Deduction u/s 80P(2)(d) allowable to Co-Op Society on Interest Income from co-op banks: ITAT rules in Favour of Bangalore Credit Co- operative Society [Read Order]

Bangalore Credit Co-operative society, the assessee is a co-operative society engaged in the business of providing credit facilities to its members. The assessee filed its return of income for assessment year 2018-19 on 22.09.2018 declaring total income as Nil after claiming deduction of Rs.3,32,62,487/- under Section 80P(2) of the Act.

The assessee received a communication under Section 143(l)(a) proposing to add Rs. 66,900/- as there was mismatch in the amount mentioned in the Income Tax Return and Annexure to Form 3CD.The assessee while filing the return of income by oversight had mentioned the amount under Section 40(a)(i) instead under section 40(a)(ia) of the Act.

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Since the same did not match with the Annexure to Form 3CD the mismatch occurred. Subsequently, the assessee received intimation under section 143(1) of the Act dated 08.02.2020 from the ld. Assistant Director of Income Tax -CPC, Bangalore wherein the income was computed at Rs. 3,33,29,387/- by disallowing a sum of Rs.3,06,04,900/- to the returned income. On perusal it was seen that the deduction under section 80P(2)(d) was disallowed and reason for disallowance was also not communicated in the intimation. Subsequently an appeal was filed against the intimation under section 143(1) of the Act on 16.03.2020.

Notices under section 142(1) of the Act was issued to the assessee seeking certain information and documents. In response to the same, the assessee made its submissions by a letter dated 15.02.2021. The assessee society claims that the deduction under section 80P(2)(d) on the interest earned from FDs with other co-operative societies/ Co-operative banks cannot be denied. Upon perusal of the submissions made by the assessee, the AO assessed on a total income of Rs.3,32,62,487/- by disallowing the deduction claimed amounting to Rs. 3,32,62,487/- under section 80P of the Act.

The AO relying on the decision of the Karnataka High Court in the case of Totgar's Co-operatiye Sale Society disallowed the deduction of Rs.3,05,38,002/- stating that the character of interest on investment or deposits does not change irrespective of the fact that it is earned or received from a scheduled bank or Co-operative bank.

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The assessee preferred an appeal before the CIT(A)/NFAC. The CIT(A)/NFAC allowed the appeal of the assessee by holding that there is plethora of case laws where the uniform stand has been adopted by the different Courts/Tribunal that the income derived by co-operative societies by way of income earned from FDs with other co-operative societies/co-operative banks qualifies for deduction under section 80P(2)(d) of the Act. Therefore, the deduction denied to the assessee to the tune of R.3,32,62,487/- for the AY 2018-19 was directed to be restored and accordingly all the grounds are decided in affirmative to the assessee.

Aggrieved by the order of CIT(A)/NFAC dated 24/09/2024, the revenue has filed the present appeals before this Tribunal and the assessee has filed the cross objection supporting the order of CIT(A)/NFAC.

It is submitted that the interest income earned by co-operative societies are governed by section 80P(2)(a)(i) of the Act. It is submitted that the interest income is attributable to the business of providing credit facilities to its members and therefore, it is eligible for deduction under section 80P(2)(a)(i) of the Act. It is also submitted that the deduction under section . 80P is in respect of income attributable to the business of providing credit facilities to its members.

Supreme Court in CIT Vs Karnataka State Co-operative Apex Bank has held that interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. The placement of such funds being imperative for the purpose of carrying on banking business the income therefrom would be income from the respondent’s business.

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A two member bench of Shri Waseem Ahmed, Accountant Member and Shri Keshav Dubey, Judicial Member held that the assessee is entitled to deduction under section 80P(2)(a)(i) of the Act on the interest income earned from deposits made in compliance with statutory requirements.

The interest received exclusively from the credit facilities provided to its members will be treated as operating Profit of the Co-operative society & eligible for deduction under section 80P(2)(a)(i) of the Act. Further, the Interest income earned out of the Statutory deposits/maintain fluid resources are attributable to the business activity of the co-operative society & hence also eligible for deduction under section 80P(2)(a)(i) of the Act irrespective of the fact that the interest is earned from the co-operative bank and/or scheduled bank.

In respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income is eligible for deduction under section 80P(2)(d) of the Act.

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