The Income Tax Appellate Tribunal, Pune, has clarified that primary credit cooperative societies are entitled to claim deduction under Section 80P(2)(d) of the Income-tax Act for interest income earned from investments in cooperative banks, overturning a disallowance that had been upheld by lower authorities. This ruling reinforces the distinction between cooperative banks and cooperative societies for tax exemption purposes and resolves a long-standing ambiguity in the application of Section 80P.
Background & Facts
The Dispute
The appellant, Satara Zilla Gramin Dak Sevak Sahakari Patsanstha Ltd., is a primary credit cooperative society registered under the Maharashtra Co-operative Societies Act, 1960. It provides credit facilities and accepts deposits from its members. For the assessment year 2021-22, the assessee filed its return declaring income of Rs. 200 after claiming a deduction of Rs. 5,92,356 under Section 80P(2)(a)(i). The return was processed under Section 143(1)(a) and accepted. Subsequently, the case was selected for scrutiny via CASS, and notices under Sections 143(2), 142(1), and show cause notices were issued.
Key Facts
- The assessee received interest and dividend income of Rs. 5,92,556 from investments held with cooperative banks and other cooperative societies during the year.
- The Assessing Officer (AO) disallowed the entire amount under Section 80P(2)(d), treating it as non-exempt income, and added it to the total income.
- The AO allowed deduction under Section 80P(2)(a)(i) for income from its core cooperative activities but denied it for income derived from investments in other cooperative entities.
- The assessee had submitted detailed records of investments, including bank statements and certificates from cooperative banks, evidencing the source of interest income.
- The CIT(A) confirmed the disallowance by relying on Mavilayi Service Cooperative Bank Ltd. v. CIT and Section 80P(4), which excludes cooperative banks from claiming deductions under Section 80P.
Procedural History
- 14.02.2022: Return filed for A.Y. 2021-22 declaring income of Rs. 200 with deduction of Rs. 5,92,356 under Section 80P(2)(a)(i).
- 28.12.2022: AO passed order under Section 143(3) read with Section 144B, adding Rs. 5,92,556 as income by disallowing deduction under Section 80P(2)(d).
- 22.08.2025: CIT(A) dismissed the appeal, upholding the AO’s order.
- 07.04.2026: Hearing before ITAT Pune.
- 26.05.2026: ITAT Pune pronounced order allowing the appeal.
Relief Sought
The appellant sought: (1) reversal of the disallowance of Rs. 5,92,556 under Section 80P(2)(d); (2) allowance of deduction for interest income earned from cooperative banks; and (3) restoration of the claimed exemption.
The Legal Issue
The central question was whether a primary credit cooperative society is eligible for deduction under Section 80P(2)(d) of the Income-tax Act for interest income earned from investments in cooperative banks, despite the exclusion of cooperative banks under Section 80P(4).
Arguments Presented
For the Appellant
The appellant relied on multiple coordinate bench decisions of the ITAT, including Kai Fakira Jairam Patil Sahakari Patsanstha Maryadit Shahada v. ITO (ITA No. 553/PUN/2023) and Ugar Sugar Works Kamgar & Dr. Shirgaokar Shaikshanik Trust Nokar Co-op Credit Society v. ITO (ITA No. 84/PAN/2018). It argued that Section 80P(2)(d) explicitly covers income derived by a cooperative society from its investment in any other cooperative society, and that cooperative banks are legally classified as cooperative societies under the Co-operative Societies Act. The appellant further cited the Karnataka High Court’s decision in CIT v. Totagars Cooperative Sale Society (392 ITR 74), which held that Section 80P(2)(d) applies to interest from cooperative banks, distinguishing it from Section 80P(2)(a)(i). The appellant emphasized that Section 80P(4) only bars cooperative banks from claiming the deduction, not other societies from earning it.
For the Respondent
The Revenue contended that the Mavilayi Service Cooperative Bank Ltd. decision by the Supreme Court barred any deduction under Section 80P for entities engaged in banking activities, and that the interest income received by the assessee was essentially banking income. It argued that since cooperative banks are excluded under Section 80P(4), any income derived from them should also be excluded. The Revenue relied on the CIT(A)’s reasoning that allowing such deductions would create a loophole, enabling societies to circumvent the statutory exclusion.
The Court's Analysis
The Tribunal carefully distinguished between the nature of the assessee and the nature of the income. It noted that the assessee is not a cooperative bank but a primary credit cooperative society, whose core activity is providing credit to members. The interest income in question was not from its own banking operations but from surplus funds invested in other cooperative banks and societies.
"The only issue in the present case is as to the allowability of exemption under the provisions of section 80P(2)(d) in respect of interest income earned by a cooperative society from the cooperative bank. This issue is no longer res integra..."
The Tribunal emphasized that Section 80P(2)(d) does not restrict the source of investment to non-banking cooperative societies. It held that the term "cooperative society" in Section 80P(2)(d) includes cooperative banks, and that the exclusion under Section 80P(4) applies only to cooperative banks claiming the deduction themselves, not to other societies earning income from them.
The Tribunal reviewed the Karnataka High Court’s reasoning in Totagars Cooperative Sale Society and the Delhi High Court’s contrary view in Mantola Cooperative Thrift Credit Society, and preferred the Karnataka view as more consistent with the statutory language. It also noted that the Supreme Court’s decision in Mavilayi concerned a cooperative bank claiming the deduction, which is categorically barred under Section 80P(4), and is therefore inapplicable to a non-banking society earning interest from such banks.
The Tribunal concluded that the AO and CIT(A) erred in law by conflating the identity of the recipient with the identity of the payer. The deduction under Section 80P(2)(d) is available to the investing society regardless of whether the paying entity is a cooperative bank, provided the investment is in another cooperative society.
The Verdict
The appeal was allowed. The ITAT Pune set aside the order of the CIT(A) dated 22.08.2025 and directed the Assessing Officer to allow the deduction of Rs. 5,92,556 under Section 80P(2)(d) of the Income-tax Act for the assessment year 2021-22. The Tribunal further clarified that the deduction is available for interest income earned from both cooperative banks and scheduled banks, provided the investment is made by a primary credit cooperative society.
What This Means For Similar Cases
Deduction Under Section 80P(2)(d) Is Not Blocked by the Nature of the Paying Entity
- Practitioners must now argue that the eligibility for deduction under Section 80P(2)(d) depends solely on the status of the investing cooperative society, not the type of entity paying the interest.
- Even if the interest is paid by a cooperative bank, the receiving society remains eligible if it is not itself a cooperative bank.
Section 80P(4) Is a Restriction on Claimants, Not on Receivers
- The exclusion under Section 80P(4) applies only to cooperative banks seeking the deduction - it does not disqualify other societies from earning exempt income from them.
- Revenue authorities cannot use Section 80P(4) to deny deductions to non-banking societies on the grounds that the interest came from a bank.
Precedents from Coordinate Benches Are Binding in Absence of Jurisdictional Authority
- Where no binding precedent exists from the jurisdictional High Court, coordinate benches of the ITAT may rely on well-reasoned decisions from other benches, especially when supported by High Court rulings.
- The ITAT Pune’s reliance on the Karnataka High Court’s view in Totagars reinforces the trend of favoring a purposive interpretation of Section 80P to support cooperative sector growth.
Documentation Is Critical for Claiming Section 80P(2)(d)
- Cooperatives must maintain clear records of investments, including bank statements, certificates of deposit, and correspondence with paying institutions.
- The nature of the payer (cooperative bank vs. non-banking society) should be explicitly documented to preempt disallowance.
Avoid Misapplication of Supreme Court Precedents
- The Mavilayi decision does not apply to primary credit societies earning interest from cooperative banks - it applies only to cooperative banks claiming the deduction.
- Practitioners should distinguish between the status of the claimant and the status of the payer when citing precedents.
