ASHAPURA CO-OP CREDIT SOCIETY,MEHSANA V. THE DY.CIT, CIRCLE-PATAN, PATAN

ITA 490/AHD/2025

AI Insights

The case involves Ashapura Co-op. Credit Society Ltd., which appealed against the decision of the Deputy Commissioner of Income Tax, Circle Patan, regarding the assessment of interest income and the applicability of deductions under section 80P of the Income Tax Act, 1961. The primary contention was whether interest income from deposits with co-operative banks qualifies for deduction under section 80P(2)(d). The Assessing Officer had treated the interest income as 'Income from other sources' under section 56, denying the deduction. The Tribunal examined precedents and statutory provisions, ultimately allowing the deduction for interest from co-operative banks but not from Dena Gujarat Gramin Bank, for which proportionate expenditure was allowed under section 57(iii).

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 772776 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2017-2018
• Other Referred Cases: Totgars Co-operative Sale Society Ltd. v. ITO, Pr. CIT v. Totgars Co-operative Sale Society, State Bank of India v. CIT, Mavilayi Service Co-operative Bank Ltd., Annasaheb Patil Mathadi Kamgar Sahakari Pathpedhi Ltd., Ashwinkumar Arban Co-op Society Ltd., Sabarkantha Dist. Coop. Milk Producers Union Ltd., Surat Vankar Sahakari Sangh Ltd. v. ACIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMIT PRATAP SINGH
• Assessee Lawyers: SHAILESH GANDHI
• Keywords: Business income; Capital expenditure; Co-operative Credit Society
• Section: 143(3); 56; 28

Judgement Text

" आयकर अपीलीय अिधकरण, अहमदाबाद Ɋायपीठ “ SMC”, अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “ SMC ” BENCH, AHMEDABAD सुŵी सुिचũा काɾले, Ɋाियक सद˟ एवं ŵी मकरंद वसंत महादेवकर, लेखा सद˟ क े समƗ। ] ] BEFORE Ms SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं /ITA No.490/Ahd/2025 िनधाŊरण वषŊ /Assessment Year : 2017-18 Ashapura Co-op. Credit Society Ltd., Opp. Gram Panchayat Office, Society Building, Main Road Pilvai, Taluka Vijapur, Dist. Mehsana Pilvai-382850. (Gujarat) बनाम/ v/s. The Deputy Commissioner of Income Tax, Circle Patan, Patan. ̾थायी लेखा सं./PAN: AAAAA6598C अपीलाथŎ/ (Appellant) Ů̝ यथŎ/ (Respondent) Assessee by : Shri Shailesh Gandhi, AR Revenue by : Shri Amit Pratap Singh, Sr-DR सुनवाई की तारीख/Date of Hearing : 31/07/2025 घोषणा की तारीख /Date of Pronouncement: 28/08/2025 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM: ] ] This appeal by the assessee arises from the order passed by the office of learned Commissioner of Income-tax (Appeals), Addl JCIT (A)-2, Chennai [hereinafter referred to as “CIT(A)”] dated 09.01.2025, for Assessment Year 2017-18. The impugned appellate order affirms the assessment framed under section 143(3) of the Income-tax Act, 1961[hereinafter referred to as “the Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 2 Act”] by Assistant Commissioner of Income Tax, Circle, Patan [hereinafter referred to as “Assessing Officer or AO”] vide Order dated 27.06.2019. Facts of the Case 2. The assessee is a co-operative credit society. The assessee filed its return of income electronically on 29.09.2017 declaring total income of Rs. 140/- after claiming deduction under section 80P of Rs. 21,69,578/-. The case was selected for limited scrutiny under CASS. The Assessing Officer noted that the assessee is engaged in the business of providing credit facilities to its members only from the deposits received from them. The assessee declared net profit of Rs. 20,00,000/- for the year, and after adjustments claimed deduction under section 80P resulting in Nil income in the computation, though the return declared Rs. 140/- as taxable income. 3. During the course of assessment, the Assessing Officer issued a show cause notice dated 14.06.2019 proposing to tax interest income earned from deposits with banks. Though the show cause referred to a figure of Rs. 30,34,533/-, the assessee clarified that the interest relatable to co-operative and nationalised banks during the year aggregated to Rs. 16,88,927/-, and that a small interest of Rs. 144/- from Bank of India had already been offered to tax. The assessee explained that its claim under section 80P comprised two limbs, namely, Rs. 4,80,651 under section 80P(2)(a)(i) being income from members for Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 3 providing credit facility, and Rs. 16,88,927 under section 80P(2)(d) being interest from co-operative banks, aggregating to Rs. 21,69,578 as claimed in the return. The assessee furnished bank- wise particulars of interest (Total: Rs. 16,88,927/-) as under: i. The Mehsana Urban Co-op Bank – Savings: Rs. 18,884/- ii. The Mehsana Urban Co-op Bank – Fixed Deposit: Rs. 6,68,965/- iii. Dena Gujarat Gramin Bank – Savings: Rs. 2,188/- iv. The Mehsana District Central Co-op Bank Ltd.: Rs. 1,73,191/-. v. Dena Gujarat Gramin Bank – Fixed Deposit: Rs. 8,25,699/- 4. Without prejudice to the principal claim under section 80P(2)(d), the assessee also contended that if such interest is assessed under the head “Income from other sources” under section 56, a deduction of Rs. 12,38,996/- under section 57 be allowed towards expenditure incurred for earning the interest. The detailed working as enclosed and reproduced by the CIT(A) is as follows: Sr. No. Particulars Amount (Rs.) 1 Total Incomes – as per credit side of P&L A/c (A) 81,45,361/- 2 Gross Total Income – as per Return of Income (B) 21,69,722/- 3 Interest Income from Co-op Banks (C) 16,88,927/- 4 Allowable Expenditure (A –B2) (D) 59,75,639/- 5 % of Allowable Expenditure (D ÷ A × 100) (E) 73.36% Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 4 6 Expenditure deductible u/s 57 (C × 73.36%) 12,38,996/- 5. The Assessing Officer did not accept the assessee’s position. Referring to the decision of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. v. ITO [(2010) 322 ITR 283] and to the Karnataka High Court in Pr. CIT v. Totgars Co-operative Sale Society [(2017) 83 taxmann.com 140], he held that interest on deposits of surplus funds with banks is not business income and is taxable under section 56 as “Income from other sources”. He also distinguished the assessee’s reliance on the Gujarat High Court decision concerning SBI Employees’ Co-operative Credit Society. The assessment order discusses the Finance Act, 2006 insertion of section 80P(4) and Circular No. 14/2006, and records the conclusion that deduction under section 80P(2)(d) is confined to interest or dividend derived from investments made “with any other co-operative society” and not with co-operative or nationalised banks. On the alternate plea under section 57, the Assessing Officer held that there was no nexus established and no proof that any specific expenditure was laid out wholly and exclusively for earning the impugned interest. He therefore added Rs. 16,88,927/- and computed the assessed income at Rs. 16,89,067/-, rounded to Rs. 16,89,070/-, with consequential interest under sections 234A, 234B, 234C and 234D, and initiated penalty proceedings under section 270A for under- reporting or misreporting. Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 5 6. The assessee preferred an appeal before CIT(A), who dismissed the appeal. The learned CIT(A) reproduced the statutory text of section 80P(1) and section 80P(2)(d) and recorded that the assessee’s deposits were with co-operative banks and not with co- operative societies. Reliance was placed on judicial precedent, and reference was made to the ratio laid down by the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. wherein it was propounded that interest earned on surplus funds is assessable under section 56 and not under section 80P(2)(a)(i). Reference was also made to the decision of the Hon’ble Karnataka High Court reported in 395 ITR 611, and it was noted in the words extracted in the order that “The words ‘co-operative banks’ are missing in clause (d) of sub-section (2) of section 80P of the Act. Even though a co-operative bank may have the corporate body or skeleton of a co- operative society, but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation Act, 1949.” Attention was further invited in the order to the amendment brought about by the Finance Act, 2015 in section 194A(3)(v) whereby co-operative banks were excluded from the expression “co-operative society”, and section 80P(4) was set out, which specifically excludes co- operative banks other than PACS and PCARDB. 7. With regard to the jurisdictional position, reliance was placed on the judgment of the Hon’ble Gujarat High Court in State Bank of India v. CIT [389 ITR 578], and the conclusion was reproduced in terms to the effect that “to the extent of the interest Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 6 earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co- operative society, is not deductible under section 80P(2)(d) of the Act.” The order also took note of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. [123 taxmann.com 161] which explained the limited object of section 80P(4), as well as the Hon’ble Gujarat High Court in Katlary Kariyana Merchant Sahakari Sarafi Mandali Ltd. [2022] 140 taxmann.com 602. The reliance placed by the assessee on Surat Vankar Sahakari Sangh Ltd. v. ACIT and on the decision of the Hon’ble Supreme Court in Annasaheb Patil Mathadi Kamgar Sahakari Pathpedhi Ltd. (Civil Appeal No. 8719 of 2022, order dated 20.04.2023) was held to be distinguishable, it having been noted that the latter judgment was rendered in a different context concerning section 80P(4). 8. On these premises, the action of the Assessing Officer in denying deduction under section 80P(2)(d) on the sum of Rs. 16,88,927/- and in assessing the same under section 56 was upheld. On the alternate ground, the proportional working of Rs. 12,38,996/- under section 57 as placed by the assessee was extracted, but concurrence was expressed with the Assessing Officer that no direct nexus had been demonstrated, nor had it been shown that the expenditure was laid out wholly and exclusively for earning the impugned interest as contemplated by section 57(iii). Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 7 9. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal: 1. The learned CIT(A) erred in law and on facts in not allowing deduction of Rs. 16,88,927 u/s 80P (2)(d) of the Income Tax Act, 1961 for the interest received by the appellant from the Co- operative Societies/Banks. 2. The learned CIT(A) erred in law and on facts in not considering the submission made by the appellant during the appellate proceedings on 02-12-2024 and thereby violated the principle of equality and justice and hence the Order should be treated as bad in law. 3. The learned CIT(A) erred in law and on facts in not allowing deduction of Rs. 12,38,996 u/s 57 of the Income Tax Act, 1961 for the expenditure incurred for the earning of the income of Rs. 16,88,927/-. In view of the above the appellant prays to delete the additions and allow the deduction of Rs. 16,88,927/- u/s 80P(2)(d) of the Income Tax Act, 1961 as claimed in the return of income, treat the Appeal Order bad in law and allowing deduction of Rs. 12,38,996 u/s 57 of the Income Tax Act, 1961 for the expenditure incurred for the earning of income of Rs. 16,88,927/-. Also, the appellant prays for leave to add, alter and / or to amend all or any of the grounds of appeal on or before the final date of hearing of the appeal. 10. During the course of hearing before us the Authorised Representative (AR) reiterated the facts already placed on record and submitted detailed arguments against the disallowance of Rs. 16,88,927/- claimed as deduction under section 80P(2)(d) of the Act. It was contended that he reliance placed by the Assessing Officer on Totgars Co-operative Sale Society Ltd. v. ITO [(2010) 322 ITR 283 (SC)] was stated to be misplaced. The appellant had itself offered the impugned interest income under section 56 as “Income Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 8 from Other Sources” and not under section 28 as “Business Income.” Hence, the very proposition in Totgars that interest on surplus funds is assessable under section 56 has already been followed. The addition is therefore unsustainable. 11. The observation of the AO, relying on PCIT v. Totgars Co-op Sale Society Ltd. [(2017) 395 ITR 611 (Karnataka)], that co- operative banks are not co-operative societies was argued to be factually and legally incorrect. It was submitted that a co- operative bank continues to be a co-operative society registered under the Co-operative Societies Act, and section 80P(2)(d) grants deduction with respect to interest earned from “any other co- operative society,” without distinction based on its business activity. Reliance was placed on section 2(19) defining “co- operative society,” to submit that once an entity is registered as a co-operative society, the nature of its activity (whether banking or otherwise) does not change its character as a co-operative society. Hence, interest from deposits with a co-operative bank is squarely covered under section 80P(2)(d). It was emphasised that section 80P(4) only denies deduction to a co-operative bank on its own income but does not restrict the deduction available to another co-operative society in respect of interest earned from such a bank. The AO was stated to have erroneously extended section 80P(4) beyond its legislative scope. 12. Reliance was placed on Mavilayi Service Co-op Bank Ltd. [(2021) 123 taxmann.com 161 (SC)] clarifying the scope of section Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 9 80P. The AR also cited the Supreme Court in PCIT v. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedhi Ltd. (Civil Appeal No. 8719 of 2022, dated 20.04.2023), where it was reiterated that a co-operative credit society is distinct from a co-operative bank for the purposes of section 80P(4). Strong reliance was also placed on the jurisdictional Gujarat High Court in PCIT v. Ashwinkumar Arban Co-op Society Ltd. (Tax Appeal No. 538 of 2024, decided on 24.09.2024), where deduction under section 80P(2)(d) on interest from co-operative banks was allowed after considering Totgars and other decisions. Reference was made to earlier Gujarat High Court decisions including CIT v. Sabarkantha Dist. Coop. Milk Producers Union Ltd. (Tax Appeal No. 473 of 2014, dated 16.06.2014), Surat Vankar Sahakari Sangh Ltd. v. ACIT [(2019) 72 taxmann.com 169], and various ITAT Ahmedabad decisions, all of which allowed deduction under section 80P(2)(d) in respect of interest earned from co-operative banks. 13. It was further contended that the assessee’s additional written submissions dated 02.12.2024, containing the above judgments, were not considered by the learned CIT(A). Only the earlier submissions dated 18.11.2024 were referred to. This amounted to violation of principles of equality and justice, rendering the appellate order bad in law. Without prejudice, it was argued that if interest income is assessed under section 56, proportionate expenditure of Rs. 12,38,996/- should be allowed under section 57(iii). Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 10 14. The learned Departmental Representative (DR) placed reliance on the findings recorded by the Assessing Officer as well as by the learned CIT(A). 15. We have carefully considered the rival submissions and perused the record, including the computation of income filed by the assessee along with its return. It is evident from the computation that the assessee itself has disclosed interest income of Rs. 16,88,927/- earned from deposits placed with co-operative institutions under the head “Income from Other Sources” as per section 56 of the Act. Thus, the Assessing Officer’s reliance on the judgment of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. v. ITO [(2010) 322 ITR 283 (SC)] to re- characterise the income under section 56 is misplaced, since the assessee had already offered the impugned income under section 56 and not as “Profits and Gains of Business.” The only controversy which remains for adjudication is the eligibility of deduction claimed under section 80P(2)(d) of the Act in respect of such interest. 16. We find that there exists a clear line of distinction between interest earned from deposits with scheduled/nationalised banks and interest earned from deposits with co-operative banks. The Hon’ble Supreme Court in Totgars (supra) was dealing with interest earned on deposits with nationalised banks, and the ratio laid down therein was in the context of section 80P(2)(a)(i) – whether such interest could be said to be attributable to the Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 11 business of providing credit facilities to members. The Hon’ble Court held such interest to be taxable under section 56. The issue of section 80P(2)(d) was not directly in consideration before the Hon’ble Supreme Court. The reliance placed by the Revenue on Totgars (SC) and Totgars (Kar HC) thus needs to be examined in the context of the binding judgments of the Hon’ble jurisdictional High Court. 17. The Hon’ble Gujarat High Court in SBI v. CIT (supra), Sabarkantha District Co-op. Milk Producers Union Ltd. (supra), and Surat Vankar Sahakari Sangh Ltd. (supra), has consistently held that co-operative banks, being registered as co-operative societies under the relevant State Co-operative Societies Act, fall within the expression “any other co-operative society” used in section 80P(2)(d). The judgment in Ashwinkumar Arban Co-op. Society Ltd. (supra) dated 24.09.2024 has further clarified this position by considering both strands of precedent and resolving the issue in favour of the assessee. Being the jurisdictional High Court, these decisions are binding on us. 18. We further note that the assessee had, without prejudice to its primary claim under section 80P(2)(d), raised an alternate plea for deduction of expenditure amounting to Rs. 12,38,996/– under section 57(iii) of the Act against the interest income assessed under “Income from Other Sources.” The working placed on record was based on the ratio of total expenditure to total income, Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 12 applying a proportion of 73.36% to the interest income of Rs. 16,88,927/–. 19. It is a settled principle that deduction under section 57(iii) is admissible only in respect of such expenditure (not being capital expenditure) which is laid out wholly and exclusively for the purpose of making or earning such income. In the present case, it is evident that the funds placed in deposits with banks were sourced from interest-bearing deposits collected from members. The management of such funds, including decisions relating to their placement and maintenance, involves administrative effort and expenditure. Thus, there exists a reasonable nexus between the interest income earned and a portion of the overall administrative expenditure incurred by the assessee society. 20. At the same time, it is also clear that only such proportion of the expenditure as can be reasonably attributed to the earning of interest income chargeable under “Income from Other Sources” can be allowed. The Assessing Officer had rejected the claim on the ground of absence of direct nexus. In our considered view, the existence of direct one-to-one nexus is not required, what is necessary is a proximate and reasonable connection between the expenditure incurred and the income earned. The Hon’ble Courts have consistently held that where the assessee establishes such proximate connection, deduction under section 57(iii) cannot be denied. Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 13 21. It is noted that the interest income of Rs. 2,188/- from Dena Gujarat Gramin Bank (Savings) and Rs. 8,25,699/- from Dena Gujarat Gramin Bank (Fixed Deposit) has been earned from a Regional Rural Bank, which is neither a co-operative bank nor a co-operative society within the meaning of section 2(19) of the Act. Hence, these amounts are not eligible for deduction under section 80P(2)(d). 22. In the facts of the present case, therefore, while deduction under section 80P(2)(d) has been allowed on interest from deposits with co-operative banks, the alternate claim under section 57 deserves to be considered in respect of the balance interest income from deposits with Dena Gujarat Gramin Bank (Savings Rs. 2,188/– and Fixed Deposit Rs. 8,25,699/–), which is not eligible under section 80P(2)(d). Accordingly, proportionate expenditure relatable to such income is to be allowed under section 57(iii). 23. In view of the foregoing discussion, deduction under section 80P(2)(d) is to be allowed in respect of interest income of Rs. 8,61,040/- earned from deposits with co-operative banks, whereas the balance interest income of Rs. 8,27,887/- earned from Dena Gujarat Gramin Bank is not eligible under section 80P(2)(d). However, for the latter amount, the Assessing Officer shall grant deduction of proportionate expenditure under section 57(iii), to the extent it is relatable and has proximate nexus with Printed from counselvise.com ITA No.490/Ahd/2025 Ashapura Co.op. Credit Soc Ltd. Vs. DCIT Assessment Year 2017-18 14 earning of such income. The Assessing Officer is directed to recompute the total income of the assessee accordingly. 24. In the result, the appeal of the assessee stands partly allowed. Order pronounced in the Open Court on 28th August, 2025 at Ahmedabad. Sd/- Sd/- (SUCHITRA KAMBLE) JUDICIAL MEMBER (MAKARAND V.MAHADEOKAR) ACCOUNTANT MEMBER (True Copy) Ahmedabad, Dated 28/08/2025 Manish, Sr. PS आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. संबंिधत आयकर आयुƅ / Concerned CIT 4. आयकर आयुƅ ) अपील ( / The CIT(Exemption)-Ahmedabad 5. िवभागीय Ůितिनिध , आयकर अपीलीय अिधकरण , राजोकट/DR,ITAT, Ahmedabad, 6. गाडŊ फाईल /Guard file. आदेशानुसार/ BY ORDER, सȑािपत Ůित //True Copy// सहायक पंजीकार (Asstt. Registrar) आयकर अपीलीय अिधकरण, ITAT, Ahmedabad Printed from counselvise.com "