Case Law Details
Kundapura Vyavasaya Seva Sahakari Sangha Vs ITO (ITAT Bangalore)
Bangalore ITAT Slams Denial of U/s 80P Deduction to Credit Co-operative Society – Interest on Bank Deposits Held Eligible U/s 80P(2)(a)(i), Ad-hoc Disallowance of Provisions Also Deleted
The Bangalore ITAT allowed the appeals of a primary agricultural credit co-operative society and held that interest earned on deposits kept with banks out of business funds/reserves is eligible for deduction u/s 80P(2)(a)(i) where the society is engaged in providing credit facilities to its members. The Tribunal noted that the assessee had never claimed deduction u/s 80P(2)(d) and therefore the Revenue wrongly relied upon the Karnataka High Court ruling in Totagars. Instead, the case was squarely covered by the Karnataka High Court decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which held that temporary parking of surplus funds in banks does not change the character of business income.
The AO had treated interest income from scheduled/co-operative banks as “Income from Other Sources” and denied deduction u/s 80P while also making disallowances towards excess interest provision and other expense provisions on the allegation that the assessee followed a hybrid accounting system. However, the Tribunal found that the provisions were made on an accrual basis following a scientific method linked to outstanding member loans, and hence could not be disallowed merely on assumptions and conjectures.
The ITAT observed that there was no evidence brought by the department to show that the interest income was taxable under the head “Income from Other Sources”. Since the funds represented business reserves not immediately required for lending to members, interest earned therefrom remained attributable to the business of providing credit facilities to members and qualified for deduction u/s 80P(2)(a)(i). The Tribunal accordingly directed deletion of the disallowances and allowed the deduction claimed by the assessee for all three assessment years.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. ITA Nos. 1798-1800/Bang/2025 for Assessment Year 2017-18, 2018-19 & 2020-21 are filed by M/s. Kundapura Vyavasaya Seva Sahakari Sangha [ The Assessee/ Appellant] against the Appellate Order passed by the National Faceless Appeal Centre (NFAC), Delhi [ the Ld. CIT (A) ] dated 20.06.2025 by separate orders for all these assessment years wherein the Appeals of the Assessee were dismissed.
2. Assessee is aggrieved and the only issue involved is the allowability of deduction u/s. 80P as well as the confirmation of disallowance of various expenses.
3. The brief facts of the case show that Assessee is a primary agricultural cooperative society registered under the Karnataka Cooperative Societies Act, 1959 with the primary object of providing credit facilities to its members by lending loans and accommodating deposits.
4. For AY 2017-18 The Assessee filed its return of income on 27.10.2017 at a gross total income of Rs. 53,19,074/- and returned income of Rs. 1,46,620/-after claiming deduction u/s. 80P of the Act of Rs. 51,72,452/-. The case of the Assessee was selected for scrutiny and thereafter the Assessment was made disallowing claim of deduction u/s. 80P of the Act. The Ld. Assessing Officer further disallowed provision of interest expenditure and disallowance of provision of expenses debited to the profit and loss account. The Assessed income of the Assessee arrived at Rs. 1,48,07,000/- by Assessment Order dated 13.11.2019.
5. The Assessment Order was challenged before the Ld. CIT(A), Bengaluru who has partly allowed the Appeal of the Assessee directing the Ld. Assessing Officer to verify that only the profits and gains from credit facility given to members is allowable as deduction u/s. 80P.
6. Assessee preferred an Appeal before the ITAT which has remitted the matter back to the file of the Ld. Assessing Officer with respect to the claim of deduction u/s. 80P of the Act. The disallowance of provision of interest expenditure of Rs. 78,87,620/- and disallowance of various provision of expenses of Rs. 16,00,308/- was also restored.
7. Based on this, the Ld. Assessing Officer framed the Assessment Order. He noted that the Assessee has earned interest income from investments in scheduled banks and cooperative banks amounting to Rs. 48,33,777/-. The Ld. Assessing Officer further noted that Assessee has made provision of interest in past year of Rs. 2.87 crores and for this year of Rs. 3.66 crores and therefore there is an excess provision of Rs. 78,87,620/-. Further, the Ld. Assessing Officer noted that that there are certain provisions of agricultural fund etc., of Rs. 16,00,308/-. The Ld. Assessing Officer further asked the Assessee to give proportionate working of interest income earned by the Assessee for the purpose of giving deduction u/s. 80. On that basis, he found that a sum of Rs. 5,08,766/- is the cost of fund of interest income of Rs. 48,33,774/- and taxed the balance sum of Rs. 43,25,008/- under the head income from other sources and consequently denied the deduction u/s. 80P of the Act. With respect to the provision of excess interest and provision of expenses was also denied holding that Assessee is maintaining books of accounts on accrual basis. However, the Assessee is following hybrid system of accounting. The provision of expenditure is not an asset and liability.
8. Accordingly, the Assessment Order was passed on 12.03.2025 determining total income of the Assessee at Rs. 1,39,59,556/-.
9. For Assessment Year 2018-19 also, the order was made wherein the Assessee was denied deduction u/s. 80P of the Act of Rs. 62,25,778/- against the returned income of the Assessee of Rs. 2,14,240/- following Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 com140 (Karnataka)/ [2017] 395 ITR 611 (Karnataka)/ [2017] 297 CTR 158 (Karnataka) [16-06-2017]. In this case, the Assessee has earned interest from various banks of Rs. 1,04,65,386/-.
10. For Assessment Year 2020-21, the facts also show that Assessee filed its return of income at Rs. 1,08,410/- wherein the claim of deduction u/s. 80P(2)(a)(i) of the Act was made of Rs. 63,91,514/-. The Ld. Assessing Officer after granting the deduction of the cost held that a sum of Rs. 8,18,047/- as interest income received from SCDCC bank is not allowable to the Assessee u/s. 80P based on Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 com140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017] and computed the Assessed income of Rs.9,26,457/-
11. Identically, the Appeals were filed before the Ld. CIT(A) for all these 3 years. For Assessment Year 2017-18, the Assessee pleaded that its claim is deduction u/s. 80P(2)(a)(i) of the Act, the issue is covered by the decision of the Hon’ble Karnataka High Court in favor of the Assessee. However, the Ld. CIT(A) dismissed the Appeal of the Assessee. Further, the disallowance of excess interest expenditure and disallowance of provision for expenses was also sustained.
12. Similarly, for other Assessment Years also, Assessments of the Assessee were confirmed.
13. The Assessee aggrieved in all these 3 Appeals has submitted a paper book containing 59 pages. The submission of the Assessee with respect to the Assessment Year 2017-18 is that the Assessee is a credit cooperative society and is eligible for deduction u/s. 80P(2)(a)(i) of the Act so far as the income of the Assessee is attributable to the business of providing credit facilities to its members. This issue is squarely covered in favor of the Assessee by the decision of the Hon’ble Karnataka High Court. It is specifically claimed by the Assessee that it has not claimed any deduction u/s. 80P(2)(d).
14. On the issue of excess interest expenditure claimed by the Assessee he submitted that the Ld. Assessing Officer has wrongly compared the interest expenditure provision of earlier year with the current year. The provision made by the Assessee is based on a scientific method and the amount of outstanding loans of the members. It is not the method which is considered to be a hybrid method but accrual method only.
15. With respect to the interest provision of expenditure, the Assessee further submitted that provision of expenditure is made based on accrued liability and therefore it cannot be disallowed. In the end, it was also submitted that there is no more denying even if the expenditure is disallowed of excess provision of interest or the disallowance of provision of expenditure, it will go to increase the profits of the business of the Assessee and therefore Assessee would be entitled to higher deduction u/s. 80P(2)(a)(i).
16. The Ld. Departmental Representative vehemently supported the order of the Ld. lower authorities and also stated that decision of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017] on the issue of section 80P(2)(d)of the Act squarely covers the issue against the Assessee.
17. We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities and decision relied upon by the parties.
18. We find that Assessee is a credit member’s cooperative society. It deals with only its members; the amount of funds deposited in the bank account is also part of the reserve funds of the Assessee and further the interest income earned on the bank is also part of the business income of the Assessee. There is no evidence placed by the Ld. lower authorities that the interest income earned by the Assessee is chargeable to tax under the head income from other sources. The only attempt made by the Ld. revenue authorities is to charge the bank interest, holding it to be income from other sources and thereby denying the deduction to the Assessee u/s. 80P(2)(d) of the Act. It is not the case of the Assessee that it is claiming deduction u/s. 80P(2)(d). For all these 3 years, the claim of the Assessee claims that it is claiming deduction only u/s. 80P(2)(a)(i) of the Act.
19. We find that the issue is squarely covered in favor of the Assessee by the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 com447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] holding that co-operative 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. Society is not carrying on any separate business for earning such interest income. The income 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. As the interest income 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.
20. Assessee has never claimed the interest income earned by it from the cooperative societies is chargeable to tax under the head income from other sources. Therefore, the decision relied up on by the ld. Revenue authorities does not apply to the facts of the case. Further even the Honourable Karnataka Highcourt in Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] 78 com169 (Karnataka)// [017] 392 ITR 74 (Karnataka) [05-01-2017] which has not been overruled by larger bench.
21. In the result, we are of the opinion that respectfully following the decision of the Hon’ble Karnataka High Court Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 com447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014]on the issue of availability of deduction u/s. 80P(2)(a)(i) of the Act, we allow all these 3 Appeals to the extent of allowing deduction u/s. 80P(2)(a)(i) to the Assessee of the business income attributable to the business of providing credit to the members.
22. Further, the disallowance of interest expenditure and disallowance of provision of expenses is merely made on the surmises and conjunctures. In fact, the Assessee has made provision of interest expenditure as well as provision for expenses based on the accrual basis of accounting and therefore same could not have been disallowed.
23. Accordingly, we reverse the orders of the Ld. lower authorities, direct the Ld. Assessing Officer to delete the disallowance of provision of expenses and provision of interest expenditure and allow the Assessee deduction u/s. 80P(2)(a)(i) of the Act as claimed by the Assessee.
24. In the result, all these 3 Appeals filed by the Assessee are allowed.
Order pronounced in the open court on 21stMay, 2026.
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