Souharda Society Wins 80P Deduction – ITAT Rejects Technical Denial & Expands Benefit

G M Souharda Pattina Sahakara Nyt Vs ITO (ITAT Bangalore)

Souharda Society Wins 80P Deduction – ITAT Rejects Technical Denial & Expands Benefit

In G M Souharda Pattina Sahakara Niyamitha, the Bangalore ITAT dealt with denial of deduction u/s 80P(2)(a)(i) to a Souharda co-operative society.

The Assessing Officer had denied deduction on the ground that:

• The assessee was not registered under the Karnataka Co-operative Societies Act, and
• Allegedly earned income from non-members.

The CIT(A) also denied deduction relying on Mavilayi Service Co-operative Bank Ltd.

However, the ITAT held:

• A society registered under the Karnataka Souharda Sahakari Act, 1997 is still a co-operative society u/s 2(19).
• Hence, it is eligible for deduction u/s 80P.
• There was no evidence of dealings with non-members, and even otherwise, judicial precedents support eligibility.

Relying on Karnataka High Court rulings (Totagars, Tumkur Merchants) and SC ruling in Mavilayi, ITAT clarified:

• Deduction u/s 80P cannot be denied on technical registration grounds.
• Income from providing credit facilities to members (including nominal members) qualifies for deduction.

Additional important ruling:

• Disallowance (e.g., TDS default) increases business income – That increased income is also eligible for 80P deduction (same source principle).

Souharda societies are not second-class co-ops-they qualify for 80P. And once income is business-attributable, even additions boost deduction, not tax.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. These 3 Appeals are filed by M/s. G M Souharda Pattina SahakaraNyt[ the Assessee/ Appellant ]for Assessment Year 2017-18, 2018-19 and 2020-21 involving the similar issue.Therefore these appeals are disposed of by this common order.

2. We first take the ITA No. 3104/Bang/2025 which is filed for Assessment Year 2017-18 against the Appellate Order passed by the National Faceless Appeal Centre, Delhi (the Ld. CIT(A)) on 24.10.2025 wherein the Appeal filed by the Assessee against the Assessment Order passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) by the Assistant Commissioner of Income Tax, Circle – 1, Davanagere [ the ld. AO ] was partly allowed. The Assessee is aggrieved with the same and has preferred this Appeal raising several grounds of appeal.

3. The challenge is to the provisions of section 251 of the Act being the enhancement made by the Ld. CIT(A).

4. The briefly stated facts shows that Assessee is a credit co-operative society registered under the Karnataka SouhardaSahakari Act, 1997. It filed its return of income on 31.10.2017 declaring total income of the Rs. 17,07,220/- claiming deduction of Rs. 1,42,62,849/- u/s. 80P(2)(a)(i) of the Act. The case of the Assessee was selected for scrutiny which resulted into the Assessment Order passed u/s. 143(3) of the Act on 16.12.2019 wherein the deduction u/s. 80P(2)(a)(i) of the Act was denied and further disallowance of Rs. 69,208/- was made for non-deduction of tax at source.

5. The Assessee preferred Appeal before the Ld. CIT(A). The Ld. CIT(A) following the decision of the Hon’ble Supreme Court in case of Mavilayi Service Co­operative Bank Ltd. 123 com 161 held that Assessee is not eligible for deduction u/s. 80P of the Act for interest received from non-eligible entities. Further if the business is carried out with society, the deduction is not allowable to the extent of that income. Accordingly, the deduction was denied u/s. 80P(2)(a)(i) of the Act.

6. Ms.Smitha R, CA for the Assessee and Shri Balusamy N, JCIT was heard on behalf of the revenue.

7. Briefly stated the facts clearly shows that Assessee is a co-operative society though registered under the Karnataka SouhardaSahakari Act, 1997 and therefore according to the decision of the Hon’ble High CourtGovernment of India Ministry of Finance vs. Karnataka State Souharda Federal Co-operative Ltd. [2022] 134 com 170 (Karnataka)/[2022] 285 Taxman 529 (Karnataka)[20-12-2021] where in it is held that Assessee which was a co­operative society registered under Karnataka SouhardaSahakari Act, 1997 would be construed as co-operative society within ambit of section 2(19) and thus, would be entitled to claim benefit of section 80P of the Act as a co­operative society. The Ld. Assessing Officer denied the deduction only for the reason that Assessee is not registered under the Karnataka State Co-operative Societies Act, 1959. Thus, in view of the decision of the Hon’ble Karnataka High Court, the stand of the Ld. Assessing Officer is not correct. As the Assessee is not registered under the Karnataka State Co-operative Societies Act, the deduction u/s. 80P(2)(a)(i)of the Act was denied to the Assessee. The expenditure with respect to the 30% ofRs. 2,30,695/- being advertisement expenseswas also disallowed.

8. After hearing the parties, we find that Assessee is a co-operative society who is eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Assessee is engaged in its business with members of the co-operative society. There is no evidence that Assessee is dealing with non-members. Therefore, the finding of the Ld. CIT(A) that as Assessee is earning interest income from non-members, the Assessee is not entitled to deduction. We find that this finding is without any basis and the Assessee could not have treated with non-members. The decision of the Hon’ble Supreme Court in case of Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC)[12-01-2021] also deals with the same stating that if the Assessee is engaged into the business with the members of the co-operative society be it regular members or nominal members, the deduction cannot be denied to the Assessee. Thus, we find that the Ld. CIT(A) is not correct in not allowing the deduction u/s. 80P(2)(a)(i) of the Act. We hold that issue is squarely covered in favor of the Assessee by the decisions of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] 78 taxmann.com 169 (Karnataka)/[2017] 392 ITR 74 (Karnataka)[05-01-2017] and also 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]wherein members co-operative society engaged into the business of providing credit facilities to its members as well as non-members and income attributable from such business is allowable for deduction u/s. 80P(2)(a)(i) of the Act.

9. Further, the disallowance made for non-deduction of tax would increase the income of the Assessee which is attributable to the business of providing credit facilities to its members. Therefore, any disallowance made by the Ld. Assessing Officer for non-deduction of tax would further increase the income and simultaneously also increase the deduction. In view of the above facts, the Appeal filed by the Assessee is allowed.

10. The facts for Assessment Year 2018-19 and 2020-21 are also similar. Therefore, for the reasons stated by us in Appeal of the Assessee for Assessment Year 2017-18, we direct the Ld. Assessing Officer to allow the deduction of business income attributable to the business of credit facilities u/s. 80P(2)(a)(i) of the Act.

11. Further, the interest income earned by the Assessee is not claimed by the Assessee u/s. 80P(2)(d) of the Act but whole of the income is stated to be business income attributable to the business of the Assessee. Therefore, in subsequent years, the issue raised by the Ld. revenue authorities of denying deduction u/s. 80P(2)(d) of the Act does not survive.

11. Accordingly, all three Appeals filed by the Assessee are allowed.

Order pronounced in the open court on 28^th April, 2026.