnataka Co-Operative Societies Act, 1959, and is engaged solely in providing credit facilities to its members. It is also undisputed that the interest income of ₹ 29,08,301/- represents interest earned on deposits maintained with Co-operative Banks and Scheduled Banks out of its funds not immediately required for lending to its members.
9. We find that while deciding a similar issue the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO, Ward-V, Tumkur, reported in (2015) 55 taxmann.com 447 (Kar), after considering the decision of the Hon’ble Supreme Court in Totgar’s Co-operative Sale Society Ltd vs ITO., reported in [2010] 322 ITR 283 (SC), held that the interest earned by the Co-operative Society, which is engaged in the business of providing credit facilities to its members, from deposit of excess amount for short term in bank is eligible for deduction under section 80P(2)(a)(i) of the Act. The relevant findings of the Hon’ble Jurisdictional High Court, in the aforesaid decision, are reproduced as follows: –
“6. From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1,77,305/- represents the interest earned from short-term deposits and from savings bank account. The assessee is a Cooperative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i):
“Deduction in respect of income of co-operative societies:
80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely:
(a) in the case of co-operative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or (ii) to (vii)
the whole of the amount of profits and gains of business attributable to any one or more of such activities.”
7. The word ‘attributable’ used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) as under:
‘As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature, has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression ”derived from”, as, for instance, in section-80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.’
8. Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.
9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee – Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue.”
10. During the hearing, the learned Departmental Representative (“learned DR”) placed reliance upon the decision of the Hon’ble Jurisdictional High Court in Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka). On a perusal of the said decision, we find that the deduction therein was claimed under section 80P(2)(d) and not under section 80P(2)(a)(i) of the Act, as is evident from the following observations of the Hon’ble Jurisdictional High Court in the aforesaid decision: –
“11. 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 way of interest or dividends derived by the assessee Co-operative Society from its investments with any other Co-operative Society.”
(Emphasis supplied)
11. Since the assessee’s claim in the present case is under section 80P(2)(a)(i) of the Act, we are of the considered view that the decision relied upon by the learned DR is not applicable to the facts of the present case. On the other hand, the decision of the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. (supra) squarely covers the issue in favour of the assessee on facts similar to those before us.
12. Respectfully following the aforesaid decision of the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. (supra), we are of the considered view that the interest income of ₹ 29,08,301/- earned by the assessee from deposits with Co-operative Banks and Scheduled Banks is attributable to the business of providing credit facilities to its members, and the assessee is accordingly entitled to claim deduction under section 80P(2)(a)(i) of the Act on the said amount. Since the issue stands squarely covered by a binding decision of the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. (supra), and no useful purpose would be served by remanding the matter to the file of the learned CIT(A), we deem it fit to decide the issue on merits ourselves. Accordingly, the impugned order is set aside, and the AO is directed to delete the addition of ₹ 29,08,301/- and allow the deduction claimed under section 80P(2)(a)(i) of the Act.
13. In the result, the appeal by the assessee is allowed.
Order pronounced in the open court on 15-Sept-2026.
