Bangalore ITAT Slams Flip-Flop by AO; Grants Full 80P Deduction Including Bank Interest to Credit Co-operative Society

Thannirupantha Primary Agricultural Credit Co-opeartive Society Ltd. Vs ITO (ITAT Bangalore)

Bangalore ITAT Slams Flip-Flop by AO; Grants Full 80P Deduction Including Bank Interest to Credit Co-operative Society

In a significant ruling, the Bangalore ITAT allowed the claim of Thannirupantha Primary Agricultural Credit Co-operative Society Ltd. under Section 80P(2)(a)(i) and held that interest income earned from deposits with banks and co-operative banks was eligible for deduction as income attributable to the society’s business of providing credit facilities to its members.

The Assessing Officer had denied deduction by alleging that the society dealt with nominal and associate members, thereby destroying the principle of mutuality, and further treated interest and dividend income from bank deposits as “Income from Other Sources” relying upon the Totgars line of decisions. The CIT(A) affirmed the disallowance.

The Tribunal, however, noted that in the assessee’s own case for AY 2015-16, the very same Assessing Officer, after detailed verification pursuant to an earlier ITAT remand, had accepted that the society was eligible for deduction under Section 80P and had even allowed deduction on interest and dividend income earned from co-operative banks. The ITAT found it difficult to understand how a diametrically opposite view could be taken in later years on identical facts without any distinguishing feature.

Relying heavily on the Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd., the Tribunal reiterated that Section 80P is a benevolent provision that must be interpreted liberally and that deduction cannot be denied unless the society is shown to be dealing with non-members. The Tribunal specifically recorded that no evidence had been brought on record to establish dealings with non-members.

The ITAT further held that the interest earned on bank deposits was attributable to the business of the credit co-operative society and was therefore eligible for deduction under Section 80P(2)(a)(i). It distinguished recent decisions concerning Section 80P(2)(d), observing that the present dispute related to deduction under Section 80P(2)(a)(i), making the Revenue’s reliance on those authorities misplaced. The Tribunal followed the Karnataka High Court rulings in Tumkur Merchants Souharda Credit Co-operative Ltd., Guttigedarara Credit Co-operative Society Ltd., and Totagars Co-operative Sale Society (2017 Karnataka HC).

The Tribunal also deleted the separate addition relating to provisions for audit fees and interest liabilities, observing that the Assessing Officer had incorrectly added both expenditure provisions and income provisions, resulting in an unjustified addition.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. These are the two appeals filed by the assessee appellant against the order of the learned CIT – A pertaining to 2 assessment years assessment year 2017 – 18 and 2018 – 19 wherein the claim of the assessee for deduction under section 80 P (2) (a) (i) of the act is denied to the assessee. For assessment year 2017 – 18 there are certain other adjustment with respect to the disallowance of the provisions of expenses was also made.

2. The assessee is a Primary Agricultural Co-operative Society engaged in accepting deposits from and extending loans to its members. For AY 2017-18, it filed its return of income on 27.10.2017, declaring total income of Rs. 27,590 after claiming a deduction of Rs. 59,93,313 under section 80P of the Income-tax Act. The return was processed under section 143(1). The case was later selected for scrutiny under CASS, and notices under sections 143(2) and 142(1) were issued on 28.08.2018 calling for further details. The Assessee’s claim is under section 80P(2)(a)(i), which allows deduction in respect of income earned by a co-operative society engaged in banking or in providing credit facilities to its members.

3. It is noted that the assessee Society has four categories of members. ‘A’ Class members are regular members with voting rights and entitlement to dividends. ‘B’ Class members are government organizations. ‘C’ Class members are nominal members. ‘D’ Class members are associate members who may borrow from and deposit with the Society but have no voting rights and cannot participate in its administration. Accordingly, the Society cannot be regarded as a mutual concern, and the principle of mutuality does not apply. Transactions with associate and nominal members generate income or other benefits that are ultimately applied for the benefit of the regular members. In these circumstances, the entire deduction claimed by the assessee under section 80P (2) of the Act was disallowed.

4. On verification of the details furnished, it was found that the assessee had earned interest and dividend income of Rs. 70,49,396/- from investments made with Scheduled Banks and Co-operative Banks other than co-operative societies (Interest: Rs. 63,64,690/-; Dividend: Rs. 6,84,706/-). The assessee included this income in its claim for deduction under section 80P. However, the Assessing Officer held that such income was taxable under section 56 as “Income from Other Sources” and, therefore, not eligible for deduction under section 80P(2)(a)(i). The Assessing Officer further held that section 80P(2)(d) also did not apply, as that provision grants deduction only in respect of interest or dividend derived from investments with another co-operative society. Since the assessee had invested surplus funds, not immediately required for lending to its members, with Co-operative Banks and Scheduled Banks, the resulting income did not qualify for deduction under section 80P(2)(d). In support, reliance was placed on the judgment of the Hon’ble Karnataka High Court in The Totagars Co-operative Sale Society, ITA No. 100066/2016 dated 16.06.2017, which held that interest earned from deposits with co-operative banks and urban banks is assessable under section 56. Accordingly, the interest and dividend income of Rs. 70,49,396/- was treated as income from other sources and added to the total income. The assessee had also made provisions for certain expenses, which were disallowed. Consequently, the assessment under section 143(3) was completed at a total income of Rs. 74,26,180/-.

5. The assessee appealed before the learned CIT(A), who affirmed the denial of deduction under section 80P(2)(a)(i). He held that, by admitting a category of members without ownership or governance rights and treating them substantially on par with the general public, society had diluted the principle of mutuality. He further upheld the Assessing Officer’s reliance on the decision in Totgars. Consequently, the interest and dividend earned on deposits with DCC banks were assessed as “Income from Other Sources” and held ineligible for deduction under sections 80P(2)(a)(i) and 80P(2)(d). He also held that no deduction under section 57 was allowable, as the assessee failed to establish any specific and verifiable nexus between the claimed expenses and the interest income. The provisions made towards interest, audit fees, and other items were likewise disallowed, unascertained liabilities being unsupported by verifiable evidence of accrual.

6. For AY 2018-19, the assessee filed its return of income on 28.09.2018, declaring gross total income of Rs. 64,79,278/- and nil total income after claiming deduction of Rs. 64,79,278/- under section 80P(2)(a)(i) of the Income-tax Act, 1961. On scrutiny, the learned Assessing Officer held that the interest earned by the assessee-society on deposits and investments made with co-operative banks was not eligible for deduction under section 80P(2)(d). He further held that the Assessee’s claim for deduction in respect of interest income earned from co-operative banks, commercial banks, and other financial institutions was not allowable under any provision of section 80P of the Act. Accordingly, the entire interest income of Rs. 64,79,278/- was brought to tax as “Income from Other Sources.”

7. On Appeal the ld. CIT (A) upheld the order of the d AO on similar lines as in AY 17-18

8. The learned authorised representative submitted that identical issue arose in the case of the assessee for assessment year 2015 – 16 wherein after the order has been restored back to the file of the learned assessing officer for verification and deciding the issue afresh, the learned assessing officer has passed the order under section 143 (3) read with section 254 read with section 144B of the income tax act on 10 February 2023. According to that order the learned assessing officer carried out the fresh verification and thereafter issued several notices under section 142 (1) asking for the several details did not make any adjustment to the total income of the assessee. It was submitted that in that year the assessee claimed deduction under section 80 P of ₹ 5,264,317 where the assessee was granted the deduction. In paragraph No. 3.4 of the assessment order the learned assessing officer has agreed with the contention of the assessee that activities of the assessee are covered under the provisions of section 80 P (2 ((a) (i) of the act and therefore the deduction has been rightly claimed by the assessee under that section on the issue of income attributable to the business of the assessee. He further stated that the learned assessing officer further agreed that that interest on dividend income earned by the assessee from District cooperative Banks of ₹ 5,501,889 is also eligible for deduction under section 80 P (2) (a) of the act. The reliance placed by the assessee on the decision of the honourable Karnataka High Court in case of Tumkur merchants so hard the credit cooperative Ltd is also accepted. Considering the above aspect no adverse inference was drawn and the returned income at rupees Nil is accepted. He therefore submitted that in assessment year 2015 – 16, the assessing officer has completely examined the claim of the assessee and accepted that assessee is entitled to deduction under section 80 P (2) (a) of the act. He therefore submitted that when the claim of the assessee is accepted after due verification by order under section 143 (3) passed on 10 February 2023 by the learned assessing officer, diametrically opposite view was taken for assessment year 17 – 18 and 2018 – 19 which is not correct. He further submitted that that the decision of the honourable Karnataka High Court rendered with respect to deduction under section 80 P (2) (d) was also referred by the ITAT to be verified so far as its applicability is concerned. The learned assessing officer has also reached to the conclusion that there is no applicability to the facts of the case of the assessee of that decision. On the identical basses the learned assessing officer has changed his stand and has held that the decision of the honourable Karnataka High Court which was stated to be not applicable for assessment year 2015 – 16, is used for making a disallowance for assessment year 2017 – 18 and 2018 – 19. He further relied upon the written submissions made before the learned assessing officer for assessment year 2015 – 16 which were exhaustive as stated by him, may be considered.

9. The learned departmental representative vehemently supported the orders of the learned that lower authorities and submitted that the decision of the honourable Karnataka High Court clearly says that the interest income earned by the assessee should be considered as income from other sources and no deduction under section 80 P (2) (d) should be allowed to the assessee as the interest income earned from the cooperative banks is not same as interest income earned from other cooperative societies.

10. We have carefully considered the rival contention and perused the orders of the learned that lower authorities. As per the facts stated above, we find that the learned assessing officer for assessment year 2015 – 16 has categorically held by passing an order under section 143 (3) read with section 254 read with section 144B of the income tax act dated 10 February 2023 has categorically held that the interest income earned by the assessee from the cooperative societies which are cooperative banks is eligible for deduction under section 80 P (2) (a) of the act. The learned assessing officer has reached such conclusion after receiving the list of interest received from members and non-members, and details of dividend and interest received from schedule Banks and cooperative societies. The learned assessing officer has further enquired by issuing notice on the eligibility criteria for deduction claimed under section 80 P of the act. The learned assessing officer was further confronted with the decision of the honourable Karnataka High Court which has categorically held that interest income earned by the assessee is income derived from the business of the borrowing and lending from the members and therefore is entitled to deduction under section 80 P (2) (a) of the act.

11. As the facts stated above clearly shows that the assessee is a cooperative society which is engaged in the business of borrowing and lending with the members. Income of such cooperative societies are covered under the provisions of section 80 P of the act wherein in the case of an assessee being a co-operative society the carrying on of the business of banking or providing credit facilities to its members, the whole of the amount of the profits and gains of business attributable to such activity are fact that assessee has not dealt with any non-members. No evidence was brought on record before us by the learned lower authorities are mentioned in the assessment and appellate order that assessee has ever dealt with non-members.

12. Honourable Supreme court in Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 com161 (SC)/ [2021] 279 Taxman 75 (SC)/ [2021] 431 ITR 1 (SC) [12-01-2021] has held that:-

21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment:

“34. Seventhly, section 80P(1)(c) also makes it clear that section 80P is concerned with the co-operative movement generally and, therefore, the moment a co-operative society is registered under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). The reach of sub-clause (c) is extremely wide, and would  include co-operative societies engaged in any activity, completely independent of the activities mentioned in sub-clauses (a) and (b),  subject to the cap of INR 50,000/- to be found in sub-clause (c)(ii). This put paid to any argument that in order to avail itself of a benefit under section 80P, a cooperative society once classified as a particular type of society, must continue to fulfil those objects alone. If such objects are only partially carried out, and society conducts any other legitimate type of activity, such co-operative society would only be entitled to a maximum deduction of Rs. 50,000/- under sub-clause (c).’

45. To sum up, therefore, the ratio decidendi of Citizen Co-operative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into section 80P(2)(a)(i) when it is not there. Further, section 80P (4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P (4) is out of harm’s way, all the assesses in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable  to such loans obviously cannot be deducted.”

13. Therefore, the assessee is engaged into the carrying on the business of banking or providing credit facilities to its members only. Therefore, it fulfils the provisions of section 80 P (2) (a)(i) of the act. The assessee’s claim is also supported by the decision of the honourable Supreme Court as above wherein it has been held that the claim of the assessee is not hampered unless the assessee society deals with non-members.

14. On the issue of eligibility of deduction of bank interest under section 80 P (2) (a) (i) of the act we find that the interest income earned by the society is also attributable to such activities. The law provides that in such case whole of the number of profits and gains of business is required to be granted as deduction. It is not the case that the interest income earned by the assessee society is not profit attributable to the business of the credit cooperative society. This issue is also squarely covered in favour of the assessee by the decision of the honourable Karnataka High Court in case of Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] 78 com169 (Karnataka)/[2017] 392 ITR 74 (Karnataka)[05-01-2017] and Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] and Guttigedarara Credit Co-operative Society Ltd. vs. Income-tax Officer, Ward 2(2), Mysore [2015] 60 taxmann.com 215 (Karnataka)/[2015] 234 Taxman 476 (Karnataka)/[2015] 377 ITR 464 (Karnataka)[09-06-2015] [ all these three decisions considered and interpreted the decision of Honourable Supreme court in Totgars, Cooperative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC)/[2010] 322 ITR 283 (SC)/[2010] 229 CTR 209 (SC)[08-02-2010]] which was also referred to in the order of the coordinate bench for assessment year 2016 – 17. In view of this the assessee is entitled to deduction on the bank interest also and the claim is not covered by the decisions of the honourable Karnataka High Court as stated by the learned assessing officer in case of total are cooperative societies Ltd.

15. The Ld. DR has relied up on decision of Honourable Karnataka high court in case of 2025 (10) TMI 770 – KARNATAKA HIGH COURT M/s. Judicial Employees House Building Cooperative Society Limited Versus Income Tax Officer Ward -2 (2), Mysuru. and 2025 (6) TMI 2113 – ITAT BANGALORE ITO Ward-7 (2) (1) Bangalore Versus M/s. Bangalore Credit Co-operative Society Ltd. (Vice-Versa) the question before the court was

“1. Whether on facts and circumstances of the case, the Tribunal was justified in coming to the conclusion that the interest derived by the Co-operative society from its investments was not with any other co-operative Society as required under Section 80P2(d)?

2. Whether for the purpose of Section 80P(2)(d) a Co-operative Bank should be considered as a Co-operative Society or not. For, if a Co-operative Bank is considered to be a Co-operative Society, then any interest earned by the Co-operative Society from a Cooperative Bank would necessarily be deductible under Section 80P (1)?”

16. So, none of the above two decision were on the issue of deduction u/s 80P 92) (a) of the act. Admittedly we are not confronted with claim of deduction denied u/s 80 P (2) 9d) but u/s 80 P 92) (a) (i) of The Act. hence reliance on these two judgments is misplaced. Had it been the case before us of deduction u/s 80 P (2) (d) those two decisions would have clinched the issue in favour of revenue.

17. In n State of Orissa Sudhanshu Sekhar Misra [1968] 2 SCR 154, Honourable supreme court has held that “A decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it.

18. In view of the above judicial pronouncement of the honourable jurisdictional High Court, we allow the appeal of the assessee and direct the learned assessing officer to grant deduction under section 80 P (2) of the act to the assessee considering that even the interest income earned by the assessee from the banks wherein the members money deposited is attributable to the business of borrowing and lending with the members.

19. It is real strange fact that the learned assessing officer for assessment year 2015 – 16 has taken a diametrically opposite view as compared to the decision taken by him for assessment year 2017 – 18 and 2018 – 19. For assessment year 2015 – 16 he has taken a view which is favourable to the assessee and for assessment year 2017 – 18 and 2018 – 19 he has taken a view which is against the assessee. The reasons given by the learned assessing officer initially for questioning the claim of the assessee are same. Therefore it is not acceptable to take the different view on same set of facts. Though the principle of rest judicata does not apply to the income tax proceedings, however, the reasons held to be given if the two orders for the two different years are not giving the same results. We do not find that any such distinction has been made. For this reason also the orders passed for assessment year 17 – 18 and 2018 – 19 disallowing the claim of the assessee for deduction under section 80 P (2) (a ) of the act are not sustainable.

20. On the issue of the disallowance of the provision of the expenditure, we find that the provision made by the assessee is on the basis of expenditure incurred. For assessment year 2017 – 18 assessee has made any interest provision from government, interest payable and also on audit fee provision of ₹ 15,000. The learned assessing officer has dealt with this issue as under:-

“It has come to light from the Profit and Loss Account of the Society that society has provided following provisions: On Interest Rs. 57,660/-Interest from Govt. Rs. 13,32,615/- Audit Fees Rs. 15,000/- Total Rs. 14,05,275/- Since the above mentioned provisions are neither expenditure nor an ascertained liability, same is not admissible as allowable expenditure. Hence, same is disallowed and added back to the income of the assessee society. 9. The assessee society claimed inadmissible deduction under Section 80P (2)(a)(i) and thereby underreported its income and reduced the tax liability. Further is has claimed inadmissible deductions on account of provisions/reserves as discussed above and claimed excess interest by making provision as discussed above and thereby underreported its income.”

21. We note that the provision of the interest expenditure receivable from the government of India is income of the assessee and further the provision of audit fees of ₹ 15,000 is the expense of the assessee. Therefore, the learned assessing officer has made the addition of both the provision is made for expenses as well as the provisions of income receivable. The provision of income receivable has already gone to swell the income of the assessee. Therefore, there would be double addition to that extent. The provision of ₹ 15,000/- audit expenditure on interest expenditure of ₹ 57,660/– made by the assessee is also on the basis of closing balances of the outstanding as well as the fee payable to the auditor. Therefore, the addition made by the learned assessing officer and confirmed by the learned CIT – A of the above provision is unjustified and therefore directed to be deleted.

22. Thus, the appeal of the assessee for both these years are allowed.

Order pronounced in the open court on 29^th May 2026.