Jagadguru Mouneshwar Pattin Sahakari Sangh Niyamit Kerur Vs ITO (ITAT Bangalore)
Interest Earned by Credit Co-operative Society from Co-operative Bank Deposits Eligible for Section 80P Deduction: Bangalore ITAT
The Bangalore Bench of the Income Tax Appellate Tribunal, in Shree Jagadguru Mouneshwar Pattin Sahakari Sangh Niyamit Kerur v. ITO, ITA No.2884/Bang/2025, held that interest earned by a credit co-operative society from deposits maintained with co-operative banks was eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961.
The Tribunal further held that interest earned from statutory reserve fund deposits constituted operational income arising in the course of the society’s business. Even interest arising from deposits exceeding the minimum statutory requirement was held eligible for deduction because the deposits represented deployment of funds generated from the society’s credit business.
Society Engaged in Providing Credit Facilities to Members
The assessee was a co-operative credit society registered under the Karnataka Co-operative Societies Act, 1959. Its principal activity was accepting deposits from its members and providing credit facilities to them in accordance with its bye-laws.
The assessee had not originally filed its return for Assessment Year 2016-17. Information available with the Department indicated that the assessee had deposited cash amounting to approximately Rs.3.45 crore in Shri Veerpulikeshi Co-operative Bank Ltd. Proceedings under Section 148A were initiated, followed by issuance of notice under Section 148.
In response, the assessee filed its return declaring nil income. During the reassessment, the Assessing Officer noticed that the assessee had earned interest income of Rs.8,80,946 from deposits maintained with co-operative banks, including amounts kept in the statutory reserve fund.
The assessee claimed that its only business was providing credit facilities to members and that the surplus generated from such business was temporarily deposited with co-operative banks. The interest was therefore attributable to its business and eligible for deduction under Section 80P(2)(a)(i).
Assessing Officer Treated Interest as Income from Other Sources
The Assessing Officer rejected the claim and assessed the entire interest income of Rs.8,80,946 under the head “Income from Other Sources.”
The CIT(A) confirmed the disallowance by relying upon the Karnataka High Court’s decision in PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka).
According to the lower authorities, interest arising from deposits with co-operative banks could not be treated as income attributable to the business of providing credit facilities to members.
The assessee carried the dispute before the Tribunal and relied upon the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO [2015] 55 taxmann.com 447 (Karnataka).
Tumkur Merchants Decision Squarely Applied
The Tribunal examined the decision in Tumkur Merchants, which itself had considered the Supreme Court’s ruling in Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC).
In Tumkur Merchants, the Karnataka High Court had held that where a co-operative society engaged in providing credit facilities to its members temporarily deposits surplus funds in a bank, the interest earned from such deposits is attributable to its business and qualifies for deduction under Section 80P(2)(a)(i).
The Tribunal found that the assessee before it was also a credit co-operative society engaged in providing credit facilities to its members. The deposits had been made out of surplus funds generated from that activity. Consequently, the jurisdictional High Court’s ruling in Tumkur Merchants squarely covered the issue in favour of the assessee.
CIT(A) Relied Upon a Decision Concerning Section 80P(2)(d)
The Tribunal drew an important distinction between the two provisions contained in Section 80P.
It observed that the Karnataka High Court decision in PCIT v. Totagars Co-operative Sale Society, relied upon by the CIT(A), concerned a claim under Section 80P(2)(d). That provision deals with interest or dividend income derived by a co-operative society from investments with another co-operative society.
The assessee’s claim, however, was under Section 80P(2)(a)(i), which grants deduction in respect of profits and gains attributable to the business of banking or providing credit facilities to members.
The High Court decision relied upon by the CIT(A) specifically recorded that the assessee in that case had shifted its claim from Section 80P(2)(a) to Section 80P(2)(d). Therefore, the Tribunal held that the CIT(A) had applied a decision rendered in a materially different statutory context.
A judgment concerning eligibility under Section 80P(2)(d) could not automatically govern a claim independently made under Section 80P(2)(a)(i).
Statutory Reserve Fund Interest Also Qualifies for Deduction
The Tribunal separately considered interest earned from statutory deposits maintained in the reserve fund under the Karnataka Co-operative Societies Act.
It held that such interest was operational income derived in the course of the assessee’s business. Maintenance of a statutory reserve was connected with and incidental to the conduct of the credit society’s activities. Interest arising from such deposits therefore retained a direct nexus with the society’s business.
More importantly, the Tribunal extended the deduction even to interest attributable to deposits exceeding the statutory minimum. It reasoned that the interest arose from deposits forming part of the profits and gains attributable to the assessee’s business.
Accordingly, the Tribunal allowed deduction under Section 80P(2)(a)(i) in respect of interest earned from co-operative bank deposits, statutory reserve fund deposits and deposits exceeding the statutory requirement.
Delay of 128 Days Condoned in the Interest of Substantial Justice
The appeal before the Tribunal had been filed with a delay of 128 days. The assessee explained that two appellate orders, relating to Assessment Years 2016-17 and 2020-21, were received by email on the same day. Its staff mistakenly treated both as pertaining to Assessment Year 2020-21. The omission was noticed later by the Chartered Accountant while updating the records.
Following the Supreme Court’s decision in Collector, Land Acquisition v. Mst. Katiji, the Tribunal held that rules of procedure are handmaids of justice and that substantial justice should prevail over technical considerations.
As the assessee did not stand to benefit from filing the appeal late and sufficient cause was demonstrated, the delay was condoned.
Author’s Comments
This decision is particularly useful for Karnataka-based credit co-operative societies because it carefully distinguishes the two lines of decisions commonly cited in disputes concerning interest income.
The decisive question is not merely whether the investment was made with a co-operative bank. It is necessary to identify the precise clause under which deduction is claimed and the nexus between the deposited funds and the society’s credit business.
Where the claim is under Section 80P(2)(a)(i) and the deposits represent temporary deployment of business funds generated from providing credit facilities to members, the decision in Tumkur Merchants continues to support the deduction. A decision dealing with Section 80P(2)(d) cannot be mechanically applied to reject such a claim.
The ruling is also significant because it covers not only mandatory statutory deposits but also deposits exceeding the statutory requirement. The source and business character of the funds, rather than the mere fact of their placement in a bank deposit, determined the eligibility for deduction.
Cases Discussed
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO [2015] 55 taxmann.com 447 (Karnataka)
- Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC)
- PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)
- Collector, Land Acquisition v. Mst. Katiji
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE
The assessee has filed the present appeal against the impugned order dated 27/05/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2016-17.
2. The present appeal is delayed by 128 days. Along with the appeal, the assessee has filed an application seeking condonation of delay duly supported by the affidavit of the Chief Executive Officer of the Assessee Society. In the application, it is submitted that the order passed by the learned CIT(A) was received on the same date, i.e. 27/05/2025 and communicated by email. It is further submitted that on the same date, the assessee received the appellate order for the assessment year 2020-21.
Therefore, the staff of the assessee’s office mistakenly assumed that both the orders pertain to the assessment year 2020-
21. Even though necessary steps were taken against the learned CIT(A)’s order for the assessment year 2020-21 and an appeal was filed before the Tribunal. However, no steps were taken in respect of the impugned order for the year under consideration. It is submitted that only when the Chartered Accountant of the assessee, while updating the records of the assessee, noticed the appellate order for the assessment year 2016- 17, necessary steps were taken for the appeal before the Tribunal. As per the assessee, the delay in filing the present appeal was neither deliberate nor intentional and has occurred due to circumstances beyond the control of the assessee. Accordingly, the assessee has prayed for condonation of delay in filing the present appeal.
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 pref erred. 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: –
1. The order passed by the learned NFAC is opposed to law and facts of the case.
2. The assumption of jurisdiction and the issue of notice by the Assessing Officer is bad in law.
3. The issue of notice by the Jurisdictional Assessing Officer is contrary to the statutory requirement, as such, notices are to be issued through the Faceless mechanism as mandated under the statute and the CBDT Circular.
4. The NFAC ought to have held that the interest earned by the appellant from deposits with other co- operative banks is deductible u/s 80P(2)(d) of the Act.
5. The NFAC erred in upholding the disallowance of deduction under section 80P amounting to Rs. 8,80,946/- and assessing the said amount under the head income from other sources. Thus, the impugned appellate order is bad in law.
6. Alternatively and without prejudice the expenses incurred for earning such interest ought to have been allowed as addition in computing the income.
5. The only 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.
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. The assessee is engaged in providing credit facilities to its members within the framework of its bye-laws read with the Karnataka Co- Operative Societies Act, 1959. For the year under consideration, the assessee did not file its return of income. On the basis of the information that during the year under consideration the assessee has deposited a huge amount of cash in Shri Veerpulikeshi Co-op Bank Ltd amounting to ₹ 3,45,80,000, a show cause notice under section 148A(b) of the Act was issued. After completion of the proceedings under section 148A, notice under section 148 of the Act was issued. In response to the said notice, the assessee filed its return of income on 17/03/2023 declaring a total income of ₹ Nil. During the assessment proceedings, it was observed that the assessee has received total interest income of ₹ 8,80,946 from the deposits maintained with the Co- operative Banks. Accordingly, the assessee was asked to show cause as to why the said interest income should not be added to its total income as “ Income from Other Sources”. In response, the assessee submitted that and only business is carrying on the credit co- operative society, i.e. receiving deposits from members and lending loans and advances to the members. The assessee submitted that the surplus cash generated is being kept in the Co- operative Banks to earn interest, which is directly attributable to its activities of a credit co- operative society. Accordingly, the assessee submitted that on the said interest income, it is entitled to claim deduction under section 80P(2)(a)(i) of the Act. In support of its contention, the assessee placed reliance upon the decision of 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). The assessee further submitted that even the Reserve Fund Deposit is as per the provisions of the Karnataka Co-Operative Societies Act, 1959 and rules made thereunder. Thus, it was submitted that the interest income earned from Reserve Fund Deposit is also attributable to its business activity of providing credit facilities to its members.
7. The Assessing Officer (“AO”), vide order dated 16/03/2024 passed under section 147 read with section 144B of the Act, disagreed with the submissions of the assessee and treated the entire interest income of ₹ 8,80,946 earned from deposits in co- operative Banks and from Reserve Fund Deposit as income of the assessee under the head “Income from Other Sources”.
8. The learned CIT(A), vide impugned order, following 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), held that the interest income earned by the assessee does not qualify for deduction under section 80P(2)(a)(i) of the Act. Being aggrieved, the assessee is in appeal before us.
9. We have considered the submissions of both sides and perused the material available on record. The admitted facts of the case are that 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. During the year under consideration, the assessee, inter alia, earned interest income of ₹ 8,80,946 from investments in Co- operative Banks and statutory deposits in Reserve Fund. As per the assessee, these investments were made out of surplus funds generated from the activities of providing credit to members and are inextricably linked to the business. Further, the assessee claims that a portion of these investments is statutory in nature and must be maintained under the Karnataka Co- operative Societies Act, 1959. Therefore, as per the assessee, the interest earned on these deposits should be treated as business income and is eligible for deduction under section 80P(2)(a)(i) of the Act. However, the AO held that the interest income is chargeable to tax under the head “ Income from Other Sources” and not as business income.
10. We find that while deciding a similar issue the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. (supra), 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.
11. Insofar as 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), placed reliance upon by the learned CIT(A), from the careful perusal of the same, we find that in that case the deduction was claimed under section 80P(2)(d) and not under section 80P(2)(a)(i) of the Act. The said fact 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 o f interest or dividends derived by the assessee Co- operative Society from its investments with any other Co-operative Society.” (Emphasis supplied)
12. Since the assessee’s claim is under section 80P(2)(a)(i) of the Act, we are of the considered view that the decision relied upon by the learned CIT(A) 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. Accordingly, we are of the considered view that the assessee is entitled to claim deduction under section 80P(2)(a)(i) of the Act in respect of the interest earned from investments in Co- Operative Banks. E ven the interest income earned by the assessee from statutory deposits is in the nature of operational income derived by the assessee in the course of its business, and consequently the same also qualifies for deduction under section 80P(2)(a)(i) of the Act. Further, the interest income attributable to deposits which exceeds the statutory requirement is also eligible for deduction under section 80P(2)(a)(i) of the Act, as the interest is earned from deposits, which is part of the profits and gains attributable to the business of the assessee. Accordingly, the assessee’s claim of deduction under section 80P(2)(a)(i) of the Act in respect of interest income earned from investments in Co-operative Banks and on account of statutory deposits is allowed. As a result, the impugned order is set aside, and the grounds raised in the assessee’s appeal are allowed.
13. In the result, the appeal by the assessee is allowed.
Order pronounced in the open court on 21-Sept-2026.
