ITAT Bangalore Affirms Section 80P Relief for Souharda Co-operative Societies

Overview

The Bangalore Bench of the Income Tax Appellate Tribunal, in the case of G M Souharda Pattina Sahakara Nyt Vs ITO, has clarified that a credit society registered under the Karnataka Souharda Sahakari Act, 1997 is still to be regarded as a "co-operative society" for the purposes of Section 2(19) of the Income Tax Act 1961, and consequently eligible for deduction under Section 80P(2)(a)(i).

The Tribunal simultaneously rejected two key grounds commonly invoked by the Department:

  • That registration under the Karnataka Co-operative Societies Act, 1959 is mandatory to claim Section 80P deduction, and
  • That unsubstantiated allegations of dealings with non-members are enough to deny the claim.

In addition, the ITAT also clarified that where disallowances (such as for non-deduction of tax at source) enhance the business income of a co-operative credit society, the resultant increase in income also enjoys deduction under Section 80P(2)(a)(i), as long as the income is attributable to the society’s core business of providing credit to its members.

Case Background

Appeals and Assessment Years

The decision covers three connected appeals filed by M/s. G M Souharda Pattina Sahakara Nyt for:

  • Assessment Year 2017-18 (ITA No. 3104/Bang/2025)
  • Assessment Year 2018-19
  • Assessment Year 2020-21

All three appeals raised substantially the same legal issue regarding eligibility of deduction under Section 80P(2)(a)(i) and were, therefore, disposed of by a common order dated 28-04-2026.

Nature of the Assessee and Return Filing

The assessee is a credit co-operative society registered under the Karnataka Souharda Sahakari Act, 1997, engaged in providing credit facilities to its members.

For Assessment Year 2017-18, the assessee:

  • Filed its return of income on 31-10-2017,
  • Declared total income of Rs. 17,07,220/-, and
  • Claimed deduction of Rs. 1,42,62,849/- under Section 80P(2)(a)(i) of the Income Tax Act 1961.

The case was picked up for scrutiny and culminated in an assessment order passed under Section 143(3) on 16-12-2019.

Assessment Findings

In the scrutiny assessment, the Assessing Officer (AO):

  • Denied the deduction under Section 80P(2)(a)(i) entirely, and
  • Made an additional disallowance of Rs. 69,208/- on the ground of non-deduction of tax at source (TDS).

The denial of Section 80P deduction was primarily based on:

  1. The assessee being registered under the Karnataka Souharda Sahakari Act, 1997 instead of the Karnataka Co-operative Societies Act, 1959; and
  2. The AO’s conclusion that the assessee had allegedly earned income from non-members, making it ineligible for deduction.

First Appeal Before CIT(A)

The assessee challenged the assessment order before the National Faceless Appeal Centre, Delhi (the CIT(A)). While the appeal was partly allowed on other aspects, the critical issue of deduction under Section 80P was decided against the assessee.

The CIT(A):

  • Relied heavily on the judgment of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. 123 com 161,
  • Interpreted this decision to mean that income from transactions with "non-eligible entities" or from business done with other societies is not entitled to deduction under Section 80P, and
  • Consequently denied the assessee’s claim under Section 80P(2)(a)(i) in its entirety.

The assessee then carried the matter in second appeal to the ITAT.

The Tribunal had to address, in substance, the following legal questions: