Case Commentary: ITAT Bangalore Allows Section 80P Deduction to Souharda Cooperative Society – A Landmark Ruling on Eligibility and Business Income Attribution
Introduction
The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, in a significant ruling dated 28th April 2026, allowed three appeals filed by M/s. G M Souharda Pattina Sahakara Nyt (the Assessee) for Assessment Years 2017-18, 2018-19, and 2020-21. The core dispute revolved around the denial of deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, to a credit cooperative society registered under the Karnataka Souharda Sahakari Act, 1997. The Tribunal, comprising Vice-President Shri Prashant Maharishi and Judicial Member Shri Keshav Dubey, overturned the orders of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)], holding that the Assessee is entitled to the deduction as a cooperative society under Section 2(19) of the Act. This commentary provides a deep legal analysis of the Tribunal’s reasoning, its reliance on binding High Court precedents, and the implications for cooperative societies claiming deductions under Section 80P.
Facts of the Case
The Assessee, a credit cooperative society registered under the Karnataka Souharda Sahakari Act, 1997, filed its return of income for Assessment Year 2017-18 declaring total income of Rs. 17,07,220/- and claiming a deduction of Rs. 1,42,62,849/- under Section 80P(2)(a)(i) of the Act. The Assessing Officer, during scrutiny under Section 143(3), denied the deduction solely on the ground that the Assessee was not registered under the Karnataka State Cooperative Societies Act, 1959. Additionally, the AO made a disallowance of Rs. 69,208/- for non-deduction of tax at source. The CIT(A) upheld the denial of deduction, relying on the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd. (2021), holding that interest income from non-eligible entities is not deductible. The Assessee appealed to the ITAT.
Reasoning of the ITAT
The Tribunal’s reasoning is structured around three key legal issues: (a) the eligibility of a Souharda cooperative society for deduction under Section 80P, (b) the applicability of the Mavilayi decision to the facts, and (c) the treatment of disallowance for non-deduction of tax.
1. Eligibility of Souharda Cooperative Society under Section 2(19) and Section 80P
The Tribunal first addressed the foundational issue: whether a society registered under the Karnataka Souharda Sahakari Act, 1997 qualifies as a ‘cooperative society’ under Section 2(19) of the Income Tax Act. The AO had denied the deduction solely because the Assessee was not registered under the Karnataka State Cooperative Societies Act, 1959. The Tribunal, however, relied on the binding decision of the Karnataka High Court in Government of India Ministry of Finance vs. Karnataka State Souharda Federal Co-operative Ltd. (2022) 134 taxmann.com 170 (Karnataka). In that case, the High Court held that a cooperative society registered under the Karnataka Souharda Sahakari Act, 1997 is a ‘cooperative society’ within the ambit of Section 2(19) and is thus entitled to claim the benefit of Section 80P. The Tribunal categorically stated that the AO’s stand was “not correct” in light of this High Court decision. This finding is crucial because it establishes that the Assessee’s registration under the Souharda Act does not bar it from claiming deductions under Section 80P.
2. Applicability of the Mavilayi Decision and Business with Members
The CIT(A) had denied the deduction by applying the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd. (2021) 123 taxmann.com 161 (SC), which held that interest income from non-eligible entities is not deductible under Section 80P. The Tribunal, however, distinguished this decision on facts. It noted that the Assessee is engaged in business with its members, and there was “no evidence” that the Assessee dealt with non-members. The Tribunal observed that the CIT(A)’s finding that the Assessee earned interest income from non-members was “without any basis.” The Tribunal further clarified that the Mavilayi decision itself states that if the Assessee is engaged in business with members—whether regular or nominal—the deduction cannot be denied. Thus, the Tribunal held that the issue is squarely covered in favor of the Assessee by the Karnataka High Court decisions in Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society (2017) 78 taxmann.com 169 (Karnataka) and Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax Officer (2015) 55 taxmann.com 447 (Karnataka). These decisions hold that income attributable to the business of providing credit facilities to members, even if mixed with non-member transactions, is allowable for deduction under Section 80P(2)(a)(i). The Tribunal’s reasoning emphasizes that the deduction is not lost merely because the society is registered under a different state Act, as long as it is a cooperative society dealing primarily with members.
3. Treatment of Disallowance for Non-Deduction of Tax
The AO had made a disallowance of Rs. 69,208/- for non-deduction of tax at source. The Tribunal held that this disallowance increases the income of the Assessee, which is attributable to the business of providing credit facilities to its members. Therefore, any such disallowance would simultaneously increase the deduction under Section 80P(2)(a)(i). The Tribunal directed the AO to allow the deduction on the enhanced income as well. This reasoning is consistent with the principle that the deduction under Section 80P is computed on the gross total income from the eligible business, and any disallowance that adds to that income should also qualify for the deduction.
4. Interest Income and Section 80P(2)(d)
The Tribunal also addressed a related issue raised by the revenue authorities regarding the denial of deduction under Section 80P(2)(d) for interest income. The Tribunal noted that the Assessee had not claimed the interest income under Section 80P(2)(d) but had treated the entire income as business income attributable to its business. Consequently, the Tribunal held that the issue of denying deduction under Section 80P(2)(d) does not survive for subsequent years. This clarification prevents the revenue from re-litigating the same issue in future assessments.
Conclusion
The ITAT’s decision in M/s. G M Souharda Pattina Sahakara Nyt is a significant victory for cooperative societies registered under state-specific Acts like the Karnataka Souharda Sahakari Act. The Tribunal has reaffirmed that such societies are entitled to the benefits of Section 80P, provided they are engaged in business with members. The ruling also clarifies that the Mavilayi decision does not automatically deny deduction to all cooperative societies; it only applies where there is clear evidence of business with non-members. The Tribunal’s direction to allow deduction on disallowances for non-deduction of tax ensures that the Assessee is not penalized twice. This order is likely to have a persuasive effect on other benches and lower authorities, especially in Karnataka, where the High Court has already settled the law in favor of Souharda societies.