Case Law Details
Shiddhanath Nagari Sahakari Patsanstha Maryadit Vs ITO (ITAT Pune)
Pune ITAT Slams Revenue for Denying Wrong Deduction: Interest from Bank Deposits Eligible for Section 80P(2)(a)(i)
The Pune ITAT allowed the appeals of a co-operative credit society and held that interest earned from deposits placed with banks by a co-operative credit society engaged in providing credit facilities to its members remains eligible for deduction under Section 80P(2)(a)(i). The Tribunal also criticized the authorities for denying a deduction under a provision which the assessee had never claimed.
The assessee, a co-operative credit society registered under the Maharashtra Co-operative Societies Act, was engaged in accepting deposits from members and providing loans to them. It had claimed deduction of ₹32.68 lakh under Section 80P(2)(a)(i). However, the Assessing Officer disallowed the claim on the ground that the society had earned interest from a co-operative bank and therefore was not eligible for deduction under Section 80P(2)(d).
The Tribunal noted the fundamental error committed by both the Assessing Officer and the CIT(A). While the assessee had claimed deduction under Section 80P(2)(a)(i), the authorities proceeded to examine and reject eligibility under Section 80P(2)(d), a provision that was never invoked by the assessee at all. The ITAT described this approach as wholly unsustainable.
Relying upon the decisions of the Supreme Court in Karnataka State Co-operative Apex Bank, the Bombay High Court in Annasaheb Patil Mathadi Kamgar Sahakari Pathpedhi Ltd., the Andhra Pradesh & Telangana High Court in Vavveru Co-operative Rural Bank Ltd., and the Kerala High Court in Sahyadri Co-operative Credit Society Ltd., the Tribunal held that interest earned on funds deposited with banks out of business funds of a co-operative credit society retains the character of business income attributable to the activity of providing credit facilities to members.
The ITAT emphasized that a co-operative credit society is not a co-operative bank merely because it carries on credit activities, and unless it possesses a banking licence from the RBI, it continues to remain eligible for the deduction available under Section 80P(2)(a)(i). The Tribunal further observed that prudent deployment of surplus business funds in bank deposits does not alter the character of the income earned therefrom.
Accordingly, the Tribunal held that the assessee was fully entitled to deduction under Section 80P(2)(a)(i) on the interest income earned from bank deposits and allowed the appeals for both AYs 2018-19 and 2019-20. The Revenue’s objection based on Section 80P(2)(d) was rejected as entirely misplaced since that provision had never formed the basis of the assessee’s claim.
FULL TEXT OF THE ORDER OF ITAT PUNE
These are two appeals filed by the Assessee against the separate orders of the Learned Additional/Joint Commissioner of Income Tax (Appeals)-3, Delhi [Ld. Addl./JCIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AYs 2018-19 and 2019-20 on 07/02/2026 and 06/02/2026, respectively.
2. We have heard both the parties and perused the records. For the sake of convenience and since issue involved is same, both the appeals were heard together and are disposed of by this common order.
3. For the sake of convenience, we will consider AY 2018-19 as a lead appeal.
4. In this case assessee filed return of income u/s 139 of the Act. Assessee case was selected for scrutiny. It is an admitted fact that Assessee is Cooperative Credit Society established in 2002 and it is duly registered under Maharashtra Cooperative Societies Act. It is an admitted fact that object of Assessee is to collect deposits from members and provide loan facilities for members. Assessee has claimed deduction u/s 80P(2)(a)(i) of the Act of Rs.32,68,339/-. In the assessment order, the Assessing Officer disallowed assessee’s claim for deduction u/s 80P(2)(a)(i) of Rs.32,68,339/- stating that assessee had earned interest from Cooperative Bank hence Assessee is not eligible for deduction u/s 80P(2)(d) of the Act.
4.1 Aggrieved by the assessment order, Assessee filed appeal before the Ld. CIT(A), who confirmed the disallowance.
4.2 In this case, it is ironical that Assessing Officer though in para 1 of the assessment order has stated that Assessee claimed deduction u/s 80P(2)(a)(i) of the Act for Rs.32,68,339/-. However, subsequently, without understanding the case held that Assessee is not eligible for deduction u/s 80P(2)(d) of the Act. Though, Assessee had claimed deduction u/s 80P(2)(a)(i) of the Act but ironical Assessing Officer denied deduction u/s 80P(2)(d) of the Act which was never claimed by the assessee. For this reason only, the disallowance is unsustainable.
4.3 Be it as it may be, the First Appellate Authority has also not bothered to verify whether deduction claimed was u/s 80P(2(a)(i) or 80P(2)(d) of the Act. In this case, the First Appellate Authority in its order dated 07/02/2026 has mentioned that Assessee had filed appeal against order u/s 154 of the Act, in this context Ld. AR submitted that in Form 35 the Assessee by mistake mentioned section 154 but in grounds of appeal in Form 35 mentioned order u/s 143(3) of the Act. This fact has not been rebutted by the Ld. DR. The entire discussion of the First Appellate Authority is on section 80P(2)(d) of the Act which assessee had not claimed.
5. Admittedly, the Assessee is Cooperative Credit Society duly registered under Maharashtra Cooperative Societies Act. Assessee’s business is to provide credit facilities to its members. These facts are mentioned in the assessment order. It is also mentioned in the assessment order that Assessee had claimed deduction u/s 80P(2)(a)(i) of the Act. Thus, the issue before us is whether Assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act or not .
5.1 Hon’ble Supreme Court in the case of CIT Vs. Karnataka State Co-operative Apex bank [2001] 251 ITR 194 (SC) observed as under :
Quote, “The question in appeal reads : “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 80P(2)(a)(i ) of the Income-tax Act, 1961 ?”
5.2 While deciding the above question of Law raised by Revenue, the Hon’ble Supreme Court observed as under :
Quote, “……….. There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee’s business ………….” Unquote.
5.3 The Hon’ble Supreme Court in the above case answered the question in favour of Assessee and against Revenue.
5.4 Thus, the proposition of law emanating from the above decision is that interest earned from Funds deposited with State bank of India by Co-Operative Bank is business income and eligible for deduction u/s 80P(2)(a) of the Act.
5.5 The Hon’ble Bombay High Court in the case of PCIT Vs. M/s. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedhi Ltd. in Income Tax Appeal No.933 of 2017 vide order dated 14thOctober, 2019 dismissed the appeal of the revenue on the following questions of law raised by the revenue :
“The Revenue urges the following two questions of law for our consideration : (a) Whether on the facts and circumstances of the case and in law, the Tribunal is correct in holding that assessee is entitled to deduction u/s 80P(2)(a) and (d) of the IT Act, 1961.
(b) Whether on the facts and circumstances of the case and in law, the Tribunal is right to allow the relief to the assessee by holding that the assessee being Co-operative Credit Society is not a Co-operative Bank hence entitled for deduction u/s 80P(4) of the I.T. Act despite the fact that the assessee is carrying on the banking business and has been categorized as Co-operative Bank / other Bank”?
5.6 Thus, the issue is settled now that a Cooperative Society registered under a state Cooperative Society Act or Central Cooperative Society Act will not be considered as Bank unless it has received Banking License from RBI. Such Cooperative Credit Societies will be entitled for deduction u/s 80P(2)(a) of the Act. When we read the above proposition of law laid down by Hon’ble Supreme Court along with the proposition of law laid down by Hon’ble Supreme Court in the case of CIT Vs. Karnataka State Co-operative Apex bank (supra), the proposition of law emanating is that interest earned by depositing Funds with banks by such Co-operative Credit Societies will be Business Income and will be eligible for deduction u/s 80P(2)(a) of the Act.
5.7 Same proposition of Law has been laid down by The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371.
5.8 The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371 analysed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagar’s Cooperative Sale Society, and held as under :
Quote,“8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub-section (2) of section 80P or not.
9. While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co-operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar’s Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283.
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34. The case before the Supreme Court in Totgar’s Co-operative Sale Society Ltd.’s case (supra) was in respect of a co-operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar’s Co-operative Sale Society Ltd.’s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar’s struck a different note.
35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
36. The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression “attributable to” and not any one of the two expressions, namely, “derived from” or “directly attributable to”.
37. Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.” Unquote.
5.9 Thus, Hon’ble High Court of AP & TS held that Interest Income earned by investing Income derived from Business and Profession by a Co-Operative Society was eligible for deduction u/s.80P(2)(a) of the Act.
6. In the case of Sahyadri Co-operative Credit Society Limited, the Sahyadri Co-operative Credit Society had deposited excess funds in the Banks or Institutions permitted by the Co-operative Societies Act. In that context, the Hon’ble Kerala High Court in the case of Pr.CIT Vs. Sahyadri Co-operative Credit Society Ltd., [2024] 301 Taxman 36 (Kerala) vide order dated 04.09.2024 has held as under :
Quote “7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T. Act for a Co-operative Society that is assessed to tax under the head of ‘Profits and Gains of Business or Profession’ is of the whole of the amount of profits and gains of business attributable to any one or more of its activities. Thus, all amounts as can be attributable to the conduct of the specified businesses by a Co-operative Society will be eligible for the deduction envisaged under the statutory provision. The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns interest on such deposits, such interest would cease to form part of its profits and gains attributable to its business of providing credit facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount [the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co-operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members. Under those circumstances, if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.” Unquote (emphasis supplied)
7. What emerges from the above referred decisions of Hon’ble Supreme Court and Hon’ble High Courts is that Interest earned by Cooperative Credit Society registered under state cooperative society Act, which is engaged in the business of providing credit facilities to its members, from funds deposited with Cooperative Bank or Bank is eligible for deduction u/s 80P(2)(a) (i) of the Act.
8. Similar view has been taken by ITAT Pune Bench in the case of ITO vs Dhanshri Multi State Cooperative Society Ltd in ITA No.463/PUN/2024, Arth Nagari SahakariPatsanstha Limited vs ITO Arth Nagari SahakariPatsanstha Limited.
9. Respectfully following the judicial precedents we hold that the assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act. Accordingly, grounds of appeal raised by the Assessee for AY 2018-19 are allowed.
10. For AY 2019-20, the Ld. CIT(A) had denied deduction u/s 80P(2)(d) of the Act. However, we have already held that the assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act which was claimed by the assessee. Our findings in AY 2018-19 will apply mutatis mutandis to AY 2019-20. Accordingly, assessee’s appeal for AY 2019-20 is allowed.
11. In the result, both the appeals of the Assessee are allowed.
Order pronounced in the open Court on 10thJune, 2026
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