Section 80P(2)(a)(i) | Co-operative Societies Entitled to Deduction on Interest Income from Member Loans : ITAT Pune

The Income Tax Appellate Tribunal (ITAT), Pune, has delivered a significant ruling on the eligibility of co-operative societies for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Tribunal held that interest income earned by a co-operative society from deposits with banks is attributable to its business activities and qualifies for deduction, distinguishing the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd. v. ITO. This judgment reinforces the principle that co-operative societies engaged in providing credit facilities to members are entitled to tax benefits on their entire income derived from such activities, including interest from surplus funds deposited in banks.

Background & Facts

The Dispute

The appellant, Dapodi Workshop Employees Co-operative Credit Society Limited, is a co-operative credit society registered under the Maharashtra Co-operative Societies Act, 1960. It is engaged in providing loans and credit facilities exclusively to its members. For the assessment year 2018-19, the assessee filed its return of income on 03.10.2018, declaring a total income of Nil after claiming a deduction of Rs. 32,97,192 under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer disallowed this claim, and the disallowance was upheld by the Learned Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi, in an order dated 16.01.2026. Aggrieved by this order, the assessee appealed to the ITAT.

Key Facts

• The assessee is a salary earners' co-operative credit society registered under the Maharashtra Co-operative Societies Act, 1960.
• It filed its return of income for AY 2018-19 on 03.10.2018, claiming deduction under Section 80P(2)(a)(i).
• The Assessing Officer disallowed the deduction, holding that the interest income earned from deposits with banks did not qualify for deduction under Section 80P(2)(a)(i).
• The assessee's claim was based on the argument that the interest income was derived from its business activities of providing credit facilities to members.

Procedural History

• 03.10.2018: Assessee filed return of income for AY 2018-19, claiming deduction under Section 80P(2)(a)(i).
• Assessment Order: Assessing Officer disallowed the deduction.
• 16.01.2026: Ld. CIT(A) / NFAC upheld the disallowance.
• 24.06.2026: Appeal heard by ITAT, Pune.
• 06.07.2026: ITAT pronounced its order, allowing the appeal.

Relief Sought

The assessee sought restoration of the deduction of Rs. 32,97,192 under Section 80P(2)(a)(i) of the Income Tax Act, arguing that the interest income earned from deposits was attributable to its business activities.

The Legal Issue

The central question before the Tribunal was whether a co-operative credit society is entitled to deduction under Section 80P(2)(a)(i) of the Income Tax Act on interest income earned from deposits with banks, where such deposits are made from surplus funds generated from its business activities.

Arguments Presented

For the Appellant

The Ld. Counsel for the assessee relied on the following key arguments:

1. Precedent in Assessee's Own Case: The Tribunal had allowed a similar claim in the assessee's own case for AY 2020-21 (ITA No. 824/PUN/2025, order dated 16.05.2025).

2. Binding Precedents: The assessee cited several decisions where co-operative societies were allowed deduction under Section 80P(2)(a)(i) on interest income, including:

   • PCIT vs. Annasaheb Patil Mathadi Kamgar Sahakari Patpedhi Maryadit Ltd (2023) 150 taxmann.com 173 (SC)
   • Ruby Hall Clinic Karmchari Sahakari Patsanstha Maryadit vs. ITO (ITA No. 49/PUN/2024, order dated 25.04.2024)
   • Baner Nagari Sahakari Pat Sanstha Maryadit vs. ITO (ITA No. 549/PUN/2024, order dated 30.04.2024)
   • State Bank of India Employees Co-Op. Credit Society Ltd vs. ITO (ITA No. 306/PUN/2022, order dated 29.08.2022)
   • The Mavilayi Service Co-operative Bank Ltd. & Ors vs. CIT & Anr (2021) 431 ITR 1 (SC)
   • Vavveru Co-operative Rural Bank Ltd. (2017) 396 ITR 371 (AP & Telangana HC)

3. Distinction from Totgars Case: The assessee argued that the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd. v. ITO (2010) 188 Taxman 282 (SC) was distinguishable. In Totgars, the society had retained members' funds and invested them, whereas the assessee had invested its own surplus funds generated from its business activities.

For the Respondent

The Ld. Departmental Representative (DR) heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC, contending that the interest income earned from deposits did not qualify for deduction under Section 80P(2)(a)(i).

The Court's Analysis

The Tribunal conducted a detailed analysis of the legal principles governing the deduction under Section 80P(2)(a)(i) of the Income Tax Act. The key observations and reasoning are as follows:

1. Binding Precedent in Assessee's Own Case: The Tribunal noted that an identical issue had been decided in the assessee's favor for AY 2020-21 (ITA No. 824/PUN/2025, order dated 16.05.2025). In that case, the Tribunal had allowed the deduction under Section 80P(2)(a)(i) on interest income earned from deposits, holding that the income was attributable to the assessee's business activities.

2. Judicial Precedents: The Tribunal relied on several decisions of the ITAT, Pune, and the High Court of Andhra Pradesh and Telangana, which had consistently held that co-operative societies are entitled to deduction under Section 80P(2)(a)(i) on interest income earned from deposits. The Tribunal quoted extensively from the judgment of the Andhra Pradesh and Telangana High Court in Vavveru Co-operative Rural Bank Ltd. (2017) 396 ITR 371, which distinguished the Totgars case and held:

   "The real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub-section (2) of section 80P or not."

   The High Court further observed:

   "The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression 'attributable to' and not any one of the two expressions, namely, 'derived from' or 'directly attributable to'."

   The High Court concluded that the interest income earned by co-operative societies from deposits was eligible for deduction under Section 80P(2)(a).

3. Distinction from Totgars Case: The Tribunal emphasized that the Totgars case was distinguishable on facts. In Totgars, the society had retained members' funds and invested them, whereas in the present case, the assessee had invested its own surplus funds generated from its business activities. The Tribunal held that the interest income earned from such investments retained the character of income derived from the assessee's business activities.

4. ITAT Pune Decisions: The Tribunal also relied on decisions of the ITAT, Pune, which had consistently allowed deductions under Section 80P(2)(a)(i) for co-operative societies. For instance, in Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd. Vs. Income-tax Officer (158 taxmann.com 322), the Tribunal had held:

   "Even the interest income earned by cooperative society on deposits made out of surplus funds with cooperative banks as well as schedule bank qualifies for deduction both under the provisions of section 80P(2)(a)(i) and section 80P(2)(d) of the Act."

   Similarly, in Yashwant Nagari Sahakari Patsanstha Maryadit Vs. ITO (ITA No. 644/PUN/2024, order dated 04.06.2024), the Tribunal had allowed the deduction under Section 80P(2)(a).

5. Rule of Precedence: The Tribunal noted that no contrary decision of the jurisdictional High Court had been brought to its notice. Therefore, the decisions of the Andhra Pradesh and Telangana High Court and the ITAT, Pune, were binding precedents.

The Verdict

The Tribunal allowed the appeal filed by the assessee. It set aside the order of the Ld. CIT(A) / NFAC dated 16.01.2026 and directed the Assessing Officer to allow the claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act for the amount of Rs. 32,97,192. The grounds raised by the assessee were accordingly allowed.

What This Means For Similar Cases

Co-operative Societies Can Claim Deduction on Interest Income

This judgment reinforces the principle that co-operative societies engaged in providing credit facilities to members are entitled to deduction under Section 80P(2)(a)(i) on their entire income, including interest earned from deposits with banks. Practitioners should note:

• The income must be attributable to the business activities of the society, as opposed to being derived from or directly attributable to such activities.
• The distinction from Totgars lies in the fact that the society must invest its own surplus funds generated from business activities, rather than retaining members' funds.

Binding Precedents Simplify Future Litigation

• The Tribunal's reliance on binding precedents, including its own earlier decision in the assessee's case, simplifies future litigation for co-operative societies.
• Assessees can cite this judgment to argue that interest income from deposits is eligible for deduction under Section 80P(2)(a)(i), provided the funds are generated from the society's business activities.

Assessing Officers Must Follow Judicial Precedents

• Assessing Officers are now bound by the Tribunal's interpretation of Section 80P(2)(a)(i). Disallowances based on the reasoning that interest income from deposits does not qualify for deduction are likely to be overturned on appeal.
• Practitioners should ensure that Assessing Officers apply the correct legal principles and do not mechanically rely on the Totgars decision without considering the factual distinctions.

Practical Implications for Co-operative Societies

• Documentation: Co-operative societies should maintain clear records showing that the interest income is derived from surplus funds generated from their business activities.
• Appeal Strategy: In cases of disallowance, assessees should cite this judgment and other binding precedents to strengthen their appeal.
• Tax Planning: Societies can plan their investments in a manner that maximizes their eligibility for deductions under Section 80P(2)(a)(i).