Deduction on Interest Income from Co-operative Banks under Section 80P: Analysis of ITAT Bangalore Decision in Saunshi Urban Co-op Credit Society Ltd Vs ITO

Background of the Dispute

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) was called upon to decide important issues relating to the availability of deduction under Section 80P of the Income Tax Act 1961 for Assessment Year 2018–19 in the case of **Saunshi Urban Co-op Credit Society Ltd Vs ITO`.

The assessee, a co-operative society registered under the Karnataka State Co-operative Societies Act, 1959, was engaged in extending credit facilities to its members. For AY 2018–19, the assessee filed its return declaring nil taxable income, after claiming deduction of ₹54,05,866 under Section 80P. This amount largely represented interest income.

The Assessing Officer (AO) denied the deduction on the reasoning that:

• Interest from investments with banks (₹45,72,083), and
• Other interest income (₹15,62,397),

were not attributable to the assessee’s core business of providing credit facilities to its members, and therefore could not be brought under Section 80P(2)(a)(i).

The National Faceless Appeal Centre (NFAC), acting as CIT(A), partly upheld the disallowance, which led to the present appeal before the ITAT.

Issues Considered by the ITAT

The Tribunal had to deal with the following broad questions:

1. Whether interest income from deposits/investments with co-operative banks and other banks, made under statutory compulsion, is eligible for deduction under Section 80P(2)(a)(i) as “business income”.
2. Whether interest income from investments with co-operative banks qualifies for deduction under Section 80P(2)(d).
3. What treatment should be given if such interest is taxed under the head “Income from Other Sources”, including availability of related expenditure.
4. Consequential issues relating to interest under Section 234B and initiation of penalty under Section 270A(2).

The assessee also raised grounds on alleged violation of natural justice before the CIT(A), but these were ultimately not pressed before the Tribunal.

Factual Matrix Summarised

• The assessee is a registered co-operative society governed by the Karnataka State Co-operative Societies Act, 1959.
• Its primary objective is to provide credit to its members.
• For AY 2018–19, it claimed deduction of ₹54,05,866 under Section 80P, resulting in a nil income return.
• During scrutiny, the AO noticed:
  • Interest of ₹45,72,083 from investments with commercial/co-operative banks, and
  • Other interest of ₹15,62,397,
    and concluded these were not arising from the core lending activity to members.
• Deduction under Section 80P(2)(a)(i) on the entire amount was disallowed and the total income was assessed at ₹54,05,866.
• The CIT(A) partly sustained the disallowance, leading to the appeal before ITAT.

Assessee’s Core Contentions Before ITAT

The assessee advanced a two-fold argument:

1. Primary claim under Section 80P(2)(a)(i)

   • The funds invested with co-operative banks and other banks were placed there due to statutory obligation under the Karnataka State Co-operative Societies Act, 1959 and the rules made thereunder.
   • Such investments were said to be incidental and integral to the business of the society.
   • Accordingly, the resulting interest should be treated as business income and qualify for deduction under Section 80P(2)(a)(i).

2. Alternative claim under Section 80P(2)(d)

   • Even if not considered business income, the interest earned from investments with co-operative banks would independently qualify for deduction under Section 80P(2)(d).
   • Reliance was placed on judicial precedents, including:
     • Kerala State Co-Operative Agricultural and Rural Development Bank Ltd. CIVIL APPEAL NO(S).10069 OF 2016
     • Vittal Grameena Sahakari Bank Niyamitha vs ITO, Ward 2(5) (ITA 895/Bang/2023)
     • `M/s. Primary Agricultural Credit Co-operative Society Ltd vs.