TaxTMI 
TaxTMI 
2026 (6) TMI 1312
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.... 3. The brief facts of the case are that the assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 and is engaged in providing credit facilities to its members. The assessee filed its return of income declaring total income at Rs. Nil after claiming deduction u/s. 80P of the Act amounting to Rs. 59,32,300/- only. The case was selected under scrutiny and assessment was completed u/s. 143(3) of the Act accepting the returned income. 3.1 Subsequently, the assessment was reopened u/s. 147 of the Act on the ground that certain incomes were eligible for deduction u/s. 80P of the Act. The details of such income stand as under: (i) Interest income from bank deposits - Rs. 6,25,661/- (ii) Interest on loan given to staff - Rs. 53,963/- (iii) Other income by way of processing fees and allied charges - Rs. 1,44,675/- aggregating to Rs. 8,24,299/-. 3.2 The AO was of the view that the above income was not attributable to the business of providing credit facilities to members and therefore not eligible for deduction u/s. 80P(2)(a)(i) of the Act. The AO further held that such income is liable to be assessed under the hea....
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....ee submitted that such income is intrinsically linked to the activity of providing credit facilities and therefore forms part of eligible business income u/s. 80P of the Act. 6. The Ld. CIT(A), however, did not accept the contentions of the assessee. The Ld. CIT(A) held that the interest income earned from deposits with banks is not attributable to the business of providing credit facilities to members and is liable to be assessed under the head "Income from other sources". The Ld. CIT(A) relied on the decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. and held that such interest income does not qualify for deduction u/s. 80P(2)(a)(i) of the Act. The Ld. CIT(A) further held that the assessee is not exclusively engaged in the business of banking and that the funds invested in deposits cannot be treated as operational funds. Accordingly, the disallowance of interest income of Rs. 6,25,661/- and interest on staff loans of Rs. 53,963/- was confirmed. 6.1 However, in respect of service charges and allied income amounting to Rs. 1,44,675, Ld. CIT(A) observed that such income is directly connected with the activity of providing credit facilit....
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....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 (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities :" 10.1 On the combined reading of the provision of sub-section 1, clause (a) of sub-section 2 of the section 80P of the Act, it is transpired t....
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....d by the Tribunal as well by the Hon'ble Karnataka High Court. The dispute reached to the Hon'ble Supreme Court through the civil appeal filed by the assessee. The Bench of Hon'ble Supreme Court observed that the assessee markets the product of its members and sale proceeds of the same which was liable to be remitted to the member were sometimes retained by the assessee. The surplus fund created by such retention was not immediately required for business purposes, were invested in specified securities. The Hon'ble Supreme Court in the given facts and circumstances decided the issue favouring the Revenue by observing as under: 10. 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. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by i....
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....pect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, 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 in 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. 11. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be ....
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.... taxed by the Department under section 56 of the Act. 10.3 The above finding of the Hon'ble Supreme Court has been followed by the revenue for disallowing the deduction claimed under section 80P(2)(a)(i) of the Act on account of interest income earned from deposits or investment of surplus fund by the cooperative societies carrying on the business of banking or providing credit facilities to the members. The argument of the cooperative societies engaged in providing credit facility to the members is that the surplus fund for which members are not immediately seeking credits are deposited with bank as a prudent business decision and therefore, the interest earned thereon shall be attributed to the business only and hence, the same is eligible for the deduction. We note that the above argument of the assessee finds support from the ruling of Hon'ble Jurisdictional High court of the Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V dated 28^th October 2014, reported in [2015] 55 taxmann.com 447 (Karnataka). The Hon'ble Bench of Karnataka High Court distinguished the ratio of the Hon'ble Supreme Court in the case of Totgars Co-o....
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....ncome under Section 80P of the Act." 10.5 The Hon'ble High Court in the above stated case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) also found that ratio laid down by the Hon'ble Supreme in Totgars Co-operative Sale Society (supra) was in different context. It was found that said assessee retained the sale proceed payable to the members and deposited such retained money. The fund deposited was the liability of the said cooperative society and interest earned on such deposit was held to be not attributable to the business of the cooperative society. Hence, the Hon'ble High Court held that ratio laid down by the Hon'ble Supreme Court in Totgars Co-operative Sale Society(supra) shall not be apply where cooperative society is carrying banking business or providing credit facility to members and earns interest on deposit of surplus/idle fund out of profit & gains or capital. 10.6 It is also noted that the identical view was taken by the Hon'ble Jurisdictional High Court of the Karnataka in the subsequent decision in case of Guttigedarara Credit Co-operative Society Ltd. vs. ITO, Ward 2(2), Mysore dated 9^th June 2015 reported in [2015] 60 taxmann.com 215. 10.7 ....
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....he Hon'ble Calcutta High Court in West Bengal State Co-Operative Agriculture & Rural Development Bank Ltd. vs. DCIT reported [2025] 177 taxmann.com 469 (Calcutta)[06-08-2025]. 11. The relevant finding of the Hon'ble Kerala High Court in above stated case is extracted as under: 7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T. Act for a Co-operative Society that is assessed to tax under the head of 'Profits and Gains of Business or Profession' is of the whole of the amount of profits and gains of business attributable to any one or more of its activities. Thus, all amounts as can be attributable to the conduct of the specified businesses by a Co-operative Society will be eligible for the deduction envisaged under the statutory provision. The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns i....
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....rest income is attributable to the profits and gains of the business of providing credit facilities to its members only. Bearing in mind the meaning of the words 'attributable to' the court proceeded to consider as to the applicability of the judgment of the Hon'ble Supreme Court in Totgars, Co-operative Sale Society Ltd. (supra). It was pointed out that the Hon'ble Supreme Court was dealing with the case where the assessee therein, apart from providing credit facility to the members, was also in the business of marketing of agricultural produce grown by its members and the sale consideration received from marketing agricultural produce of its members was retained in many cases and retained amount which was payable to its members from whom produce was bought, was invested in a short term deposit/security. 12. The facts of the case of the assessee before us is entirely different as the amount which was deposited in the bank was not an amount due to the members and it was not the liability of the society to the members and, therefore, the interest earned from such deposits in the bank should be held to be eligible for deduction under section 80P(2)(a)(i) of t....
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.... retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression "profits and gains of business" and that such interest income cannot be said 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. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as "investment" are ineligible for deduction under section 80P(2)(a)(i) of the Act. For the above reasons, this court respectfully does not agree with the view taken by the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of....
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....itiate proceedings in direct violation of the law so declared. Under Art,. 215, every High Court shall be a court of record and shall have all the powers of such a court including the power to punish for contempt of itself. Under Art. 226, it has a plenary power to issue orders or writs for the en-forcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under Art. 227 it has jurisdiction over all courts and tribunals throughout the territories in relation to which it exercise jurisdiction. It would be anomalous to suggest that a tribunal over which the High Court has superint-endence can ignore the law declared by that court and start proceedings in direct violation of it. If a tribunal can do so, all the sub-ordinate courts can equally do so, for there is no specific, provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior tribunal that all the tribunals subject to its supervision should conform to the law laid down by it. Such obedi....
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....arger Bench. It is equally well-settled that the decision of one High Court is not a binding precedent on another High Court. The Supreme Court in Vattiama Champaka Pillai v. Sivathanu Pillai, AIR 1979 SC 1937, dealing with the controversy whether a decision of the erstwhile Travancore High Court can be made a binding precedent on the Madras High Court on the basis of the principle of stare decisis, clearly held that such a decision can at best have persuasive effect and not the force of binding precedent on the Madras High Court. Referring to the States Reorganisation Act, it was observed that there was nothing in the said Act or any other law which exalts the ratio of those decisions to the status of a binding law nor could the ratio decidendi of those decisions be perpetuated by invoking the doctrine of stare decisis. The doctrine of stare decisis cannot be stretched that far as to make the decision of one High Court a binding precedent for the other. This doctrine is applicable only to different Benches of the same High Court. It is also well-settled that though there is no specific provision making the law declared by the High Court binding on subordinate cou....
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....d not qualify for deduction under section 80P(2)(a)(i) of the Act and the same was liable to be taxed under the head "Income from other sources". Accordingly, the claim of deduction under section 80P(2)(a)(i) in respect of such interest income was rejected in those cases. However, the legal position now stands clarified by the judgment of the Hon'ble jurisdictional High Court of Karnataka in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra), and other case laws as discussed in preceding paragraphs wherein it has been held that where a co-operative society, engaged in the business of providing credit facilities to its members, temporarily parks its surplus funds with banks, the interest earned therefrom is attributable to the business of the society and is therefore eligible for deduction under section 80P(2)(a)(i) of the Act. 12. Since the decision of the Hon'ble Jurisdictional High Court is binding on this Tribunal, judicial discipline requires that the same be followed. Therefore, to the extent of our earlier decisions where we have taken a contrary view, we respectfully depart from the earlier stand and follow the ratio laid down by the Hon'ble Karnataka High Court in....