Case Law Details
Basaveshwaranagar Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)
The Income Tax Appellate Tribunal (ITAT), Bangalore, adjudicated an appeal filed by a credit co-operative society against the order of the Commissioner of Income Tax (Appeals) for assessment year 2014–15. The appeal arose from an assessment completed under Section 143(3) of the Income-tax Act, wherein the Assessing Officer determined the total income of the assessee at ₹63,02,920 after denying deduction claimed under Section 80P.
The core issue in the appeal was whether the assessee was entitled to deduction under Section 80P(2)(a)(i) on interest income earned from deposits with banks. The assessee had claimed that such interest income was attributable to its business of providing credit facilities to its members and therefore eligible for deduction. However, the Assessing Officer treated the interest income as “income from other sources” and denied the deduction, a position that was subsequently upheld by the CIT(A).
The assessee contended that it was a credit co-operative society engaged in providing credit facilities to its members and not a co-operative bank, and therefore the restriction under Section 80P(4) did not apply. It further argued that the interest income earned from bank deposits represented income derived from temporarily parking surplus funds arising from its business operations and should therefore be treated as business income eligible for deduction under Section 80P(2)(a)(i). The assessee relied on judicial precedents, including decisions of the Karnataka High Court, to support its claim.
On the other hand, the Revenue supported the orders of the lower authorities and contended that the issue was covered against the assessee by judicial precedents, particularly decisions interpreting similar provisions, and therefore the denial of deduction was justified.
The Tribunal examined the facts and submissions and noted that the assessee was engaged in the business of providing credit facilities to its members. It observed that the interest income in question arose from deposits made with banks using surplus funds that were not immediately required for lending to members. The Tribunal emphasized that such funds were part of the business operations and not liabilities owed to members.
The Tribunal relied on the decision of the Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd., which held that interest earned on deposits of surplus funds by a co-operative society engaged in providing credit facilities is attributable to its business and therefore eligible for deduction under Section 80P. The High Court had clarified that where surplus funds, not immediately required for business purposes, are deposited in banks to earn interest, such income retains its character as business income.
The Tribunal also examined other decisions cited by the Revenue and distinguished them on the basis that those cases involved different provisions or factual contexts. In particular, it noted that certain decisions relied upon by the Revenue pertained to deductions under Section 80P(2)(d) or involved circumstances where the nature of income differed from the present case. The Tribunal found that those rulings were not applicable to the facts under consideration.
Additionally, the Tribunal observed that the Assessing Officer had not provided specific findings to establish that the interest income should be classified as income from other sources. It further noted that the funds deposited in banks were part of the business funds, including statutory reserves, and were connected with the business activities of the assessee.
Based on the analysis of facts and judicial precedents, the Tribunal held that the interest income earned by the assessee from bank deposits was attributable to its business of providing credit facilities to members. Consequently, such income qualified for deduction under Section 80P(2)(a)(i).
The Tribunal concluded that the lower authorities had erred in treating the interest income as income from other sources and in denying the deduction. It reversed the orders of the Assessing Officer and the CIT(A) and directed that the deduction claimed by the assessee be allowed.
In conclusion, the appeal of the assessee was allowed, with the Tribunal affirming that interest earned on bank deposits of surplus business funds by a credit co-operative society is eligible for deduction under Section 80P(2)(a)(i) as business income.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by the assessee/appellant against the appellate order passed by National faceless appeal Centre, Delhi (the learned CIT – A) for assessment year 2014 – 15 on 6 August 2025 wherein the appeal of the assessee against the assessment order passed under section 143(3) of The Income tax Act [ The Act] dated 3 November 2016 by The Income Tax Officer Ward 6(2)(1), Bangalore (the learned AO) determining the total income of the assessee at ₹ 6,302,920 , was dismissed.
2. The solitary ground raised by the assessee in substance is with respect to not allowing the assessee deduction under section 80 P(2)(a)(i) of the income tax act on the interest income earned from the bank which was claimed by the assessee as income attributable to the business of the assessee but treated by the learned assessing officer and confirmed by the learned CIT – A as income from other sources and thereafter also denied the deduction to the assessee under section 80 P (2) (d) of the act relying on the decision of the honourable Karnataka High Court in 83 taxmann.com 140 despite assessee showing the decision of the honourable Karnataka High Court in case of Tumkur merchants credit cooperative Ltd versus income tax officer 55 taxmann 447 and also the decision of the same bank as well as citing several judicial precedents of the coordinate benches.
3. The brief fact of the case shows that the assessee is a credit cooperative society who filed its return of income on 22 November 2014 claiming deduction under section 80 P (2) (a) (i) of the act of ₹ 6,302,924 and declaring a total income of ₹ 73,010. The return of income was picked up for scrutiny and the learned assessing officer applying the provisions of section 80P (4) denied the assessee deduction of ₹ 6,229,912 and determined the total income of the assessee at ₹ 6,302,920 by passing an assessment order under section 14 (3) of the act on 3 November 2016.
4. Assessee preferred an appeal before the learned CIT – A showing that the provisions of section 80P (4) does not apply to the facts of the case as assessee is not a cooperative bank and further the claim of the assessee is a deduction of its income under section 80P (2) (a) (i) of the act and the interest income earned by the assessee is chargeable to tax as business income and not income from other sources.
5. The learned CIT – A did not consider the explanation of the assessee and confirmed the action of the learned assessing Officer stated that the income of bank interest earned by the assessee cannot be considered as income from business but it is income from other sources and therefore the assessee cannot claim deduction under section 80 P (2) (a) (i) of the act because of the decision of the honourable Karnataka High Court in case of Totagars cooperative sale society. Thus, the appeal of the assessee was dismissed.
6. The learned authorized representative Ms. Sahana THM (Advocate) vehemently submitted that assessee is a credit cooperative society, it is eligible for deduction under section 80 P (2) (a) (i) of the act. The claim of the assessee is not hit by the provisions of section 80 P (4) of the act and further the claim of the assessee is covered in favour of the assessee by the decision of the honourable Karnataka High Court in case of Tumkur merchants and in case of Totagara cooperative sale society Ltd. The claim of the assessee is not covered by the decision of the honourable Karnataka High Court in another decision of the Totagars cooperative sale society Ltd which was referred by the ld AO and CIT (A) because the assessee’s income from the bank is depositing the members surplus funds available for a short time. It was further stated that the learned assessing officer has not given any direction or findings at all with respect to the fact that the income of the assessee from the above bank is not income from business. Thus, the case of the assessee is covered by the decision of the honourable Karnataka High Court in favour of the assessee.
7. The learned departmental representative Shri Baluswamy The Joint Commissioner of income tax vehemently supported the decisions of the lower authorities and submitted that the issue is squarely covered in favour of the revenue and against the assessee by the decision of the honourable Karnataka High Court which has been relied upon by the lower authorities. Therefore, the appeal of the assessee may be dismissed.
8. We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that the assessee is a cooperative society carrying on the business of providing credit facilities to its member and therefore the interest income earned by the assessee from its deposit with the other banks which are also cooperative societies are claimed by the assessee as business income and as such interest income is also attributable to the business of the assessee of providing credit facilities to its members claimed its deduction under section 80P(2)(a)(i) of The Income Tax Act .
9. Honourable Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] has held that where co-operative society was engaged in business of providing credit facilities to its members, deposited excess amount for short term in bank, interest earned was entitled to be deducted under section 80P because In the instant case, 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). It considered decision of the honourable Supreme Court in Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC)
10. Further honourable Karnataka High Court in Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] 78 com 169 (Karnataka)/[2017] 392 ITR 74 (Karnataka)[05-01-2017] is held that “ the case of Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC). However, the said case dealt with the interpretation, and the deduction, which would be applicable under Section 80P(2)(a)(i) of the I.T. Act. For, in the present case the interpretation that is required is Section 80P(2)(d) of the I.T. Act and not Section 80P(2)(a)(i) of the I.T. Act. Therefore, the said judgment is inapplicable to the present case. Thus, neither of the two substantial questions of law canvassed by the learned counsel for the Revenue even arise in the present case.”
11 Further the honourable Karnataka High Court Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 com 140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017] was concerned with deduction under section 80P(2) (d) of the act and not the case before us this is for the reason that there is no finding in the assessment order that the interest income earned by the assessee is chargeable to tax under the head income from other sources and not the business income. More so ever for the reason that the amount invested is also out of the statutory reserve of the bank which cannot be considered as not related to the business of the assessee. Therefore, the decision of the honourable Karnataka High Court mentioned in this paragraph does not apply to the facts of the case.
12. In view of the above facts, we hold that the assessee is entitled to deduction under section 80 P (2) (a) (i) of the act and the learned lower authorities of wrongly denied the same to the assessee. The learned AO is directed to grant deduction to the assessee as claimed. We reverse the orders of the learned lower authorities and allow the appeal of the assessee.
13. In the result appeal filed by the assessee is allowed.
Order pronounced in the open court on 24th March, 2026.
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