Case Law Details
No 242 Rameshwara Kudumangalore Vividoddesha Prathamika Krishi Grameen SSN Vs ITO (ITAT Bangalore)
Bangalore ITAT Restores Section 80P Claim of Agricultural Credit Co-operative Society; Holds AO Must Examine Nature of Activities and Member Deposits Before Denying Deduction
The Bangalore ITAT partly allowed the appeals of an agricultural credit co-operative society for AYs 2015-16 and 2020-21, holding that the Revenue had denied deduction under section 80P without properly examining the assessee’s activities or recording sustainable reasons. The Tribunal observed that where a society is engaged in providing credit facilities exclusively to its members, the deduction under section 80P(2)(a)(i) cannot be denied merely on assumptions or by mischaracterising its activities.
For AY 2015-16, the Tribunal deleted the disallowance of ₹10.13 lakh under section 80P(2)(a)(i), noting that neither the assessment order nor the appellate order contained any discussion or reasoning for denying the claim, and that the issue had not even formed part of the revision proceedings under section 263. It further allowed deduction on interest income from investments, holding that such income, being attributable to the business of providing credit facilities to members, qualified for deduction under section 80P(2)(a)(i) in the light of the Karnataka High Court decisions in Tumkur Merchants Souharda Credit Co-operative Ltd. and Pr. CIT v. Totagars Co-operative Sale Society. The Tribunal also directed the Assessing Officer to allow the deduction under section 80P(2)(c), while restoring the issues relating to provision for audit fees and leave encashment to the Assessing Officer for verification of supporting evidence and compliance with section 43B.
For AY 2020-21, the Tribunal found that the Assessing Officer had denied deduction under section 80P and made substantial additions towards member deposits and interest thereon without properly appreciating the assessee’s status as an agricultural credit co-operative society or examining the details already furnished. It held that absence of PAN of every member, particularly village farmers who did not possess PAN, could not by itself justify treating member deposits as bogus, so long as the society maintained the Know Your Customer (KYC) particulars required under the Co-operative Societies Act and applicable regulatory guidelines. The Tribunal restored the matter to the Assessing Officer with directions to examine the society’s eligibility under section 80P(2)(a)(i) and verify compliance regarding member deposits before deciding the issues afresh.
Cases Discussed
- Bangalore Credit Co-operative Society Limited v. Income Tax Officer, Ward 7(2)(1), Bengaluru (Karnataka High Court), 2026 (4) TMI 272 (Karnataka High Court)
- M/s. Judicial Employees House Building Cooperative Society Limited v. Income Tax Officer, Ward-2(2), Mysuru (Karnataka High Court), 2025 (10) TMI 770 (Karnataka High Court)
- M/s. The Totgars Co-operative Sale Society v. Principal Commissioner of Income Tax / Income Tax Officer (Karnataka High Court), 2017 (10) TMI 941 (Karnataka High Court)
- Commissioner of Income Tax v. The Totagars Co-operative Sale Society (Karnataka High Court), 2017 (1) TMI 1100 (Karnataka High Court)
- Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income Tax Officer, Ward-1, Tumkur (Karnataka High Court), [2015] 55 taxmann.com447 (Karnataka)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. These two appeals have been filed by the assessee for assessment years 2015-16 and 2020-21. For assessment year 2015-16, the assessee challenges the appellate order dated 18 June 2025 passed by the National Faceless Appeal Centre, Delhi, dismissing its appeal against the assessment order dated 21 September 2021 passed under section 143(3) read with sections 263 and 144B of the Income-tax Act, 1961. For assessment year 2020-21, the assessee challenges the appellate order dated 18 June 2025 passed by the National Faceless Appeal Centre, dismissing its appeal against the assessment order dated 26 September 2021 passed under section 143(3) read with section 144B of the Act. Aggrieved by these orders, the assessee is in appeal before us.
2. The Assessee has raised the following grounds of appeal:
ITA 1909/BANG/2025:
1. The orders of the authorities below in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A]/NFAC is not justified in upholding the order of the learned A. O, denying the deduction claimed by the appellant under the provision of section 80P[2][a][i] of the Act in respect of the interest of Rs. 10,13,923/- under the facts and in the circumstances of the appellant’s case.
3. The learned CIT[A]/NFAC is not justified in making a separate disallowance of Rs. 1,28,311/- u/s 80P[2][a][i] of the Act in respect of interest income earned, which amounts to a double disallowance, under the facts and in the circumstances of the appellant’s case.
4. The learned CIT[A]/NFAC failed to appreciate that the interest income earned by the appellant on deposits in banks was part of the business of providing credit facilities to the members of the appellant and hence, the said Interest was liable for assessment under the head “Business” and not under the head “Other Sources” and therefore, the deduction claimed by the appellant u/s 80P[2][a][i] of the Act ought to have been allowed towards the said interest under the facts and in the circumstances of the appellant’s case.
5. Without prejudice to the above, the learned CIT[A]/NFAC ought to have appreciated that the interest was alternatively entitled to deduction u/s, 80P[2][d] of the Act, under the facts and in the circumstances of the appellant’s case.
6. The learned CIT[A]/NFAC is not justified in sustaining the disallowance of deduction of Rs. 50,000/- claimed by the appellant u/s 80P[2][c] of the Act under the facts and in the circumstances of the appellant’s case.
7. The learned CIT[A]/NFAC is not justified in sustaining the disallowance of Rs. 45,552/- being the provision for audit fees under the facts and in the circumstances of the appellant’s case.
8. The learned CIT[A]/NFAC is not justified in sustaining the disallowance of Rs. 1,32.013/- being the provision for leave encashment under the facts and in the circumstances of the appellant’s case.
9. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
ITA 1910/BANG/2025:
1. The orders of the authorities below. in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A]/NFAC is not justified in upholding the order of the learned A.O. denying the deduction of Rs. 58,23,631/- claimed by the appellant under the provision of section 80P of the Act by holding that the appellant was not entitled to the deduction in as much as the appellant was engaged in retail business of controlled items like rice, wheat, kerosene, sugar, jowar seeds, cement etc. and that the appellant was in the business of banking under the facts and in the circumstances of the appellant’s case.
3. The learned CIT[A]/NFAC is not justified in upholding the addition of Rs. 8,97,00,924/- and Rs. 64,50,872/- in respect of deposits received from members and interest paid on such deposits holding that the of the appellant’s case.
4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. The SSC is an agricultural credit cooperative society registered under the Karnataka cooperative societies act, 1959. It is providing credit facilities to its member and formed on 27th of March 1957 and claiming the deduction under section 80 P of the Income Tax Act from year to year.
4. For assessment year 2015-16, the assessee filed its return of income on 28 September 2015, declaring total income of ₹1,77,980 after claiming deduction of ₹10,63,019 under section 80P of the Act. The case was selected for scrutiny to verify the deduction claimed. By assessment order dated 19 December 2017 passed under section 143(3), the total income was determined at ₹5,78,780 after adding ₹4,00,800 towards rent and interest received from nominal members. On examining the record, the learned CIT revised the assessment as erroneous and prejudicial to the interests of the Revenue, noting that the assessee had claimed deductions of ₹10,13,923 under section 80P(2)(a)(i) and ₹50,000 under section 80P(2)(c). Pursuant to the revision order dated 6 March 2020 passed under section 263, reassessment proceedings were initiated and notice under section 142(1) was issued on 9 March 2021. The learned Assessing Officer observed that the assessee, being a co-operative society, provided credit facilities to its members but was not authorized to carry on banking business. He therefore treated interest income of ₹1,28,311 earned from non-member institutions as income from other sources and held it ineligible for deduction under sections 80P(2)(a)(i) and 80P(2)(d). He also disallowed the provision for leave encashment of ₹1,32,013 for want of evidence that it had been paid before the due date for filing the return, and similarly disallowed provision for audit fees of ₹45,552. In addition, he added interest on an income-tax refund that had not been offered to tax. Consequently, the total income was assessed at ₹18,18,056 under section 143(3) read with section 263 of the Act.
5. Aggrieved by the assessment order, the assessee appealed before the learned CIT(A), who found no merit in the grounds raised and dismissed the appeal.
6. The assessee is in appeal before the Tribunal, contending that deduction under section 80P(2)(a)(i) of the Act was wrongly denied in respect of interest income of ₹10,13,923 and that the further disallowance of ₹1,28,311 amounted to a double addition. It also submits that the interest income is assessable as business income and not as income from other sources. The assessee further challenges the disallowance of ₹45,552 towards provision for audit fees and ₹1,32,013 towards provision for leave encashment.
7. The learned Authorized Representative, Shri V. Narendra Sharma, Advocate, submitted that the assessee was entitled to deduction of the entire interest income earned during the year under section 80P(2)(a)(i) of the Act, as the profits arising from providing credit facilities to its members qualify for deduction. He relied on coordinate bench decisions and binding judgments of the Hon’ble Karnataka High Court, including Commissioner of Income Tax v. The Totagars Co-operative Sale Society, 2017 (1) TMI 1100 (Karnataka High Court), and Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income Tax Officer, Ward-1, Tumkur, [2015] 55 taxmann.com447 (Karnataka), to contend that such interest income is attributable to the assessee’s business of providing credit facilities to members and is deductible under section 80P(2)(a)(i). He further submitted that the disallowance of audit fees and leave encashment was not sustainable in law, and that the learned Assessing Officer could not have disallowed the deduction of ₹50,000 under section 80P(2)(c).
8. The learned CIT-DR, Shri N. S. Shashidhara, strongly supported the orders of the lower authorities. He submitted that the Hon’ble Karnataka High Court has held that interest income earned by such co-operative societies is taxable as “income from other sources” and that deduction under section 80P(2)(d) is not available where the income is received from co-operative banks. Relying extensively on the latest decision of the Hon’ble Karnataka High Court in M/s. The Totgars Co-operative Sale Society v. Principal Commissioner of Income Tax / Income Tax Officer, 2017 (10) TMI 941 (Karnataka High Court), he submitted that the said decision should be followed. He further submitted that the decision was rendered after considering the judgment of the Hon’ble Supreme Court and after distinguishing, in paragraph 18, the authorities relied upon by the learned Authorised Representative. He also referred to subsequent decisions of the Hon’ble Karnataka High Court following the same view, including Bangalore Credit Co-operative Society Limited v. Income Tax Officer, Ward 7(2)(1), Bengaluru, 2026 (4) TMI 272 (Karnataka High Court), and M/s. Judicial Employees House Building Cooperative Society Limited v. Income Tax Officer, Ward-2(2), Mysuru, 2025 (10) TMI 770 (Karnataka High Court). Accordingly, he submitted that there was no infirmity in the orders of the lower authorities.
9. As regards ground No. 1 of the appeal, we find that it is general in nature and requires no separate adjudication; accordingly, it is dismissed.
10. Ground No. 2 concerns the disallowance of deduction of ₹10,13,923 claimed by the assessee. We find that neither the assessment order nor the appellate order contains any discussion on this issue. Although the learned Assessing Officer added the amount to the income assessed under section 143(3) of the Act by observing that the assessee had wrongly claimed deduction under section 80P(2)(a)(i), no reasons have been recorded for doing so. We also find that this issue was not raised by the learned Principal Commissioner of Income Tax while passing the revisionary order under section 263 of the Act. Therefore, the addition appears to have been wrongly made and deserves to be deleted. Accordingly, ground No. 2 of the assessee’s appeal is allowed.
11. Ground No. 3 relates to the denial of deduction of ₹1,28,311 under section 80P(2)(a)(i) of the Act on interest income. Pursuant to the revisionary order passed by the learned Principal Commissioner of Income Tax, the learned Assessing Officer treated the interest income from investments of ₹1,28,311 as income from other sources, rather than business income as claimed by the assessee. Relying on the decision of the Hon’ble Karnataka High Court, the learned Assessing Officer held that the interest income was taxable under the head “income from other sources” and that the assessee was not eligible for deduction under section 80P(2)(d) of the Act.
12. After hearing both parties, we find that the issue is squarely covered in favour of the assessee by the decisions of the Hon’ble Karnataka High Court in Commissioner of Income Tax v. The Totagars Co-operative Sale Society, 2017 (1) TMI 1100 (Karnataka High Court), and Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income Tax Officer, Ward-1, Tumkur, [2015] 55 taxmann.com447 (Karnataka). These decisions hold that income attributable to the business of a co-operative society providing credit facilities to its members is eligible for deduction under section 80P(2)(a)(i) of the Act to the full extent of the profits and gains attributable to such activity. There is no dispute that the assessee carries on an activity covered by section 80P(2)(a)(i). Therefore, once the activity is eligible for deduction, the profits arising therefrom must be allowed as deduction in full under that provision. We also find that the learned Assessing Officer has not recorded any finding explaining why the impugned interest income should be taxed as income from other sources. Further, the decisions relied upon by the learned Departmental Representative and the learned Assessing Officer apply where the income of the co-operative society is assessable under the head “income from other sources.” In the present case, the assessee’s claim is under section 80P(2)(a)(i) on the basis that the income is business income. Accordingly, grounds Nos. 3 and 4 of the appeal are allowed.
13. In view of our decision on grounds Nos. 3 and 4, ground No. 5 has become infructuous and is accordingly dismissed.
14. Ground No. 6 concerns the disallowance of deduction of ₹50,000 under section 80P(2)(c) of the Act. We find no reason why this deduction, if otherwise allowable to the assessee, should be denied, particularly when the assessment order contains no discussion on the issue. Accordingly, we direct the learned Assessing Officer to allow deduction under section 80P(2)(c) of the Act, to the extent of ₹50,000, if any income remains after granting deduction to the assessee under section 80P of the Act. Ground No. 6 of the appeal is accordingly allowed.
15. Ground No. 7 relates to the disallowance of provision for audit fees of ₹45,552. We find that, while exercising revisionary jurisdiction, the learned CIT held that the assessee had merely made a provision for the said amount and, therefore, it was liable to be disallowed. The learned Authorised Representative submitted that the amount represented an accrued liability and not a contingent provision and therefore deserved to be allowed. The learned CIT-DR supported the orders of the lower authorities. We find that the deduction can be denied only if the liability is merely contingent. In the present case, the provision appears to have been made for audit work to be carried out and, therefore, could not have been disallowed outright by the learned Assessing Officer. Accordingly, we direct the assessee to furnish details supporting the provision for audit fees of ₹45,552. The learned Assessing Officer shall verify the details and allow the deduction if the claim is found to be in order. However, if the amount is found to be merely a contingent liability unsupported by evidence or by any applicable RBI circular or guideline requiring such provision for audit fees, the learned Assessing Officer may disallow it. Accordingly, ground No. 7 of the appeal is restored to the file of the learned Assessing Officer for verification.
16. Ground No. 8 relates to the provision for leave encashment of ₹1,32,013 made by the assessee in respect of earned leave of its staff. The assessee contends that the amount was paid before the due date for filing the return of income. However, as no documentary evidence of such payment was furnished, and as the tax audit report also did not indicate that the amount had been paid before the due date, the learned Assessing Officer disallowed the claim. In these circumstances, we direct the assessee to demonstrate before the learned Assessing Officer that the provision for leave encashment of ₹1,32,013 was actually paid to the employees before the due date for filing the return of income under section 139 of the Act. Since the claim is governed by section 43B of the Act, the learned Assessing Officer shall verify the evidence and delete the addition if the payment is found to have been made within the prescribed time. Accordingly, ground No. 8 of the appeal is allowed for statistical purposes.
17. In the result, the appeal filed by the assessee for assessment year 2015-16 is partly allowed.
18. For assessment year 2020-21, the assessee filed its return of income on 22 December 2020, declaring total income of ₹8,79,750. The return was selected for verification of the deduction claimed under section 80P of the Income-tax Act and notice under section 143(2) was issued on 29 June 2021. During assessment proceedings, the learned Assessing Officer required the assessee to furnish the names and addresses of lenders, their Permanent Account Numbers, the quantum of interest paid, and the applicable rate of interest; however, the assessee did not initially respond. The assessee later submitted that it was a society registered under the Karnataka State Co-operative Societies Act in Kodagu district and that it was engaged in retail trade of controlled commodities such as rice, wheat, kerosene, sugar, cement, and similar items. It also stated that it was engaged in small finance activities, including accepting savings and fixed deposits from its members. The learned Assessing Officer held that deduction under section 80P is available only where a society is engaged in banking, providing credit facilities to its members, or marketing agricultural produce grown by its members. Since the assessee was also engaged in retail trade of controlled commodities such as rice, wheat, kerosene, sugar, jowar seeds, and cement, the learned Assessing Officer treated it as carrying on retail business and held that deduction under section 80P was not allowable. He further observed that the assessee’s statements indicated that it was operating like a banking system without being governed as a bank under the Reserve Bank of India framework. Accordingly, he disallowed the deduction of ₹58,23,631 claimed by the assessee under section 80P of the Act.
19. The learned Assessing Officer further noted that the assessee had failed to furnish the names, addresses, and Permanent Account Numbers of the lenders. He therefore made additions in respect of unsecured loans and the related interest paid, as discussed above. Accordingly, the total income of the assessee was assessed at ₹10,28,58,177 by order dated 26 September 2022 passed under section 143(3) read with section 144B of the Income-tax Act.
20. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A), who dismissed the appeal. The learned CIT(A) substantially relied on the reasoning recorded by the learned Assessing Officer in the assessment order and did not record any independent findings. The appeal was dismissed by order dated 18 June 2025.
21. Aggrieved by the appellate order, the assessee is in appeal before us. The learned Authorised Representative submitted that the assessee had been denied deduction of ₹58,23,631 under section 80P of the Act on the ground that it was engaged in the retail business of controlled commodities such as rice, wheat, kerosene, sugar, jowar seeds, and cement, and was also carrying on banking business. He contended that the assessee was not granted proper opportunity of being heard before the lower authorities. He further submitted that the assessee is an agricultural credit co-operative society and, therefore, deduction under section 80P of the Act could not be denied on the basis adopted by the authorities below. He also submitted that additions of ₹8,97,00,924 towards deposits received from members and ₹64,50,872 towards interest paid on such deposits were wrongly made by treating the deposits as imaginary loans. Consequently, the interest paid to depositors was disallowed along with the addition of the deposits themselves.
22. The learned Departmental Representative supported the orders of the lower authorities and submitted that the additions were justified, as the assessee had failed to furnish the required details before them.
23. In rejoinder, the learned Authorised Representative submitted that the assessee had already furnished the details of unsecured loans on 10 January 2022 by enclosing the relevant list. He explained that Permanent Account Numbers could not be provided for all members because many were village-based farmers who did not have PANs. He further submitted that there was no statutory requirement for society to maintain PAN details of every member. According to him, the society had complied with the applicable Know Your Customer norms and maintained all relevant member details. Therefore, the allegation that the assessee had failed to furnish member details was incorrect and, in any event, the deposits could not be treated as bogus.
24. We have carefully considered the rival submissions and perused the orders of the lower authorities. The assessee’s case is that it is an agricultural credit co-operative society registered under the Karnataka Co-operative Societies Act and is engaged in providing credit facilities only to its members. It is further submitted that the assessee has not dealt with non-members in respect of its credit-facility activity and has been consistently allowed deduction under section 80P of the Act in earlier years. The assessee contends that, without examining the nature of its transactions, the learned Assessing Officer disallowed the deduction of ₹58,23,631 claimed under section 80P. It is also submitted that the assessee is not a bank but a co-operative society and is therefore eligible for deduction under section 80P(2)(a)(i) of the Act. As regards the additions of ₹8,97,00,924 towards unsecured loans/deposits and ₹64,50,872 towards interest paid thereon, the learned Authorised Representative submitted that the relevant details had already been furnished and that the addition of the entire amount was unjustified. On these facts, we find that the learned Assessing Officer failed to properly appreciate the nature of the assessee’s activities and the details furnished by it. We also find that the assessee cannot be expected to maintain Permanent Account Numbers for members who do not possess them. However, to the extent that the Co-operative Societies Act and applicable Reserve Bank of India guidelines require compliance with Know Your Customer norms, the relevant member details must be maintained. Where such KYC details are available and maintained in compliance with the applicable requirements, the additions could not have been made in the hands of the assessee.
25. In view of the above facts, the orders of the lower authorities are not sustainable in law, as they do not correctly appreciate the assessee’s activities or explain why the assessee is not entitled to deduction under section 80P of the Income-tax Act, particularly when such deduction has been allowed to it consistently since inception. Further, since the deposits shown by the assessee were received from its members, the lower authorities could not have concluded that the assessee was carrying on its activities with non-members.
26. In view of the above facts, we restore the assessee’s appeal for assessment year 2020-21 to the file of the learned Assessing Officer. The assessee shall establish before the learned Assessing Officer that it is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act and that the deposits received from its members comply with the provisions of the Co-operative Societies Act and the applicable guidelines of the Reserve Bank of India, if any. The learned Assessing Officer shall examine the evidence and decide the issue afresh in accordance with law.
27. In the result, the appeal filed by the assessee for assessment year 2020-21 is allowed for statistical purposes.
28. Accordingly, both appeals are disposed of in the terms indicated above.
Order pronounced in the open court on 23rd July, 2026.
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