Mookambika Vividoddesha Vs ITO (ITAT Bangalore)
Souharda by Name, Co-operative by Law: ITAT Restores Full Deduction u/s 80P(2)(a)(i)
Summary:
In Shree Mookambika Vividoddesha Souharda Sahakari Ltd. v. ITO, the Bangalore ITAT considered deduction u/s 80P(2)(a)(i) for AY 2017–18. The assessee was registered u/s 6 of the Karnataka Souharda Sahakari Act, 1997 & provided credit facilities to members.
The assessee filed its return declaring Nil income after claiming deduction of ₹15,64,262 u/s 80P(2)(a)(i). During scrutiny, the AO rejected the claim on two principal grounds. First, the assessee was described as a “co-operative” registered under the Souharda Act rather than a “co-operative society” registered under the Karnataka Co-operative Societies Act, 1959. Secondly, the AO considered the principle of mutuality to have been violated because regular members were not completely identical with associate or nominal members.
Relying on the Supreme Court decision reported in 397 ITR 1, the AO disallowed the deduction. The CIT(A) affirmed the denial, determining income at ₹15.64 lakh. Despite hearing notice, nobody appeared for the assessee; hence, the ITAT adjudicated from the record after hearing Revenue.
Issue Before the Tribunal
The issue was whether an entity registered under the Karnataka Souharda Sahakari Act qualifies as a “co-operative society” u/s 2(19) & can claim deduction u/s 80P. Did associate or nominal members destroy mutuality?
The Tribunal also examined the treatment of interest earned when surplus business funds, temporarily not required for member lending, are deposited with banks. This required distinguishing interest attributable to credit activity from income on monies held as liabilities payable to members.
Assessee’s Case Emerging From the Record
The grounds & records showed that credit was provided only to members, with no non-member dealings. Associate members admitted according to governing law & bye-laws could not be disregarded merely because their number allegedly exceeded a limit. The identity between contributors & participants remained intact.
The assessee’s income was generated from the business of providing member-credit facilities. Any interest on bank deposits represented earnings on temporary surplus that was part of its business funds, not a separate investment activity. Therefore, the entire relevant income was “attributable to” the eligible business within the wider language of section 80P(2)(a)(i).
Revenue’s Contentions
Revenue maintained that Souharda registration did not place the assessee on the same footing as a society registered under the 1959 Act. Associate or nominal members allegedly defeated complete mutuality. Thus, section 80P conditions were not satisfied.
ITAT’s Findings on Souharda Status
The Tribunal held that the status issue was conclusively covered by the jurisdictional Karnataka High Court. It relied on Government of India, Ministry of Finance v. Karnataka State Souharda Federal Co-operative Ltd., Sri Matha Vividoddesha Pathina Souharda Sahakari Niyamitha v. Union of India & Shri Vitthalray Souharda Pattin Sahakari Niyamit v. Union of India.
These rulings establish that a Souharda entity is a co-operative society u/s 2(19). Section 80P cannot be denied merely because it is governed by the Souharda statute rather than the Karnataka Co-operative Societies Act. The governing legislation does not override its substantive co-operative character.
On facts, the ITAT specifically recorded from available materials that the assessee clearly dealt only with members & not non-members. Therefore, the principle of mutuality was not lost. Its profits from providing credit facilities to members remained eligible u/s 80P(2)(a)(i).
Interest Income & the Totgars Distinction
The Tribunal applied the Karnataka High Court decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO. That decision explains that “attributable to” is wider than “derived from”. Where surplus business funds are temporarily deposited because they are not immediately required for member loans, interest remains attributable to the credit business & qualifies for deduction.
The position differs from Totgars Co-operative Sale Society Ltd., where amounts retained from marketing members’ agricultural produce were payable to those members & appeared as liabilities. Interest on such liability funds was taxable separately. Here, the surplus represented the assessee’s own profits, was not payable to members & was not shown as a liability. Bank placement did not become an independent business; it was only a prudent temporary deployment of business money.
Final Decision & Practical Implications
Following binding Karnataka High Court law, the ITAT reversed both lower orders & directed the AO to allow deduction u/s 80P(2)(a)(i) because the assessee’s income was attributable to providing credit facilities to members. The substantive grounds were allowed, connected grounds became infructuous & the appeal was partly allowed.
The ruling confirms that Karnataka Souharda societies cannot be denied section 80P relief merely because of their registration statute. Such entities should nevertheless maintain updated member registers, bye-laws, loan records & evidence excluding non-member transactions. For bank interest, accounts must clearly demonstrate that deposits comprise own temporary surplus, not monies payable to members. The source, balance-sheet classification & business nexus remain decisive in distinguishing deductible interest from taxable “other sources” income.
Cases Discussed
- Government of India, Ministry of Finance v. Karnataka State Souharda Federal Co-operative Ltd. [2022] 134 taxmann.com 170 (Karnataka)
- Sri Matha Vividoddesha Pathina Souharda Sahakari Niyamitha v. Union of India [2022] 134 taxmann.com 62 (Karnataka)
- Shri Vitthalray Souharda Pattin Sahakari Niyamit v. Union of India [2020] 121 taxmann.com 300 (Karnataka)
- Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax Officer, Ward-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)
- Totgars Co-operative Sale Society Ltd. v. Income-tax Officer [2010] 188 Taxman 282 (SC)
- CIT v. Andhra Pradesh State Co-operative Bank Ltd. [2011] 200 Taxman 220 (AP)
- Citizen Co-operative Society Ltd. v. ACIT, reported in 397 ITR 1 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
1. ITA No. 2522/Bangalore/2025, relating to assessment year 2017–18, has been filed by Shree Moorambika Vividodesha Souhradra Sahakari Limited (the assessee/appellant) against the appellate order dated 30 June 2025 passed by the Joint Commissioner of Income Tax (Appeals)–2, Surat (the learned CIT(A)). By that order, the CIT(A) dismissed the assessee’s appeal against the assessment order passed under section 143(3) of the Income-tax Act, 1961 by the Income Tax Officer, Ward–2 (the learned AO), which denied the assessee deduction under section 80P and determined its total income at ₹1,564,260.
2. The assessee’s sole grievance is that the learned AO and the learned CIT(A) did not allow the deduction claimed under section 80P(2)(a)(i) of the Income-tax Act. The assessee is aggrieved by the finding of the lower authorities that associate members exceeding the prescribed limit could not be treated as regular members, notwithstanding the powers conferred on the assessee under its bye-laws.
3. Despite service of notice, none appeared on behalf of the assessee. The learned Departmental Representative, Shri Sandeep Kumar, Assistant Commissioner of Income Tax, supported the orders of the lower authorities. Accordingly, considering the issue involved, the appeal is decided on the basis of the material available on record.
4. We find that the assessee is a Souharda Sahakari registered under section 6 of the Karnataka Souharda Sahakari Act, 1997, and is engaged in the business of providing credit facilities to its members. It is governed by the Karnataka Souharda Sahakari Act, 1997, and the Karnataka Souharda Sahakari Rules, 2004. The assessee filed its return of income on 30 October 2017 declaring nil income after claiming deduction of ₹1,564,262 under section 80P(2)(a)(i) of the Income-tax Act. The return was selected for scrutiny. The learned AO denied the deduction on the ground that the assessee was a co-operative and not a co-operative society, as it was registered under the Karnataka Souharda Sahakari Act, 1997, and not under the Karnataka Co-operative Societies Act, 1959. The AO further held that the principle of mutuality was lost because there was no complete identity between regular members and associate/nominal members. On that basis, the AO concluded that the assessee could not be treated as a co-operative society existing only for its members and providing credit facilities to them. Relying on the decision of the Hon’ble Supreme Court reported in 397 ITR 1, the AO disallowed the deduction of ₹1,564,262. On appeal, the learned CIT(A) also denied the assessee’s claim for deduction under section 80P(2)(a)(i) of the Act. The assessee is, therefore, in appeal before us.
5. The facts placed before us show that the assessee is a Souharda Sahakari registered under section 6 of the Karnataka Souharda Sahakari Act, 1997, and is engaged in providing credit facilities to its members. It deals only with its members and not with non-members; therefore, the principle of mutuality is not lost. The profits and gains from the business of providing credit facilities to its members are eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act.
6. We find that the first issue—whether an assessee registered as a co-operative society under the Karnataka Souharda Sahakari Act, 1997 is to be treated as a co-operative society within the meaning of section 2(19), and is therefore entitled to claim deduction under section 80P—stands covered in favour of the assessee. This issue has already been decided by the Hon’ble Karnataka High Court in Government of India, Ministry of Finance v. Karnataka State Souharda Federal Co-operative Ltd. [2022] 134 taxmann.com 170 (Karnataka) / [2022] 285 Taxman 529 (Karnataka) [20-12-2021]; Sri Matha Vividoddesha Pathina Souharda Sahakari Niyamitha v. Union of India [2022] 134 taxmann.com 62 (Karnataka) / [2022] 285 Taxman 230 (Karnataka) [18-10-2021]; and Shri Vitthalray Souharda Pattin Sahakari Niyamit v. Union of India [2020] 121 taxmann.com 300 (Karnataka) / [2021] 277 Taxman 276 (Karnataka) / [2020] 426 ITR 457 (Karnataka) [10-06-2020]. Accordingly, this issue is decided in favour of the assessee.
7. In Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax Officer, Ward-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka) / [2015] 230 Taxman 309 (Karnataka) [28-10-2014], the Hon’ble Karnataka High Court held that a co-operative society engaged in providing credit facilities to its members earns business income from that activity. If surplus funds that are not immediately required for lending to members are deposited in a bank to earn interest, such interest is attributable to the business of providing credit facilities to members. The society is not engaged in any separate business merely because it earns such interest. Therefore, the interest income forms part of the profits and gains attributable to the eligible activity and is deductible under section 80P. The Court further observed that the surplus invested in banks was not an amount payable to members, nor was it shown as a liability. It represented profits and gains not immediately required for lending, and the interest earned on such deposits was therefore attributable to the business of banking or providing credit facilities to members. The relevant observations of the Hon’ble Court are as under:
“8. Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative 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. The society is not carrying on any separate business for earning such interest income. The income so 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 of the Act.
9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee – Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
10. 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) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside.”
8. In view of the above facts, respectfully following the decisions of the honourable Karnataka High Court as stated above, we find no reason to deny the assessee deduction under section 80P(2)(a)(i) of the Income-tax Act. We therefore reverse the orders of the lower authorities and direct the learned Assessing Officer to allow the deduction under section 80P(2)(a)(i), since the assessee’s entire income is attributable to the business of providing credit facilities to its members and is eligible for deduction. Accordingly, ground No. 2, along with grounds Nos. 3 to 6, is allowed.
9. Since the assessee’s claim for deduction under section 80P(2)(a)(i) of the Act has been allowed, grounds Nos. 7 and 8 have become infructuous. Ground No. 1 is general in nature and is therefore dismissed.
10. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 31st August, 2026.
