IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K, JUDICIAL MEMBER Assessment Year: 2020-21 Sri Guru Ramalingeshwara Souharda Vs. The Pr. Commissioner of Pattina Sahakari Niyamitha, Income Tax, 1, Ashwini Complex, Hubli.

Gesh, Maski – 584 124. PAN – AAVAS 1264 J APPELLANT RESPONDENT Assessee by : Shri Ravishankar, Advocate Revenue by : Shri Muthu Shankar, JCIT (DR)

Date of hearing : 04.03.2026 Date of Pronouncement : 12.03.2026

O R D E R

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The present appeal, filed by the assessee, is against the order dated 22-03-2025 passed by the Learned Pr. Commissioner of Income Tax (Appeal) at National Faceless Appeal Centre-NFAC, for the A.Y.

2020-21.

2. The interconnected issue raised by the assessee through Ground Nos. 1 to 3 of the appeal is that order passed under section 263 of the Act is bad in law.

3. The facts in brief are that the assessee is cooperative society carrying on banking business, accepting deposits from its members and lending money to its members. For the year under consideration the assessee filed return of income declaring nil income after claiming deduction under section 80P(2)(a)(i) of the Act for whole amount of profit & gain of Rs. 73,65,428/- only. The return was selected for scrutiny and finally assessment order under section 143(3) of the Act was passed accepting the return income.

3.1 Subsequently on examination of the assessment records, the learned PCIT noticed that the assessee had earned interest income of ₹76,90,564/- from deposits made with co-operative banks and commercial banks. The ld. PCIT observed that while completing the assessment under section 143(3) r.w.s. 144B on 06.09.2022, the AO did not examine the nature and taxability of this interest income.

3.2 According to the PCIT, as per the judgment of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. vs. ITO (322 ITR 283), interest earned on surplus funds deposited with banks is taxable under the head “Income from Other Sources” under section 56 of the Act and not as business income. Therefore, such income is not eligible for deduction under section 80P(2)(a)(i) of the Act.

3.3 The ld. PCIT further observed that the interest was earned from deposits with co-operative banks and commercial banks and not from investments with another co-operative society. Hence, deduction under section 80P(2)(d) was also not allowable.

3.4 The ld. PCIT also relied on the decision of the Karnataka High Court in PCIT vs. Totgar Co-operative Sale Society (ITA No.100066/2016 dated 16.06.2017) reported in 83 taxmann.com 140 where it was held that interest earned from deposits of surplus funds does not arise from business operations and therefore deduction under section 80P of the Act cannot be allowed.

3.5 Based on these facts, the ld. PCIT formed the view that the AO failed to properly examine this issue and allowed the deduction without verification. Therefore, the assessment order was considered erroneous and prejudicial to the interests of the Revenue under section 263 of the Act.

3.6 In response to the notice issued under section 263 of the Act, the assessee submitted that the assessment order passed by the AO was not erroneous and that the AO had passed the order after examining the details submitted by the assessee.

4. The assessee argued that the decision of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. was not directly applicable. In that case the society was engaged in trading activities, whereas the assessee is engaged in the business of providing credit facilities to its members.

4.1 It was also submitted that under the provisions of the Karnataka Souharda Sahakari Act, the assessee is required to maintain certain reserves and liquidity in the form of deposits. Therefore, making deposits with banks is a normal part of its business activity.

4.2 The assessee therefore contended that the interest income earned