SRI BRAMARAMBA PATTINA SOUHARDA SHAKARI SANGHA NIYAMITHA,MASKI V. INCOME TAX OFFICER, WARD-1, RAICHUR

ITA 189/BANG/2025

AI Insights

The case revolves around the appeal by M/s. Sri Bramaramba Pattina Souharda Sahakari Sangha Niyamitha against the order of the National Faceless Appeal Centre (NFAC), Delhi, which denied the benefit of deduction under section 80P of the Income Tax Act for the interest income of Rs.5,95,54,167 earned from statutory investments in fixed deposits with cooperative banks/scheduled banks. The primary legal contention was whether such interest income should be classified under 'Income from other sources' or as business income eligible for deduction under section 80P(2)(a)(i). The Tribunal examined various judgments and statutory provisions, ultimately deciding in favor of the assessee.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 827261 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-01-2026
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2020-2021
• Appeal Filed On: 31-01-2025
• Other Referred Cases: Mavilayi Service Co-operative Bank Ltd. [2021] 123 taxmann.com 161 (SC), Karnataka State Apex Co-operative Bank (2001) 251 ITR 194 (SC), Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO (2015) 55 taxmann.com 447 (Karnataka), PCIT, Hubballi vs. The Totagars Co-operative Society (2017) 395 ITR 611
• Laws Referred To: Karnataka Souharda Sahakari Act, 1997, Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBRAMANIAN S
• Assessee Lawyers: SIVA PRASAD REDDY; ITP
• Keywords: Set aside; Business income
• Section: 142(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE – PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER ITA No. 189/Bang/2025 Assessment Year : 2020-21 M/s. Sri Bramaramba Pattina Souharda Sahakari Sangha Niyamitha, D.No. 01, Car Street, Main Bazaar, Maski Talu, Lingasgur, Maski – 584 125 Karnataka. PAN: AAFAS2588D Vs. The Income Tax Officer, Ward – 1, Raichur. APPELLANT RESPONDENT Assessee by : Shri Siva Prasad Reddy, ITP Revenue by : Shri Subramanian .S, JCIT-DR Date of Hearing : 04-12-2025 Date of Pronouncement : 05-01-2026 ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 22/11/2024 in respect of the A.Y. 2020-21 and raised the following grounds: “1. The Learned AO as well as the Learned CIT(A) erred: (i) In holding that interest income of Rs.5,95,54,167/- is assessable under the head, `Income from other sources' and consequently denying the benefit of deduction u/s 80P of the Act. Printed from counselvise.com Page 2 of 11 ITA No. 189/Bang/2025 (ii) In not appreciating that the interest income accruing on statutory investments in fixed deposits with co- operative banks/schedule banks made in compliance of the provisions of the Karnataka Souharda Sahakari Act, 1997 is eligible for the deduction u/s 80P(2)(a)(i) of the Act. (iii) In not appreciating that the activities of the assessee-society are limited to its members and therefore, the principle of mutuality is not breached. (iv) In not appreciating that the decisions relied upon by them are either distinguishable on facts or subsequently modified/reversed. (v) In completely misreading the judgment of the Hon'ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. [2021] 123 taxmann.com 161 (SC), which is in favour of the assessee. 2. The learned AO as well as the Learned CIT(A) erred in not following the binding judgment of the Hon'ble Supreme Court, Larger Bench in the case of Karnataka State Apex Co-operative Bank (2001) 251 ITR 194 (SC), which has settled the controversy holding that the interest income accruing on statutory reserves is eligible for the deduction u/s 80P(2)(a)(i) of the Act. 3. Without prejudice to any of the submissions and Grounds taken, the learned assessing office erred in not appreciating that the expenditure to be deducted proportionately against the gross interest receipts comprises of cost of funds & related expenditure, and not just administration expenses. 4. Without prejudice to any of the submissions and Grounds taken, the learned AO failed to appreciate that the income assessed by him under the head, 'Income from other sources, denying the deduction u/s 80P is liable to be set-off against the resultant business loss applying section 71 of the Act. 5. The Appellant craves leave to add or delete or modify or revise any ground at the time of hearing before the Hon'ble Tribunal. For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon'ble Tribunal may be Printed from counselvise.com Page 3 of 11 ITA No. 189/Bang/2025 pleased to allow the appeal in the interest of the equity and justice.” 2. The brief facts of the case are that the assessee is a co-operative society providing credit facilities to its members. The case of the assessee was selected under CASS for complete scrutiny. The AO issued notice u/s. 143(2) for which the assessee had filed their objections on 13/07/2021. In the said reply, the assessee had also explained the reasons for claiming deduction u/s. 80P of the Act in respect of the interest income earned by them. Subsequently, the AO had issued a notice u/s. 142(1) of the Act in which the various details were called for by the AO including the justification for claiming deduction u/s.80P(2) of the Act. The assessee filed their reply on 18/02/2022. Thereafter a show cause notice was issued on 14/03/2022 for which the assessee sought for time and therefore another show cause notice was issued on 12/09/2022 and the assessee also field their reply on 16/09/2022. To the proposal to disallow the deduction claimed u/s. 80P(2)(a)(i) of the Act, the assessee submitted that the deposits were made in the banks as short term deposits as per the provisions in the Karnataka Souharda Sahakari Act, 1997 and therefore the interest income received from such deposits could be treated as a business income and therefore eligible for deduction u/s. 80P(2)(a) of the Act. The assessee also relied on the judgment of the Hon’ble Supreme Court reported in 251 ITR 194 in the case of CIT vs. Karnataka State Co-operative Apex Bank. The assessee also relied on the Hon’ble Jurisdictional High Court judgment in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO reported in (2015) 55 taxmann.com 447 (Karnataka) wherein it was held that the interest earned by the assessee from the deposits made with the co- operative banks and scheduled banks are attributable to the business of providing credit facilities to its members and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. The AO had not accepted the said objections and relying on the Division Bench judgment of the Hon’ble Jurisdictional High Court in the case of PCIT, Hubballi vs. The Totagars Co-operative Society reported in (2017) 395 ITR 611 had denied the deduction claimed u/s. 80P(2)(a) of the Act on the interest income earned from the deposits made Printed from counselvise.com Page 4 of 11 ITA No. 189/Bang/2025 with the co-operative banks. The AO had also not accepted that the assessee would be eligible for claiming deduction u/s. 80P(2)(d) of the Act since the investments are made with the co-operative banks and not with the co-operative societies. The assessee challenged the said order before the Ld.CIT(A) and contended that the statutory deposits made by the assessee are eligible for deduction u/s. 80P(2)(a)(i) of the Act as business income. The Ld.CIT(A) had not accepted the claim of the assessee and confirmed the order of the AO. The Ld.CIT(A) had observed in his order that once the surplus fund is removed from the arena of mutuality and placed at the disposal of the co-operative bank where there is no restriction in its utilization by non-member / general public, brevity of mutuality is lost. It was further observed that the co-operative bank has earned a higher interest and based on a portion of such interest earned from general public to the assessee, as such the amount of interest income is not generated on account of transactions by and within the members of the society. Therefore the Ld.CIT(A) had excluded this income from the purview of deduction u/s. 80P of the Act. 3. As against the said order, the present appeal has been filed by the assessee. 4. Even though the assessee had filed an application before this Tribunal to condone the delay of 10 days, the Registry found that as per the provisions, there is no such delay and therefore we are not adjudicating the said application. 5. At the time of hearing, the Ld.AR submitted that the interest income earned by the assessee is out of the statutory investments made in the fixed deposits with co-operative banks / scheduled banks and therefore they are eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.AR further submitted that the assessee had done activities only with the members of the society and therefore the principle of mutuality has not been violated. The Ld.AR also relied on the judgment of the Hon’ble Supreme Court Printed from counselvise.com Page 5 of 11 ITA No. 189/Bang/2025 reported in 251 ITR 194 in the case of CIT vs. Karnataka State Co-operative Apex Bank. The Ld.AR also enclosed the copy of the replies filed by the assessee as well as the return of income and the computation of income along with the audit report. The assessee also filed a paper book in Vol-2 and enclosed the written submissions as well as the submissions made before the NFAC and the various submissions made before the AO and the return of income along with the statement of computation of income and financials and the audit report u/s. 44AB of the Act. The assessee also furnished the copies of the judgments of the Hon’ble Jurisdictional High Court as well as the other Hon’ble High Courts and the Hon’ble Supreme Court and also the orders of the Coordinated Benches of this Tribunal and prayed to allow the appeal filed by the assessee. 6. The Ld.DR submitted that the order of the AO as well as the Ld.CIT(A) is in accordance with the principles laid down by the Division Bench of the Hon’ble Jurisdictional High Court reported in 395 ITR 611 and therefore prayed to dismiss the appeal filed by the assessee. 7. We have heard the arguments of both sides and perused the materials available on record. 8. We have perused the various notices issued by the AO as well as the replies filed by the assessee on various dates. In the reply dated 18/02/2022, the assessee had submitted that the assessee is a society registered under the Karnataka Souharda Sahakari Act, 1997 and therefore they are also to be treated as a society registered under the provisions of the Karnataka Co-operative Societies Act and therefore the interest income earned by them would be eligible for deduction u/s. 80P(2) of the Act. Subsequently, on 16/09/2022, to the show cause notice dated 12/09/2022, the assessee had explained that they had deposited the amounts based on the provisions contained in the said Act and therefore the said income is a business income and eligible for deduction u/s. 80P(2)(a)(i) of the Act. In the said objections, the assessee also relied on the judgment of the Hon’ble Printed from counselvise.com Page 6 of 11 ITA No. 189/Bang/2025 Supreme Court reported in 251 ITR 194 in the case of CIT vs. Karnataka State Co-operative Apex Bank. The assessee had also explained that the interest income was earned from short term deposits and also from the savings bank accounts and also relied on the Division Bench judgment of the Hon’ble Jurisdictional High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO reported in (2015) 55 taxmann.com 447 (Karnataka). The assessee also relied on the another order passed by the Ld CIT(A) in the case of Agasthya Credit Co-op Society Ltd. Mysore wherein the interest income earned from the deposits made with the co-operative banks qualifies for deduction u/s. 80P(2)(a)(i) as well as 80P(2)(d) of the Act. In spite of the said objections, the AO had disallowed the deduction claimed by the assessee on the ground that the interest income was earned from the co-operative banks and therefore not eligible for deduction u/s. 80P(2) of the Act. 9. Before the Ld.CIT(A), the assessee filed a reply on 22/06/2024 and again explained the fact that the assessee had to comply with the provisions of the Karnataka Souharda Sahakari Act, 1997 / Karnataka Co-operative Societies Act and therefore the assessee had deposited the said amounts in the co-operative banks. Even though the said Acts allowed the assessee to deposit in the co-operative or scheduled banks, in the present case, the assessee had deposited the amount in the co-operative banks and earned an income of Rs. 5,54,82,789/-. Again the assessee had relied on the judgment of the Hon’ble Supreme Court reported in 251 ITR 194 in the case of CIT vs. Karnataka State Co-operative Apex Bank. The assessee had also made an alternate plea that the co-operative banks are also a co-operative society registered under the provisions of the Societies Act and therefore they are entitled for deduction u/s. 80P(2) of the Act. In spite of the said submissions made by the assessee, before the AO as well as before the Ld.CIT(A), they had disallowed the deduction claimed u/s. 80P(2) on the ground that the assessee had received interest income from co-operative banks but not considered the fact that the deposits are made out of compulsion. Printed from counselvise.com Page 7 of 11 ITA No. 189/Bang/2025 10. We have also perused the Division Bench judgment of the Hon’ble Jurisdictional High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO reported in (2015) 55 taxmann.com 447 (Karnataka) wherein similar issue came up for consideration and the Hon’ble Jurisdictional High Court had granted the deduction u/s. 80P(2) on the ground that the interest income were earned from the compulsory deposits made by the assessee with the co-operative banks / scheduled banks. 11. We have also perused the judgment of the Hon’ble Supreme Court reported in 251 ITR 194 in the case of CIT vs. Karnataka State Co-operative Apex Bank, wherein the Hon’ble Supreme Court had granted the deduction u/s. 80P(2)(a)(i) of the Act on the interest income received from the compulsory deposits made with the SBI / RBI. The above said judgment is a judgment rendered by the Constitutional Bench of the Hon’ble Supreme Court in view of the conflicting decision given by the different Benches. If we consider the principle laid down by the Constitutional Bench of the Hon’ble Supreme Court, in the present case, the assessee is entitled for deduction u/s. 80P(2)(a)(i) of the Act since the interest income was earned out of the compulsory deposits made by the assessee with the co-operative banks. By applying the Hon’ble Supreme Court judgment as well as the Division Bench judgment of the Hon’ble Jurisdictional High Court cited supra, we are in total agreement with the assessee that the interest income earned out of the statutory deposits are nothing but business income eligible for deduction u/s. 80P(2)(a)(i) of the Act. When the assessee had given a clear picture about the interest income earned from the said deposits, the authorities below had to consider the said claim based on the judgments relied on by the assessee. Therefore the order of the AO as well as the Ld.CIT(A) is not in accordance with the law and also not in accordance with the principles laid down by the above cited judgments. Printed from counselvise.com Page 8 of 11 ITA No. 189/Bang/2025 12. We have also perused the written submissions filed by the assessee in which the assessee had given a detailed discussion about the interest income earned by the assessee which reads as follows: “Ground No.1 Section 80P - Interest on Statutory Investments. 1.1. It is submitted that the ONLY issue is: Whether the interest accruing on the statutory investments made in Co-operative/scheduled banks in compliance of the State Societies Act is allowable as business income, which means the same is eligible for the deduction u/ s 80P(2)(a)(i) of the Act. 1.2. The details of interest income earned from the co- operative banks/scheduled banks held as income under the Head, 'Income from other sources' and accordingly excluded from the benefit of deduction u/s 80P are as under- mentioned in pages 7 86 8 of the impugned assessment order: Sl.No. Name of the Bank Amount (in Rs.) Interest from Co-operative Banks (i) BDCC Bank Ltd. 14,72,000 (ii) Beelagi Pattina Sahakara Bank Ltd 40,14,376 (iii) Mudgal Urban Bank Ltd 22,50,945 (iv) RDCC Bank Ltd 1,20,97,994 (v) Sharanaveereshwa Sahakara Bank Ltd 32,68,175 (vi) SUCO Bank Ltd 1,16,24,402 (vii) Tavarger Pattana Sahakara Bank Ltd 13,94,294 (viii) Vikas Pattana Sahakara Bank Ltd 74,48,736 (ix) Manvi Pattana Sahakar Bank 1,19,11,897 Total 5,54,82,819 Interest from Scheduled Bank (x) Karnataka Grameena Bank 40,71,378 Printed from counselvise.com Page 9 of 11 ITA No. 189/Bang/2025 Grand Total 5,95,54,197 1.3. It is submitted that the deposits in the co-operative banks/other scheduled banks are made in compliance of the provisions of the Karnataka Souharda Sahakari Act, 1997. Section 10(2)(xxi), read with section 18 of the said Societies Act, mandates that 25% of the profits of the year is to be invested in one of the modes specified and one of the modes of investment specified is FD with any co-operative bank or a scheduled bank. 1.4. The said Clause (xxi) of sub-section (2) of section 10 of the Souharda Act is as under: “(xxi) appropriation of amount out of the net profit specifically for the following:- (a) Twenty five percent towards the reserve fund constituted by the co-operative; (b) two percent towards the cooperative education fund to the Karnataka State Souharda Federal cooperative. provided that no cooperative which has failed to contribute to the Cooperative Education Fund shall pay dividend to its members. (c) twenty percent towards the operational reserve to meet unforeseen losses or contingencies; (d) five percent towards the Common Good Fund whose purpose is approved by the general body; (e) constitution of or contribution to, such special funds as may be specified in the bye-laws. (f) bonus not exceeding two months pay to be paid to the employees; (g) dividend to the members.] 1.5. Section 18 of the said Souharda Act, which stipulates that the investments are made in securities specified in section 20 of the Indian Trusts Act, 1882 or with any co- operative/scheduled bank, is as under: 18. Investment of Funds. - Such of its funds as are not immediately required for use by a co-operative, may be invested or deposited outside its business, namely: - (a) in any of the securities specified in Section 20 of the Indian Trusts Act, 1882 (Central Act II of 1882); or (b) with any co-operative bank or scheduled bank. Printed from counselvise.com Page 10 of 11 ITA No. 189/Bang/2025 Provided that in the case of a Co-operative Bank, such investment shall be made in accordance with the instructions and directives issued by the Reserve Bank from time to time. 1.6. The statutory provisions thus stipulate that the assessee society compulsorily invests 50% (25% + 20% + 5%) of profits of the year in the modes specified - as FDs in schedule/co-operative banks. The assessee-society has made deposits with the co-operative banks/scheduled banks in compliance of the said statutory provisions and earned interest income of Rs.5,95,54,167/-, which is assessed as Income from other sources, in the impugned assessment order denying the deduction u/s. 80P of the Act.” 13. Considering the said written submissions and the submissions filed by the assessee, we are of the view that the interest income earned by the assessee from the statutory deposits made with the co-operative banks are eligible for deduction u/s. 80P(2)(a)(i) of the Act. Further, the judgments cited by the assessee also supports the view taken by us. We, therefore set aside the order of the AO as well as the Ld.CIT(A) and direct the AO to grant the deduction in respect of the interest income earned from the co-operative banks on the statutory deposits made by them in accordance with the provisions of the Karnataka Souharda Sahakari Act, 1997 / Karnataka Co- operative Societies Act. 14. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 05th January, 2026. Sd/- Sd/- (PRASHANT MAHARISHI) (SOUNDARARAJAN K.) Vice – President Judicial Member Bangalore, Dated, the 05th January, 2026. /MS / Printed from counselvise.com Page 11 of 11 ITA No. 189/Bang/2025 Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order Assistant Registrar, ITAT, Bangalore Printed from counselvise.com "