The Income Tax Appellate Tribunal has clarified a long-standing ambiguity in the application of Section 80P(2)(d) of the Income Tax Act, affirming that interest income earned by co-operative societies from deposits with co-operative banks is eligible for deduction. This ruling resolves conflicting judicial interpretations and reinforces the principle that statutory exemptions must be construed in favour of the assessee where reasonable doubt exists.
Background & Facts
The Dispute
The appellant, Everest Grande Commercial Premises Co-operative Society Ltd., is a registered commercial co-operative society under the Maharashtra Co-operative Societies Act, 1960. It collects maintenance charges from its members on a mutuality basis and uses surplus funds to maintain common property. For Assessment Year 2022-23, the society earned ₹11,48,308 in interest from fixed deposits and savings accounts held with various co-operative banks, including Saraswat Co-operative Bank and Shamrao Vithal Co-operative Bank.
Procedural History
- 25/10/2022: Assessee filed return claiming full deduction under Section 80P(2)(d) for interest income from co-operative banks.
- 02/03/2024: Assessing Officer disallowed the deduction, relying on Section 80P(4) and the Supreme Court’s decision in Totgar’s Co-operative Sale Society Ltd. v. ITO.
- 04/12/2025: Commissioner of Income Tax (Appeals) upheld the disallowance.
- 11/02/2026: ITAT Mumbai allowed the appeal, reversing the lower authorities.
Relief Sought
The assessee sought reversal of the disallowance and restoration of the deduction under Section 80P(2)(d), arguing that co-operative banks qualify as "co-operative societies" under the definition in Section 2(19) and that Section 80P(4) only excludes co-operative banks from claiming deductions themselves - not from being valid recipients of investments by other co-operative societies.
The Legal Issue
The central question was whether interest income earned by a co-operative society from deposits with a co-operative bank qualifies for deduction under Section 80P(2)(d), despite the exclusionary effect of Section 80P(4).
Arguments Presented
For the Appellant
The appellant relied on the coordinate bench decision in Pathare Prabhu Co-operative Housing Society v. ITO and the Supreme Court’s ruling in Mavilayi Service Co-operative Bank Ltd. v. CIT, arguing that:
- Section 80P(4) only bars co-operative banks from claiming deductions under Section 80P - it does not negate their status as "co-operative societies" under Section 2(19).
- The term "any other co-operative society" in Section 80P(2)(d) includes co-operative banks, as they are registered under state co-operative laws.
- The Supreme Court in Mavilayi held that Section 80P(4) applies only when the assessee itself is a co-operative bank engaged in banking functions.
- The principle of beneficial construction in tax law mandates that ambiguous provisions favouring the taxpayer must be adopted.
For the Respondent
The Revenue contended that:
- Section 80P(4) excludes all co-operative banks from the ambit of Section 80P, rendering any investment with them ineligible for deduction.
- The Supreme Court in Totgar’s Co-operative Sale Society Ltd. supported a restrictive interpretation of Section 80P(2)(d).
- Co-operative banks are distinct entities with banking licenses and should not be treated as ordinary co-operative societies for deduction purposes.
The Court's Analysis
The Tribunal undertook a detailed statutory interpretation of Section 80P(2)(d) and Section 80P(4), distinguishing between the eligibility of the assessee and the nature of the recipient institution.
"The limited object of section 80P(4) is to exclude Co-operative Banks that function at par with other commercial banks i.e. which lend money to members of the public."
The Court emphasized that Section 80P(4) operates as a proviso to Section 80P(1) and (2), and its exclusion applies only when the assessee itself is a co-operative bank. It does not alter the definition of "co-operative society" under Section 2(19), which explicitly includes any entity registered under state co-operative laws - including co-operative banks.
The Tribunal rejected the Revenue’s reliance on Totgar’s Co-operative Sale Society Ltd., noting that the Supreme Court in that case interpreted Section 80P(2)(a)(i), not Section 80P(2)(d), making it inapplicable.
The Court also addressed the divergence between Karnataka High Court decisions, applying the Supreme Court’s principle from CIT v. Vegetable Products Ltd.: when two reasonable interpretations exist, the one favouring the assessee must prevail.
The Tribunal further affirmed that co-operative societies are statutorily required under the Maharashtra Act to deposit surplus funds in co-operative banks, making such investments integral to their functioning - not speculative or commercial.
The Verdict
The assessee prevailed. The ITAT held that interest income earned by a co-operative society from deposits with a co-operative bank qualifies for deduction under Section 80P(2)(d), as co-operative banks remain "co-operative societies" under Section 2(19) and Section 80P(4) does not bar such investments. The disallowance was set aside.
What This Means For Similar Cases
Deduction Is Not Barred by the Nature of the Bank
- Practitioners may now confidently claim Section 80P(2)(d) deductions for interest earned from any co-operative bank, provided the assessee is a registered co-operative society.
- The mere fact that the recipient is a licensed bank does not disqualify the investment - only the assessee’s own banking function triggers Section 80P(4) exclusion.
Statutory Definitions Trump Functional Classification
- The definition of "co-operative society" under Section 2(19) is broad and registration-based, not function-based.
- Even if a co-operative bank engages in commercial banking, it remains a "co-operative society" for the purpose of Section 80P(2)(d).
Precedent Overrules Conflicting High Court Views
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Where High Courts have issued conflicting rulings, the Tribunal must follow the principle of beneficial construction and coordinate bench precedents.
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Mavilayi and Pathare Prabhu now form the authoritative framework for interpreting Section 80P(2)(d).
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Actionable Takeaway: Co-operative societies should retain detailed records of deposits with co-operative banks, including bank names, account numbers, and interest certificates, to substantiate claims under Section 80P(2)(d).
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Risk Mitigation: Avoid citing Totgar’s in arguments concerning Section 80P(2)(d) - it is factually inapplicable.
