Co-op Bank’s Interest Income Deductibility Dispute Resolved

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Case Name: 

Principal Commissioner of Income Tax Vs Peroorkada Service Co-operative Bank Ltd. (High Court of Kerala)

ITA No. 323 of 2019

Date: 1st November 2021

Key Takeaways:

1. Interest income from investments with co-operative societies registered under the Kerala Co-operative Societies Act is eligible for deduction under Section 80P(2)(d), but interest from other sources like treasury is not.
2. The court differentiated between interest earned from members (eligible for deduction) and interest from non-member investments (not eligible).
3. The court relied on the Supreme Court’s rulings in Mavilayi Service Co-operative Bank Ltd. and The Totgar’s Co-operative Sale Society Limited to interpret the scope of Section 80P.

Issue: 

Whether the co-operative bank’s interest income from investments with co-operative banks and the treasury is eligible for full deduction under Section 80P(2)(a)(i) as business income, or is limited to the deduction under Section 80P(2)(d) for interest/dividend from co-operative societies.

Facts:

• The Peroorkada Service Co-operative Bank Ltd. is a primary agricultural credit society registered under the Kerala Co-operative Societies Act.
• The bank claimed full deduction of its interest income under Section 80P(2)(a)(i) as business income.
• The interest income was earned from deposits with the District Co-operative Bank, State Co-operative Bank, and the Treasury.
• The Assessing Officer rejected the bank’s claim and treated the interest income as “income from other sources”, allowing limited deduction under Section 80P(2)(d).
• The bank appealed against this, and the matter reached the High Court.

Arguments:

• The Revenue argued that the interest income should be taxed as “income from other sources” under Section 56, as it is not directly from the bank’s business activities. The deduction should be limited to Section 80P(2)(d).
• The bank argued that the interest income is part of its business activities and fully deductible under Section 80P(2)(a)(i).

Key Legal Precedents:

1. Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax (Supreme Court) - Differentiated between interest from members (eligible for deduction) and non-members (not eligible).
2. The Totgar’s Co-operative Sale Society Limited v. Income Tax Officer (Supreme Court) - Held that interest from investments not immediately required for business is not business income.

Judgement:

The High Court ruled in favor of the Revenue, holding that:

• The interest income from co-operative banks and treasury does not qualify as business income under Section 80P(2)(a)(i).
• The only eligible deduction is under Section 80P(2)(d) for interest/dividend from investments with co-operative societies registered under the Kerala Co-operative Societies Act.
• The interest income from the treasury is not eligible for any deduction.
• The Assessing Officer was directed to modify the assessment order accordingly.

FAQs:

Q1: Why was the bank’s claim for full deduction under Section 80P(2)(a)(i) rejected?

A: The court held that the interest income from investments, even with co-operative banks, is not directly attributable to the bank’s business of providing credit facilities to its members. It is more akin to “income from other sources” under Section 56.

Q2: What is the key difference between Sections 80P(2)(a)(i) and 80P(2)(d)?

A: Section 80P(2)(a)(i) allows full deduction of business income, while 80P(2)(d) limits the deduction to only the interest/dividend earned from investments with other co-operative societies.

Q3: How did the court apply the Supreme Court precedents in this case?

A: The court relied on Mavilayi and Totgar’s Co-operative cases to differentiate between interest from members (eligible for 80P(2)(a)(i) deduction) and interest from investments (limited to 80P(2)(d) deduction).

Heard learned Standing Counsel Mr Christopher Abraham for appellant and Mr C A Jojo, learned counsel for respondent in ITA Nos.323/2019 and 5/2020. No representation for respondent in ITA No.142/2019.

ITA No.142/2019 [Assessment Year 2014-15]

2. The Principal Commissioner of Income Tax -

Thiruvananthapuram/Revenue is the appellant. Vilappil

Service Co-operative Bank Ltd, Peyad,

Thiruvananthapuram/assessee is the respondent. The appeal is

at the instance of the Revenue under Section 260A of the

Income Tax Act, 1961 (for short ‘the Act’) against the order

dated 19.09.2018 of the Income Tax Appellate Tribunal (for

short ‘Tribunal’), Cochin Bench, Cochin in ITA No.

196/Coch/2018. The subject matter of the appeal relates to the

issues arising from the return filed by the assessee for the

Assessment Year 2014-15.

2.1 The assessee is a Primary Agricultural Credit Society

registered under the Kerala Co-operative Societies Act 1969.

The assessee is engaged in banking activity and providing credit

facilities to its members. The assessee claimed complete

deduction of income under Section 80P(2)(a)(i) of the Act and

also claimed inclusion of interest income earned by the assessee

from the deposit of idle funds with co-operative bank and

treasury treating the said income as business income falling

within the admissible ambit of deduction under Section 80P(2)

(a)(i) of the Act. The Assessing Officer rejected the claims of the

assessee for deduction under Section 80P(2)(a)(i) and treated

the interest income as income from other sources and also that

the interest income does not come within the purview of

Section 80P(2)(d) of the Act the deduction claim made by the

assessee has been rejected. The assessee aggrieved by the order

of Assessing Officer in Annexure-A filed appeal before the

Commissioner of Income Tax (Appeals). The CIT (Appeals),

through order in Annexure-B dated 28.02.2018, allowed the

appeal of the assessee, thereby admitted the claim of assessee of

total income eligible for deduction under Section 80P(2)(a)(i) of

the Act. The appellate authority firstly accepted that the

assessee is entitled to claim deduction as a registered co-

operative society and that the interest income earned by the

assessee from the investment with District Co-operative Bank

and Treasury forms part of business income of the assessee.

The Revenue, aggrieved by the order in Annexure-B dated

28.02.2018, filed ITA No. 196/Coch/2018 before the Tribunal and

through the order impugned the Tribunal dismissed the appeal

filed by the Department. Hence, the instant appeal.

3. The appeal is admitted on the following substantial

questions of law:

“i) Whether, on the facts and circumstances of the case and

in law, is the Tribunal justified in holding that the assessee is

eligible for claiming deduction under section 80P of the Income

Tax Act when the assessee failed to fulfil the principal objective

of providing agricultural credits to agriculturists?

ii) Whether, on the facts and circumstances of the case and

in law, is the Tribunal justified in holding that the classification

of "Primary Agricultural Credit Society" made by the

competent authority under Kerala Co-operative Societies Act is

binding on the authorities under the Income Tax Act for

determining the eligibility for deduction under section 80P(4)

of the Income Tax Act?

iii) Is not the conclusion reached by the ITAT that the

Assessing Officer cannot probe into details as to the fulfilment

of the principal objective of 'providing agricultural credits to

members' by PACs, erroneous and unjustified in view of the

provisions of KCS Act?

iv) Is not the above decision of the ITAT relying on the High

Court decision in the case of Chirakkal Service Co-op bank

&connected cases {[2016]384 ITR 490(Ker)} contradictory to the

decision rendered by this Hon'ble Court in an earlier case - M/s

Perinthalmanna Service Co-operative Bank {reported in

[2014]363 ITR 268(Ker)}

v) Should not have the Tribunal noticed in the light of the

findings of the Hon'ble Apex Court in the case Sabarkhanta

Zilla Kharid Vechan Sangh Ltd. Vs CIT reported in 203 ITR

1027(SC), that eligible deduction under section 80(1)(d)

[substituted by section 80P by the Finance (No.2) Act, 1967 w.e.f

01.04.1968] of the Income Tax Act, 1961 in respect of co-

operative societies/banks doing both agricultural and non-

agricultural activities should not be 100% of the gross profits

and gains of business of such societies etc., but should be

limited to the profits generated from agricultural activities

alone performed by such assessees?

vi) Whether on the facts and in the circumstances of the

case, the order of the ITAT is correct in not duly considering

that the interest income earned from deposits with banks

cannot be attributable as profit and gains from the business of

providing credit facilities to its members u/s80P(2)(a)(i) & in

not considering the case law in 322 ITR 283 M/s Totgar Co-

operative Sales Society applicable in the case?

Substantial Question nos.1 to 4

4. Learned counsel appearing for the Revenue and the

assessee state that the substantial question nos.1 to 4 excerpted

supra are covered by the judgment of the Supreme Court in

Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income

Tax1; the assessee since is a registered Co-operative Society and

the deduction claimed is interest earned from loans lent to

members and amount invested with Co-operative Bank and

Treasury, so the threshold eligibility of deduction is admissible

to assessee and accordingly the income earned by way of

interest from members is eligible for deduction under Section

80P(2)(a)(i) of the Act. Accordingly the questions can be

answered against the Revenue and in favour of the assessee.

Statement is placed on record. Substantial question nos.1 to 4

are answered in favour of the assessee and against the Revenue.

Substantial Question nos.5 and 6

5. Substantial Question nos. 5 and 6 relate to the claim

of deduction made by the assessee of interest income earned

from the deposits the assessee has made with District/State Co-

operative Banks and Treasury. The details of the interest

earned from the investments with above three institutions are

stated thus:

Interest received from District Co-operative Bank 59,00,912

Interest received from State Co-operative Bank 2,91,428

Interest received from Treasury deposits 60,651

Total 62,52,991

5.1 The assessee, as per the certificate dated 01.11.2016

of the Joint Registrar of Co-operative Societies (General)

Trivandrum, claims to be a Primary Agricultural Credit Co-

operative Society registered under the Kerala Co-operative

Societies Act 1969. Admittedly, the assessee is not engaged in

the banking business as defined in the Banking Regulation Act

1949. In other words, the assessee does not have licence or

authorisation under the Banking Regulation Act to do business

in Banking. Principally, the assessee is engaged in the business

of providing credit facilities to its members by accepting loans

from members as well as non-members. As stated above the

assessee earned interest income amounting to Rs.62,52,991/-

from the deposits made with Co-operative Banks/Treasury. The

Assessing Officer proposed to assess the said income under the

head: Income from Other Sources, inasmuch as, according to

Revenue, the interest income does not form part of any receipt

received by the assessee while carrying on the business of

providing credit facilities to its members. The assessee objected

to the inclusion of interest income under the head 'Income from

Other Sources', on the ground that the District Co-operative

Bank and Kerala State Co-operative Bank are registered as Co-

operative Societies and the entire interest income is eligible for

deduction under Section 80P(2)(d) of the Act. The Assessing

Officer found that the District/State Co-operative Banks are

treated as Co-operative Banks and not as Co-operative Societies.

The Assessing Officer relied on the judgment of the Supreme

Court in M/s. The Totgar's Co-operative Sale Society Ltd v. Income

Tax Officer2, and held as squarely applicable to the case on hand

for rejecting the deduction of interest earned from investments

made with Co-operative Banks/Treasury/Society. Further

unless and until the interest income conforms to the eligibility

requirement of Section 80P(2)(d), the income otherwise derived

cannot be deducted from the income of the assessee under

clause (d) of Section 80P(2). Thus, the Assessing Officer added

Rs.62,52,991/- to the income of the assessee. The CIT (Appeals)

accepted the case of the assessee that the assessee is entitled to

the claim of deduction under Section 80P(2)(a)(i); that the

interest income earned by the assessee from Co-operative

Banks/Treasury is entitled to deduction inasmuch as the

surplus fund deposited with Co-operative Bank is entitled to

deduction. The Tribunal confirmed the view taken by the CIT

(Appeals). However, the Tribunal accepted the entire claim of

deduction of interest income earned by the assessee as business

income. These findings of the Tribunal are assailed with

considerable force by the Revenue.

6. Mr Christopher Abraham appearing for the Revenue

challenges the findings of the CIT (Appeals) and the Tribunal by

contending that the appellate authority and the Tribunal

committed a serious error in law in appreciating the extent to

which the assessee is entitled to claim deduction under Section

80P(2)(a)(i) of the Act and the eligible deduction is limited to

interest or dividend derived from investments made under

Section 80P(2)(d) of the Act only to Co-operative Societies. The

decision of the Supreme Court in Mavilayi Service Co-operative

Bank Ltd is kept in mind while appreciating the case of the

assessee whether to include the interest income from

investments in Co-operative Banks/Treasury as income earned

by the assessee by providing credit facilities to its members.

The learned counsel places emphasis on the summary in

Mavilayi Service Co-operative Bank Ltd, namely “clearly, therefore,

once Section 80(P)(iv) is out of harm’s way, all the assessees in the

present case are entitled to the benefit of deduction contained in

Section 80P(2)(a)(i), notwithstanding that they may also be giving loan

to their members which are not related to agriculture. Also in case it

is found that there are instances of loans being given to non-members,

profits attributable to such loans obviously cannot be deducted.”

Therefore, he argues that, even the recent judgment of the

Supreme Court notices that a Co-operative society could be

engaging in the business of banking for providing credit

facilities to its member and also to non-members. The benefit

or deduction admissible under Section 80P(2)(a)(i) is restricted

to the Co-operative Society engaged in the business of banking

or providing credit facilities to its members. The profits

derived from any other transaction is out of harm’s way and

will have to be treated as business income of the

assessee/Society and not eligible for deduction under Sectio

80P(2)(a)(i) of the Act.

6.1 On the same analogy, according to him, the

Parliament has visualized the possibilities of the Societies

investing either the surplus funds or the funds at its disposal

with one or more financial institutions. In respect of such

investments made by the Co-operative Society, the Parliament

desired to limit the admissible deduction only to the interest

income received from investments of the assessee with any

other Co-operative Society. The argument of the assessee, if is

accepted, then, the plain meaning of Section 80P(2)(a)(i) and (d)

is expanded by adjudication or interpretation and more

deduction heads are added to the existing list. Such a course is,

according to him, impermissible. The learned counsel places

strong reliance on M/s. The Totgar's Co-operative Sale Society Ltd

case and argues that the interest from investment made by the

assessee firstly would fall under the category of ‘income from

other sources’. Once it is treated as income from other sources,

the assessee is not entitled to claim deduction under Section

80P(2)(a)(i) of the Act, Then the area available to the assessee is

under Section 80P(2)(d) of the Act. To attract Section 80P(2)(d)

the assessee must show that the interest or dividend is received

only from a Co-operative Society. Adverting to the facts of the

case, it is argued that, admittedly, the interest income is

received from Co-operative Banks which have licences from the

Reserve Bank of India under the Banking Regulation Act. The

reasoning of the appellate authority and the Tribunal is

completely illegal and the reliance placed by the Tribunal on a

few cases decided by them is fallacious and these findings are

liable to be set aside. He prays for answering the questions in

favour of the Revenue and against the assessee.

7. Mr Jojo, learned counsel appearing for the assessee,

who has made submissions in connected matters, contends that

the investment made by the assessee is with the State/District

Co-operative Banks. The banks even if have licences under the

Banking Regulation Act, still they are Co-operative Societies

registered under the Kerala Co-operative Societies Act 1969.

The investment made by the assessee is part of business activity

of the assessee, namely by not keeping the funds idle with the

assessee. Therefore, firstly the income has to be treated as

income earned by the assessee while engaging in banking

business and providing credit facilities to its members. The

counsel relies on the judgment of the Supreme Court in

Commissioner of Income Tax v. Nawanshahar Central Co-operative

Bank Ltd3. He relies on the findings recorded by the Tribunal

and contends that the questions be answered in favour of the

assessee and against the Revenue.

8. We have noted the rival submissions of the counsel

appearing for the parties. In the circumstances of this case, the

question that falls for consideration is whether, in the facts and

circumstances of this case, the interest income earned by the

assessee from the deposits made with District/State Co-

operative Banks and Treasury, firstly, would fall as business

income of the assessee, and, alternatively, whether the interest

income is eligible for deduction under Section 80P(2)(d) of the

Act. Section 80P reads as follows:

“80P (1) Where, in the case of an assessee being a co-operative

society, the gross total income includes any income referred to

in sub-section (2), here shall be deducted, in accordance with

and subject to the provisions of this Section, the sums

specified in sub-section (2), in computing the total income of

the assessee.

(2) The sums referred to in sub-section (1) shall be the

following, namely :-

(a) in the case of a co-operative society engaged in-

(i) carrying on the business of banking or providing credit

facilities to its members, or

(d) In respect of any income by way of interest or dividends

derived by the co-operative society from its investments with

any other co-operative society, the whole of such income;”

8.1 Firstly, we keep in perspective the ratio of Supreme

Court in Mavilayi Service Co-operative Bank Ltd. on the

construction of Section 80P(2)(a)(i) read with sub-section 4 of

Section 80P. Now provision in Section 80P(2)(a)(i) is read

without reference to an activity viz. Primary Agriculture etc. It

is noted that Section 80P provides for deduction in respect of

income of Co-operative Societies and Section 80P(2) allows a

straight deduction from the computation of total income of the

assessee/Co-operative Society to the extent mentioned in

respect of incomes referred therein. Under Section 80P(2)(a)(i)

the whole of profits and gains from business of banking or

providing credit facilities to the members of the Society is

entitled to deduction. Clauses (ii) to (vii) are unnecessary for

the purpose of this judgment, hence not included in the

narrative. A Division Bench of High Court of Telangana and

Andhra Pradesh in Vavveru Co-operative Rural Bank Ltd v. Chief

Commissioner of Income Tax4, has succinctly tabulated the

Societies and the benefits to which each one of the category of

Societies is entitled to, would be benefiting in our narrative to

excerpt the relevant portion as under:

“28. We have carefully considered the above submissions. Before

considering the effect of the various decisions cited on both sides,

we think it would be ideal to look at the statutory prescription in

pure and simple form. As we have indicated earlier, Section 80P(2) is

actually divided into six parts, categorised under clauses (a), (b), (c),

(d), (e), and (f). Each one of these clauses deal with different types of

co-operative societies engaged in different types of activities. The

benefit made available to each one of them is also different from the

other. Therefore, it may be useful to present a tabular form, the six

categories of co-operative societies covered by clause (a) to (f) and

the nature and extent of the benefit available to each one of them,

as follows:

Category of Co-Op., Societies covered by sub-clauses (a) to (f)

Nature and Extent of benefit available

(a) (1) Co-operative society carrying on

the business of banking or providing

credit facilities to its members;

(2) Co-op society engaged in Cottage

Industry;

(3) Co-operative engaged in marketing

of agricultural produce grown by its

members.

(4) Co-operative society engaged in

purchase of agricultural implements,

seeds etc., for the purpose of supplying to

its members;

(5) Co-operative society engaged in

processing of agricultural produce of its

members without the aid of power (6) Co-

operative society engaged in collective

disposal of the labour of its members (7)

Co-operative society engaged in fishing

or allied activities.

The whole of the amount of profits and

gains of business attributable to any one

or more of such activities.

(b) Primary co-operative society

engaged in supplying milk, oil seeds,

fruits or vegetables grown by its

members to

1) a federal co-operative society,

engaged in the same business;

2) the Government or a local authority;

3) the Government company or

Corporation engaged in the same

The whole of the amount of profits and

gains on such business business;

1) A consumer co-operative society

engaged in activities other than those

specified in clause (a) or clause (b)

either independently of, or in addition

to, all or any of the activities so

specified.

So much of the profits and gains

attributable to such activities not

exceeding Rs.100,000/- (one hundred

thousand rupees).

2) Co-operative society other than a

consumer co-operative society engaged

in activities other than those specified

in clauses (a) and (b).

So much to these profits and gains

attributable to such activities not

exceeding Rs.50,000/- (fifty thousand

rupees).

(d) Interest or dividends derived by the

co-operative society from its investments with any other co-operative society;

The whole of such income.

(e) Any income derived by the co-

operative society from the letting of

godowns or warehouses for storage,

processing or facilitating the marketing

of commodities;

The whole of such income.

(f) A co-operative society other than

1) A housing society;

2) An urban consumer society;

3) A society carrying on transport

business;

4) A society engaged in the performance

of any manufacturing operations with

the aid of power, where the gross total

income does not exceed Rs.20,000/-

(twenty thousand rupees)

The income by way of interest on

securities and the income from house

property chargeable under Section 22.

29. From the Tabular form presented above, it may be clear that the

deductions available under Clauses (a) to (c) are activity-based. The

deduction available under Clauses (d) and (e) are investment-based

and the deduction under Clause (f) is institution-based. To put it

differently,

(A) to be eligible for deduction under Clause (a), the claim should

relate to the profits and gains of business attributable to anyone or

more of the activities listed in Clause (a),

(B) to be eligible for deduction under Clause (b), the society should

be a primary society engaged in supplying milk, oilseeds, fruits, etc.

to named institutions, such as, Government, Local Authority,

Federal Co-operative Society, or Government Company,

(C) to be eligible for deduction under Clause (c), the institution must

be engaged in activities other than those covered by Clauses (a) and

(b) subject to the further condition that such profits and gains

should not exceed a particular limit,

(D) to be eligible for deduction under Clause (d), the income should

be derived from investments with another Co- operative Society,

(E) to be eligible for deduction under Clause (e), the income should

be derived from letting of godowns or warehouses, etc.”

8.2 Clause (a) of sub-section (2) of Section 80P is intended

for the benefit of certain types of co-operative societies, but

benefits are confined only to the activities listed in sub-clauses

(i) to (vii) of clause (a). In other words, clause (a) of sub-section

(2) of Section 80P confers benefit upon Co-operative Societies,

but the benefit is restricted only to stated benefits and not to all

the activities earning income for Co-operative Societies. Put it

differently, an institution claiming the benefit of clause (a) of

sub-section (2) of Section 80P should satisfy two requirements:

At the first instance, the institution has to establish that it is a

Co-operative Society. In the case on hand, such requirement is

satisfied by the assessee. At the second instance, the institution

has to establish that the interest income earned by it is from the

business of banking or by providing credit facilities to its

members. In such an eventuality, the entire income earned by

the assessee is entitled for deduction under Section 80P(2)(a)(i)

of the Act.

8.3 Further, clause (d) deals with interest in respect of

any income by way of interest or dividends derived by the Co-

operative Societies from its investments with any other Co-

operative Society, the whole of such interest income is eligible

for deduction. It is upon plain construction inferable that

clause (d) deals with income derived by a Co-operative Society,

other than the income covered by clauses (a) to (c) of Section

80P(2). Clause (d) deals with yet another type of income earned

by the Co-operative Society which is deducted while computing

the total income of the assessee. However, to merit acceptance

of deduction under clause (d) of Section 80P(2) of the Act, the

clause referring to interest or dividend derived from

investments with any other Co-operative Society is satisfied. In

the case on hand, the argument of assessee is that the interest

earned by the assessee is from Co-operative Banks/Treasury.

The Co-operative Banks are registered under the Kerala Co-

operative Societies Act. Therefore, the interest earned could be

treated as meriting consideration under clause (d) of Section

80P(2) of the Act. It is not in dispute that the District/State Co-

operative Banks have licence from the Reserve Bank of India

under the Banking Regulation Act and are registered Co-

operative Societies under the Act. Suffice to observe that by

being a Society doing banking business such society will stand

on par with a Co-operative Society registered under the Kerala

Co-operative Societies Act would come within the purview of

clause (d) of Section 80P(2).

9. The above discussion takes us to the next point for

consideration namely, whether the interest income comes

under Section 28 or 56 of the Act. In other words, the fulcrum

of assessee's case is that investment in Bank is business of

assessee. Mr Christopher Abraham relied on both the

circumstances and the ratio finally laid by the Supreme Court in

M/s. The Totgar's Co-operative Sale Society Limited.

9.1 M/s.Totgar's Co-operative Sale Society had surplus

funds with it and invested in short term deposits with banks and

in government securities. The assessee earned interest on such

investments. The assessee provides credit facilities to its

members and sells the agricultural produce of its members. The

substantial question of law which was considered by the Supreme

Court in M/s. The Totgars Co-operative Sale Society Limited is

whether interest income earned from investments would qualify

for deduction as business income under Section 80P(2)(a)(i) of

the Act. The Supreme Court, in paragraph 10, has further noted

that “at the outset an important circumstance needs to be

highlighted. In the present case, the interest held not eligible

for deduction under Section 80P(2)(a)(i) of the Act is not the

interest received from the members for providing credit

facilities to them. What is sought to be taxed under Section 56

of the Act is the interest income arising on the surplus invested

in short term deposits and securities, which surplus was not

required for business purposes. The assessee markets the

produce of its members whose sales proceeds, at times, are

retained by it. In this case, we are concerned with the tax

treatment of such amount since the fund created by such

retention was not required immediately for business purposes. It

was invested in specified securities. The question before us

(Supreme Court) is whether interest on such deposits/securities

which, strictly speaking, accrues to the members account could

be taxed as business income under Section 28 of the Act? It

was further held that an income which is attributable to any of

the specified activities in Section 80P(2) of the Act could be

eligible for deduction”.

9.2 While dealing with the definition of the word ‘income’,

it is held: “the word ‘income’ has been defined under Section

2(24)(i) of the Act to include profits and gains. This sub-section

is an inclusive provision. Parliament has included specifically

business profits into the definition of the word ‘income’.

Therefore, we are required to give a precise meaning to the

words ‘profits and gains of business’ mentioned in Section 80P(2)

of the Act. In the present case, as stated above, the

assessee/Society regularly invests funds not immediately

required for business purposes. Interest on such investments

therefore cannot fall within the meaning of the expression

‘profits and gains of business’. Such interest income cannot be

said also to be attributable to the activities of the Society,

namely carrying on the business of providing credit facilities to

its members or marketing of agricultural produce of its members.

When the assessee/society provides credit facilities to its

members, it turns interest income. As stated above, in this case,

interest held ineligible for deduction under Section 80P(2)(a)(i) is

not in respect of the interest received from members. In this

case, we are only concerned with interest which accrues on funds

not required immediately by the assessee for its business

purposes and which have been invested in specified securities as

investment. Further, as stated above, the assessee markets the

agricultural produce of its members. It retains the sales

proceeds in many cases. It is this retained amount which was

payable to its members from whom produce was brought which

was invested in short term deposits/securities. Such an amount,

which was retained by the assessee/Society was a liability and it

was shown in the balance sheet on the liability side. Therefore,

to that extent such interest income cannot be said to be

attributable either to the activity mentioned in Section 80P(2)(a)

(i) of the Act or Section 80p(2)(a)(iii) of the Act. Therefore,

looking to the facts and circumstances of this case, we are of the

view that the Assessing Officer was right in taxing the interest

income indicated above, under Section 56 of the Act”.

10. The thrust of consideration in M/s. The Totgar's Co-

operative Sale Society Limited is that the investment made by the

assessee of surplus funds whether to be treated as forming part

of regular business activity of assessee/Society or not. The

Supreme Court, no doubt, has considered that the assessee in

the reported case was also retaining the sales proceeds of its

members and was investing in the bank accounts and was

showing the amount payable to the members on the liability

side of the balance sheet. In our consideration, M/s. The Totgar's

Co-operative Sale Society Limited deals with what constitutes

business income of the Society and what does not constitute

business income of the Society. Interest earned from

investments is not straight profits or gains from business, but a

return by way of interest from investments in Bank etc. The

emphasis in Section 80P(2)(a)(i) is that in a case of a Co-

operative Society engaged in carrying on the business of

banking or providing credit facilities to its members for

deduction of such income from computation. Mavilayi Service

Co-operative Bank Ltd. has differentiated between interest earned

from members of the Society and non-members and held that

the interest income from later portion i.e., non-members is not

eligible for deduction. It is difficult to treat the interest earned

from a Treasury as better positioned than interest received

from non-members. After appreciating the circumstances of the

case on hand and the view taken by the Supreme Court in M/s.

The Totgar's Co-operative Sale Society Limited, together with

Mavilayi Service Co-operative Bank Ltd., we are of the view that

the interest income earned by the assessee, in the case on hand,

does not straight away fall under Section 80P(2)(a)(i) of the Act

commending for deduction.

11. That being so, the next question is such interest

income falls under Section 56 and even if it falls under Section

56 of the Act, whether the assessee is entitled to any deduction

or not.

11.1 Mr Christopher Abraham argues that the Parliament

in its wisdom is aware of the activities being undertaken by all

the Societies to whom relief is provided by way of deduction in

Section 80P of the Act. It is with this background the

Parliament has provided for the deductions in respect of a few

other incomes earned by the assessee/Society. Such deductions

are specifically attributable to the source from which such

interest is received. Expanding the institutions or categories of

benefits is contrary to the intent of the Legislature. According

to him clause (d) of Section 80P(2) is clear in its application, viz.

that interest/dividend received from Co-operative Societies

alone is entitled for deduction. Once interest is received from a

Bank or Treasury, such interest income is out of the purview of

the eligible deduction in the computation of assessee's income.

11.2 Mr Jojo appearing for the respondent, in reply to the

said argument, relies on the judgment of the Supreme Court in

Nawanshahar Central Co-operative Bank Ltd case and argues that

irrespective of the source from which the income is earned,

according to the principle laid down in Nawanshahar Central Co-

operative Bank Ltd case, the assessee is entitled for deduction

under Section 80P(2)(a)(i).

12. We have gone through the order of the Supreme

Court in Nawanshahar Central Co-operative Bank Ltd case, for

immediate reference it is excerpted:

“This Court has consistently held that investments made by a

banking concern are part of the business of banking. The

income arising from such investments would, therefore, be

attributable to the business of bank falling under the head

‘profits and gains of bunisess’ and thus deductable under

Section 80P(2)(a)(i) of the Income Tax Act, 1961. This has been

so held in Bihar State Co-operative Bank Ltd v. CIT [1960] 39 ITR

114 (SC); CIT v. Karnataka State Co-operative Apex Bank [2001] ....

ITR 194 (SC) and CIT v. Ramanandapuram District Co-operative

Central Bank Ltd [2002] 255 ITR 423 (SC).

The principle in these cases would also cover a situation where

a Co-operative bank carrying on the business of banking is

statutorily required to place a part of its funds in approved

securities. The appeals are accordingly dismissed without

costs.”

12.1 The decisions relied on by the Supreme Court refer to

Co-operative Banks but not Co-operative Societies. The issue on

hand is about the interest income earned by way of investments

made with institutions other than Co-operative Societies. We

are of the view that by referring to the order in Nawanshahar

Central Co-operative Bank Ltd case it cannot be held that the

income has to be brought under Section 80P(2)(a)(i) of the Act.

12.2 Section 80P deals with Co-operative Societies'

computation of income. As already noted, it has four sections

and several sub-sections and clauses. The Parliament has

considered the various situations in which the exigible income

and the deductable income of the assessee is considered while

computing the income of the assessee. For getting deduction, in

our considered view, the assessee must also establish that the

interest income earned by the assessee is from a Co-operative

Society. As a matter of fact, in the case on hand, there is no

dispute that it is not from a Co-operative Society registered

under Kerala Co-operative Societies Act. The interest income

earned from District Co-operative Bank/State Co-operative

Bank, in the facts and circumstances of the case, do come within

Section 80P(2)(d). Therefore, the income constitutes income

from other sources and the only eligible deduction is covered by

Section 80P(2)(d) viz. Interest or dividend derived by the

assessee from its investments with any other Co-operative

Society. The source of interest income is from Bank and

Treasury, interest income received from Treasury be included

in the computation of total income of the assessee. In other

words, interest earned from Treasury is inadmissible for

deduction and interest income from Co-operative Societies

registered under the Kerala Co-operative Societies Act are

eligible for deduction. The contra consideration of

Commissioner of Income Tax (Appeals) and the Tribunal is

incorrect and liable to be modified as stated above. Hence, it is

held that the interest income earned by the assessee does not

come within the ambit of Section 80P(2)(a)(i) and permissible

deduction of interest income is limited to Co-operative

Societies/Banks registered under Kerala Co-operative Societies

Act under clause (d) of the Act and effect order on the above

lines is made by the Assessing Officer. The questions are

accordingly answered.

ITA No.323/2019 [Assessment Year 2011-12]

13. The Principal Commissioner of Income Tax -

Thiruvananthapuram/Revenue is the appellant. M/s.

Peroorkada Service Co-operative Bank Limited,

Thiruvananthapuram/assessee is the respondent. The appeal is

at the instance of the Revenue under Section 260A of the Act

against the order dated 17.05.2019 of the Income Tax Appellate

Tribunal (for short ‘Tribunal’), Cochin Bench, Cochin in ITA No.

67/Coch/2019. The subject matter of the appeal relates to the

issues arising from the return filed by the assessee for the

Assessment Year 2011-12.

13.1 The details of the orders etc leading up to the filing

of the appeal are tabulated hereunder:

Assessment Year 2011-12

Assessing Officer Order No.AAAAP3974B/W-2(1)/

TVM/2018-19 dated 12.12.2018

Commissioner of Income Tax

(Appeals)

ITA

No.296/EF/TVM/CIT(A)/TVM/2017

-18 dated 27.11.2018

Income Tax Appellate Tribunal ITA No.67/Coch/2019 dated

17.05.2019

Income under the head Other Sources:

On verification of financial statements, it is seen that assessee

has surplus funds, which the assessee invested as deposits with

different institutions like Co-operative Banks, Treasuries, etc.

and is in receipt of interest income, which is credited in Profit

and Loss Account, in order to arrive at net profit. During the

course of assessment proceedings, assessee has furnished break

up of interest received during the period, on investments at

various institutions, totaling to Rs.9,85,38,230/-, details of

which are as under:

Name of Institution Amount

Trivandrum District Co-operative Bank

9,28,68,899

Kerala State Co-operative Bank 6,21,881

District Treasury 5,43,014

Kerala State Consumer Federation

Co-operative Society 15,97,654

Consumerfed 20,12,798

Kerala State Rubber Marketing

Federation Co-operative Society 5,56,484

Neyyattinkara School Teachers Co-

operative Society 2,32,500

Trivandrum Taluk Co-operative

Employees Society 1,05,000

Total 9,85,38,230

This interest income is liable to be taxed under the head

"Income from other sources" and during the course of

assessment proceedings, it was proposed to treat

Rs.9,85,38,230/- as income under the head 'Other Sources'. The

dispute relates to the extent to which the deduction claimed by

the assessee is legal. The substantial question raised reads as

follows:

1. Whether on the facts and in the circumstances of the case,

the order of the ITAT is correct in not duly considering that the

assessee had invested surplus funds like an ordinary investor

and it has to be taxed as Income from Other Sources?

ITA No.5/2020 [Assessment Year 2013-14]

14. The Principal Commissioner of Income Tax -

Thiruvananthapuram/Revenue is the appellant. M/s.

Peroorkada Service Co-operative Bank Limited,

Thiruvananthapuram/assessee is the respondent. The appeal is

at the instance of the Revenue under Section 260A of the Act

against the order dated 26.06.2019 of the Income Tax Appellate

Tribunal (for short ‘Tribunal’), Cochin Bench, Cochin in ITA No.

47/Coch/2019. The subject matter of the appeal relates to the

issues arising from the return filed by the assessee for the

Assessment Year 2013-14.

14.1 The details of the orders etc leading up to the filing

of the appeal are tabulated hereunder:

Income under the head 'Other Sources':

(i) Interest income on deposits:

(a) Vide Order u/s.263, Principal Commissioner of Income Tax

has directed to ensure that interest income on deposits is

accounted for in accordance with provisions of Section 145.

During the course of assessment proceedings, assessee has

furnished break up of interest received during the period, on

investments at various institutions, totaling to

Rs.14,18,62,743/-, details of which are as under:

Name of Institution Amount

District Treasury 36,00,000

Consumer Federation 53,23,353

Rubber Marketing Federation 9,67,350

Neyyattinkara School Teachers Co-

operative Society 2,70,000

Trivandrum Taluk Co-operative

Employees Society 1,05,000

TDCB 13,15,97,040

Total 14,18,62,743

14.2 This interest income is liable to be taxed under the

head "Income from other sources" and during the course of

assessment proceedings, it was proposed to treat

Rs.14,18,62,743/- as income under the head 'Income from Other

Sources'. The dispute relates to the extent to which the

deduction claimed by the assessee is legal. The substantial

question raised reads as follows:

1. Whether on the facts and in the circumstances of the case, is

the order of the ITAT correct, in not duly considering that the

assessee had invested surplus funds like an ordinary investor

and the interest on such deposits has to be taxed as “Income

from Other Sources”?

15. In ITA NO.142/2019 it has been held that the interest

income earned by the Society comes with the category of

income from other sources and Section 80P(2)(d) deals with the

eligible deduction in this behalf. It has been held in the

connected cases that the assessee is entitled to deduction of

interest income earned from Co-operative Banks/Societies/

Federation registered under the Co-operative Societies Act and

the income earned from Treasury is not included in Section

80P(2)(d) and is not entitled for deduction from computation of

income. The Assessing Officer passes Effect Order on the lines

indicated above.

Appeals are allowed as indicated above. No order as to

costs.

Sd/-

S.V.BHATTI

JUDGE

Sd/-

BASANT BALAJI

JUDGE