Karnataka High Court on Section 80P Deduction for Co‑operative Bank Interest

Background of the Dispute

Belve Vyavasaya Seva Sahakari Sangha Ltd. approached the Karnataka High Court under Section 260A of the Income-tax Act, 1961 challenging an adverse order of the Income Tax Appellate Tribunal, ‘C’ Bench, Bengaluru, in ITA No.819/Bang/2024 relating to Assessment Year 2016–17.

The assessee, a co‑operative society, had filed its return of income claiming deduction under Section 80P(2) of the Income Tax Act 1961. During the scrutiny assessment, the Assessing Officer examined the nature of interest income earned from deposits placed with SCDCC Bank and other nationalised banks and denied deduction on that portion of income, leading to a series of appeals culminating before the High Court.

This decision is significant for co‑operative societies that park surplus funds with co‑operative banks or nationalised banks and claim deduction under Section 80P(2)(a)(i) or Section 80P(2)(d).

Chronology of Proceedings

Assessment Stage

  • The assessee, a co‑operative society, filed its return claiming deduction under Section 80P(2) on its income.
  • The return was picked up for scrutiny and the Assessing Officer issued notice under Section 143(2).
  • On examination, the Assessing Officer observed that the assessee had:
    • Deposited funds with SCDCC Bank (a co‑operative bank), and
    • Placed deposits with other nationalised banks.
  • Interest income was earned on these deposits. The assessee treated this interest as eligible for deduction under Section 80P(2)(a)(i).

The Assessing Officer, however, concluded as follows:

  • The interest on deposits with SCDCC Bank and nationalised banks is taxable under the head “Income from Other Sources”.
  • Since the income does not qualify as profits and gains attributable to the assessee’s business of banking or providing credit facilities to its members, it cannot be covered under Section 80P(2)(a)(i).
  • Further, by reference to Section 80P(2)(d), the Assessing Officer held that the benefit of this clause is confined to interest derived from investments with “any other co‑operative society”. Interest from a co‑operative bank or nationalised bank, according to the officer, did not qualify.

Accordingly, assessment was completed under Section 143(3) by order dated 13.12.2018 disallowing the deduction on interest income from such deposits.

First Appeal Before CIT(A) / NFAC

  • Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), which came to be handled by the National Faceless Appeal Centre (NFAC), Delhi.
  • The CIT(A), by order dated 01.03.2024, upheld the assessment order and rejected the assessee’s contention that the disputed interest was eligible for deduction under Section 80P(2)(a)(i) or otherwise.

Second Appeal Before the ITAT

  • The assessee then carried the matter in further appeal to the Income Tax Appellate Tribunal, ‘C’ Bench, Bengaluru, in ITA No.819/Bang/2024.
  • By order dated 07.08.2024, the Tribunal concluded that:
    • Interest income arising from investments in SCDCC Bank and other nationalised banks could not be treated as income from the assessee’s core business of providing credit facilities to members.
    • Such interest income, in view of Section 80P(2)(d), did not qualify for deduction under Section 80P(2)(a)(i) because interest from a co‑operative bank did not fall within the scope of “any other co‑operative society” for this limited purpose.
  • Consequently, the Tribunal rejected the assessee’s appeal.

Appeal Before the Karnataka High Court

Following the Tribunal’s decision, the assessee invoked the jurisdiction of the Karnataka High Court under Section 260A, seeking to raise substantial questions of law on the interpretation of Section 80P, specifically in the context of interest on deposits with SCDCC Bank and nationalised banks.