Pune ITAT Rules in Favour of Co-operative Credit Society on Section 80P(2)(a)(i) Deduction

Overview of the Dispute

The Pune Bench of the Income Tax Appellate Tribunal (ITAT Pune) has reaffirmed that interest income earned by a co-operative credit society from bank deposits is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act 1961. The case of Shiddhanath Nagari Sahakari Patsanstha Maryadit Vs ITO involved a fundamental mistake by the Revenue authorities: they rejected the assessee’s claim under Section 80P(2)(a)(i) by wrongly examining the matter under Section 80P(2)(d), a provision which the assessee had never invoked.

The Tribunal not only corrected this error but also restated the settled legal position that:

  • A co-operative credit society providing credit to its members is distinct from a co-operative bank unless it possesses an RBI banking licence.
  • Interest arising from prudent deployment of business funds in bank deposits continues to be part of business income attributable to the core activity of providing credit facilities to members.
  • Such interest income qualifies for deduction under Section 80P(2)(a)(i).

The appeals relating to AY 2018-19 and AY 2019-20 were both allowed in favour of the assessee.

Facts and Background

Nature of the Assessee and Its Activities

The assessee, Shiddhanath Nagari Sahakari Patsanstha Maryadit, is:

  • A co-operative credit society formed in 2002.
  • Registered under the Maharashtra Co-operative Societies Act.
  • Engaged in:
    • Accepting deposits from its members.
    • Granting loans and credit facilities exclusively to its members.

For AY 2018-19, the assessee claimed deduction of ₹32.68 lakh under Section 80P(2)(a)(i) in its return filed under Section 139.

Assessment Proceedings and Disallowance

The case was selected for scrutiny. In the assessment order passed under Section 143(3), the Assessing Officer (AO):

  • Acknowledged that the assessee had claimed deduction under Section 80P(2)(a)(i) of ₹32,68,339.
  • Noted that the assessee earned interest income from deposits placed with a co-operative bank.
  • Nevertheless disallowed the deduction on the reasoning that the assessee was not eligible for deduction under Section 80P(2)(d), treating the matter as if the claim was under that clause.

This approach effectively denied the deduction by applying a provision (Section 80P(2)(d)) which was never the basis of the assessee’s claim.

First Appeal Before CIT(A)

Aggrieved, the assessee preferred an appeal before the CIT(A).

However:

  • The First Appellate Authority did not properly verify whether the deduction was claimed under Section 80P(2)(a)(i) or Section 80P(2)(d).
  • The entire discussion in the appellate order revolved around Section 80P(2)(d), again ignoring the actual provision under which the assessee sought relief.
  • There was also a procedural confusion where the appellate form (Form 35) mentioned Section 154 in one place, though the grounds clearly challenged an order under Section 143(3); this factual clarification by the assessee’s representative remained unrebutted by the Departmental Representative.

The CIT(A) ultimately confirmed the denial of deduction, still focusing on Section 80P(2)(d) and not on the real issue—eligibility under Section 80P(2)(a)(i).

Core Issue Before the ITAT

Based on the admitted facts:

  • The assessee is a co-operative credit society, not a co-operative bank.
  • It is registered under the Maharashtra Co-operative Societies Act.
  • Its main business is accepting deposits from and providing credit to members.
  • It claimed deduction under Section 80P(2)(a)(i).
  • Interest income arose from funds deposited with a co-operative bank/outside banks.

The central legal question before ITAT Pune was:

Whether interest income earned from deposits kept with banks, out of the business funds of a co-operative credit society engaged in providing credit to its members, is eligible for deduction under Section 80P(2)(a)(i)?

The Tribunal also had to address the Revenue’s erroneous reliance on Section 80P(2)(d) despite the assessee never having claimed deduction under that clause.

Tribunal’s Critique of Revenue’s Approach

Misapplication of Section 80P(2)(d)

The ITAT clearly pointed out that:

  • The AO himself recorded that the assessee claimed deduction under Section 80P(2)(a)(i).
  • Despite this, the AO denied deduction by stating that the assessee was not eligible under Section 80P(2)(d).
  • The assessee had never claimed any deduction under Section 80P(2)(d).

The Tribunal described this as ...