Interest on deposits qualifies as deductible business income for credit co-operatives under Sec 80P(2)(a)(i) | Income Tax deduction for co-ops : ITAT Bangalore

The Income Tax Appellate Tribunal (Bangalore) set aside the Assessing Officer’s disallowance of a credit co-operative’s claim for deduction under Section 80P(2)(a)(i), holding that interest earned on deposits with a co-operative bank is attributable to the business of providing credit facilities and therefore deductible.

Background & Facts

The Dispute

M/s. Sri Gayathri Credit Co-operative Society Ltd., Hassan (the appellant) is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959. It provides credit facilities exclusively to its members. For Assessment Year 2017-18 the society filed its return on 17 August 2017, declaring total income of Rs. 1,81,770 and claiming a deduction of Rs. 29,42,348 under Section 80P(2)(a)(i) on the basis that interest earned on deposits with the District Central Co-operative Bank, Hassan, was attributable to its credit-facility business.

Key Facts

• The society earned interest income of Rs. 26,42,517 from deposits during AY 2017-18.
• It claimed a deduction of Rs. 29,42,348 under Section 80P(2)(a)(i), arguing that the interest is part of profits and gains from its credit-facility activity.
• The Assessing Officer (AO) held that the society was engaged in banking, that the principle of mutuality was defeated by the existence of nominal members, and disallowed the deduction, treating the interest as income from other sources.
• The AO relied on Citizen Co-operative Society Ltd. v. ACIT (Civil Appeal No. 10245 of 2017) and PCIT v. Totgars Co-operative Sales Society (2017) to support the view that interest on deposits with a co-operative bank is not deductible.
• The society contended that nominal members are “members” under the Karnataka Co-operative Societies Act and that the interest is wholly attributable to its credit-facility business.

Procedural History

• 17 August 2017: Return of income filed for AY 2017-18.
• 02 March 2018: Return processed u/s 143(1).
• Date not specified: CASS scrutiny; notices u/s 143(2) and 142(1) issued.
• 16 December 2019: AO issued order u/s 143(3) disallowing the deduction.
• 03 November 2025: The CIT(A)/NFAC dismissed the society’s appeal, upholding the AO’s view.
• 03 June 2026: Present appeal heard before the ITAT Bangalore.
• 17 August 2026: Judgment pronounced.

Parties' Positions

• Appellant (Society): Argues that the interest earned on deposits is a profit arising from the business of providing credit facilities; relies on Citizen Co-operative Society Ltd., Mavilayi Service Co-operative Bank Ltd., and the definition of “member” under the Karnataka Act.
• Respondent (Revenue): Maintains that the interest is income from other sources, that the principle of mutuality is defeated by the existence of nominal members, and that the deduction is barred under Section 80P(2)(d).

Relief Sought

The appellant sought a reversal of the AO’s order and the CIT(A) order, requesting that the deduction of Rs. 29,42,348 under Section 80P(2)(a)(i) be allowed.

The Legal Issue

Whether interest income earned by a credit co-operative society on deposits placed with a co-operative bank is deductible under Section 80P(2)(a)(i) of the Income Tax Act, 1961, i.e., whether such interest is attributable to the business of providing credit facilities and whether the existence of nominal members defeats the principle of mutuality.

Arguments Presented

For the Appellant

• The society contended that the interest is a profit arising from its core activity of providing credit facilities, and therefore falls within the ambit of Section 80P(2)(a)(i).
• Relied on Citizen Co-operative Society Ltd. v. ACIT (Supreme Court) that the provision must be read liberally in favour of the assessee.
• Cited Mavilayi Service Co-operative Bank Ltd. v. CIT and the definition of “member” under the Karnataka Co-operative Societies Act, emphasizing that nominal members are still members.
• Submitted that the expression “attributable to” in the statute is wide-ranged and includes interest earned on short-term deposits of surplus funds.

For the Respondent

• The AO argued that the interest is income from other sources and not part of the business, invoking the principle of mutuality to show a distinction between regular and nominal members.
• Relied on PCIT v. Totgars Co-operative Sales Society and Citizen Co-operative Society Ltd. to argue that interest on deposits with a co-operative bank is not eligible for deduction.
• Asserted that Section 80P(2)(d), not Section 80P(2)(a)(i), governs the situation and therefore the deduction must be denied.

The Court's Analysis

The Tribunal began by interpreting the phrase “profits and gains attributable to the business” in Section 80P(2)(a)(i). It observed that the legislature deliberately used “attributable” rather than “derived from”, signalling a broader scope. Referring to Cambay Electrical Supply Industrial Co. Ltd. v. CIT (1978), the Tribunal held that “attributable” embraces receipts that are not directly derived from the core activity but are nevertheless a consequence of it.

"Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee."

The Tribunal distinguished the AO’s reliance on the principle of mutuality. It noted that the Karnataka Co-operative Societies Act defines “member” to include nominal and associate members, and that the Supreme Court in Citizen Co-operative Society Ltd. rejected the view that the presence of such members defeats the deduction. Consequently, the existence of nominal members does not defeat the mutuality principle for the purpose of Section 80P(2)(a)(i).

Next, the Tribunal examined the distinction between Section 80P(2)(a)(i) and Section 80P(2)(d). It emphasized that the two provisions are “entirely different and distinct” and that a deduction under 80P(2)(d) does not preclude a separate deduction under 80P(2)(a)(i). The AO’s conflation of the two provisions was therefore erroneous.

The Tribunal also considered the factual matrix: the society’s surplus funds were not a liability to members, were idle, and were placed in a bank to earn interest. This interest, the Tribunal held, is a profit arising from the society’s business of providing credit facilities, even though the actual earning of interest occurs in a bank.

Finally, the Tribunal rejected the AO’s reliance on Totgars Co-operative Sale Society Ltd. because that case dealt with a different factual scenario where the interest was linked to marketing activities, not pure credit-facility operations.

The Verdict

The appeal is allowed. The Assessing Officer is directed to allow the deduction of Rs. 29,42,348 claimed by the appellant under Section 80P(2)(a)(i) of the Income Tax Act, 1961. No other monetary relief or costs are awarded.

What This Means For Similar Cases

Interest on Deposits Is Deductible When Attributable

• Practitioners can argue that interest earned on short-term deposits of surplus funds is attributable to the credit-facility business, provided the funds are not a liability to members.
• The broader interpretation of “attributable” allows inclusion of such interest in the profit and gains of the business.

Principle of Mutuality Not a Bar

• The presence of nominal or associate members does not defeat the deduction, as “member” under the respective State Co-operative Societies Act includes them.
• Courts will follow the liberal approach endorsed in Citizen Co-operative Society Ltd..

Distinguish Between Sections 80P(2)(a)(i) and 80P(2)(d)

• 80P(2)(a)(i) applies to interest earned on deposits when the society’s core activity is providing credit facilities.

• 80P(2)(d) deals with interest on deposits that are not linked to the credit-facility business; the two cannot be merged.

• Ensure factual segregation before invoking either provision.

• Actionable Takeaways:

  • Verify that interest income arises from surplus funds not required for immediate lending.
  • Document the classification of members under the relevant State Co-operative Act.
  • Cite Citizen Co-operative Society Ltd. and Mavilayi Service Co-operative Bank Ltd. for a liberal construction of “attributable”.