ITAT Upholds Section 80P Deduction for Co-operative Credit Society, Deletes Section 68 Addition on Cash Deposits

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Revenue’s appeal against Kothali Vividh Karyakari Sahakari (Vikas) Seva Society Ltd., holding that cash deposits made by members could not be treated as unexplained cash credits under Section 68 once the society had furnished complete details of the depositors. The Tribunal also reaffirmed that a co-operative credit society is entitled to deduction under Section 80P(2)(a)(i) on interest earned from depositing surplus funds with banks.

The assessee, a co-operative credit society registered under the Maharashtra Co-operative Societies Act, filed its return for AY 2021-22 declaring nil income after claiming deduction under Section 80P. During assessment proceedings, the Assessing Officer noticed cash deposits of Rs. 2.94 crore in the society’s account with the Kolhapur District Central Co-operative Bank. Since no response was filed during assessment, the AO treated the deposits as unexplained cash credits under Section 68 and simultaneously denied the deduction under Section 80P for non-compliance with the notices.

Before the Commissioner (Appeals), the assessee produced detailed evidence, including the list of members, their account numbers, and details of individual cash deposits. It explained that the cash represented deposits received from its members in the ordinary course of providing credit facilities. The CIT(A) called for a remand report from the Assessing Officer but found that no verification had been carried out regarding the documents submitted by the assessee. Accordingly, the CIT(A) deleted the addition under Section 68 and allowed the deduction under Section 80P.

The Revenue challenged the relief before the Tribunal.

The Tribunal observed that once the assessee had furnished the identity of the members along with their account numbers and deposit details, the initial burden cast upon it under Section 68 stood discharged. If the Assessing Officer still had doubts, he was required to verify the information or conduct further enquiries. However, no such investigation was carried out, nor did the Revenue produce any material to show that the details furnished by the assessee were false or incorrect. In these circumstances, the Tribunal held that the deletion of the Section 68 addition by the CIT(A) was fully justified.

On the issue of deduction under Section 80P, the Tribunal noted that the assessee was engaged exclusively in providing credit facilities to its members and therefore qualified for deduction under Section 80P(2)(a)(i). Referring to the Supreme Court’s ruling in CIT v. Karnataka State Co-operative Apex Bank, the Tribunal reiterated that interest earned from deposits made as part of carrying on banking or credit activities constitutes business income eligible for deduction.

The Tribunal also relied on the Andhra Pradesh and Telangana High Court’s decision in Vavveru Co-operative Rural Bank Ltd. and the Kerala High Court’s ruling in PCIT v. Sahyadri Co-operative Credit Society Ltd., which held that interest earned by co-operative credit societies on surplus funds deposited with banks retains its character as business income and remains eligible for deduction under Section 80P. The Bench observed that merely depositing surplus business funds in a bank does not alter the nature of such income, particularly where the deposits are made in accordance with the governing co-operative law.

Following these judicial precedents as well as its own earlier decision in ITO v. Dhanshri Multi State Cooperative Society Ltd., the Tribunal upheld the order of the CIT(A), dismissed the Revenue’s appeal, and confirmed both the deletion of the Section 68 addition and the allowability of deduction under Section 80P(2)(a)(i).

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