Interest on Bank Deposits Can Still Qualify for 80P Deduction- Bangalore ITAT Gives Relief to Credit Co-operative Society

Hamdard Co-operative Society Limited Vs ADDL/JCIT (ITAT Bangalore)

Interest on Bank Deposits Can Still Qualify for 80P Deduction- Bangalore ITAT Gives Relief to Credit Co-operative Society

The Bangalore ITAT allowed deduction u/s 80P(2)(a)(i) to a credit co-operative society by holding that the interest earned on deposits kept with co-operative banks and reserve fund deposits was attributable to the business of providing credit facilities to members and therefore eligible for deduction. The Tribunal distinguished the facts from the Supreme Court ruling in Totgars and relied on the Karnataka High Court ruling in Tumkur Merchants Souharda Credit Co-operative Ltd. to hold that temporary parking of business funds in banks does not change the character of the income.

The AO had denied deduction on two grounds – firstly, that the interest income of ₹5.78 lakh was taxable as “Income from Other Sources”, and secondly, that the society had nominal members and therefore was not eligible for deduction u/s 80P.

The Tribunal rejected both objections. It observed that the assessee was engaged only in the business of accepting deposits and lending to members, and the funds parked in banks were part of the operational business funds of the society. Hence, the interest income retained the character of business income attributable to the activity of providing credit facilities to members.

On the issue of nominal members, the ITAT relied on the Supreme Court ruling in Mavilayi Service Co-operative Bank Ltd. and held that transactions with nominal members would not automatically disentitle the society from claiming deduction u/s 80P, especially when there were no dealings with non-members. Accordingly, the entire deduction claimed by the assessee was directed to be allowed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. ITA No. 1873/Bang/2025 is filed by Hamdard Co-operative Society Limited against the appellate order passed by the Joint Commissioner of Income Tax Appeal – 2 Surat (the learned CIT-A) dated 30^th June 2025 wherein the appeal filed by the assessee against the intimation order passed under Section 143(1) of the Income Tax Act, 1961 (the Act) passed by the Income Tax Office Ward – 2, Shimoga (the learned Assessing Officer) on 29^th December 2019 was dismissed. Therefore, assessee is in appeal before us.

2. The only issue in appeal before us is deduction under Section 80P(2)(a)(i) and 80P(2)(d) denied to the assessee.

3. Briefly stated the facts show that assessee is a Credit Co-operative Society filed its return of income on 30^thOctober 2017 declaring income of Rs. 1,78,130/- and claimed deduction under Section 80P of Rs. 15,73,747/-. The return of income was picked up for scrutiny for verification of the deduction. The verification showed that assessee has filed return of income wherein the deduction under Section 80P was claimed of Rs. 15,73,747/- and the assessee has also earned interest income of Rs. 5,78,187/-.This interest income is also considered as income attributable to the business of the assessee of credit facilities to members. The main object of society was providing various credit facilities to its member.

4. The learned Assessing Officer based on the decision of the Hon’ble Supreme Court in case of Totgars Co-operative Society Ltd. vs. Income Tax Officer dated 08.02.2010 Totgars, Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC)/[2010] 322 ITR 283 (SC)/[2010] 229 CTR 209 (SC)[08-02-2010]and later decision of Hon’ble Karnataka High Court dated 05.01.2017Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017] held that income of Rs. 5,78,187/-interest income earned by the assessee is chargeable to tax under the head income from other sources and therefore the deduction claimed by the assessee on the same deserves to be withdrawn.

5. The AO further noted that assessee has 2,520members and 330 nominal members. The AO on the basis of the fact that the income from nominal members disentitles the assessee for deduction under Section 80P of the Act. Accordingly, the deduction under Section 80P was also disallowed. Accordingly, the assessment order was passed on 29^thDecember 2019. The assessee approached the learned CIT-Appeal wherein the assessee was denied deduction under Section 80P(2)(a)(i) as well as under Section 80P(2)(d).

6. Aggrieved with the same the assessee is in appeal before us.

7. We have heard Shri. G S Bhatt, CA, the Authorized Representative and Shri. Ganesh R Ghale, Standing Counsel for the Revenue. We have also perused the orders of the learned Lower Authorities and also considered the various judicial precedents relied in the orders as well as cited before us.

8. We find that assessee is a Credit Co-operative Society engaged in accepting deposits and providing credit facilities to its member. The assessee has claimed the deduction of the interest income also claiming under Section 80P(2)(a)(i) of the Act. The assessee has earned interest income of Rs. 5,78,187/-out of the mandatory reserve fund deposits and with Shimoga District Central Co-operative Bank. The sum of Rs. 9,95,560/-was also stated to be business income from credit facilities extended to its members. There is no reason that the income earned by the assessee of interest should be considered as income from other sources. When the assessee has claimed the same as income received from the money deposited by its members in those bank accounts.

9. We find that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 taxmann.com447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] where it is held that o-operative society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. Society is not carrying on any separate business for earning such interest income. The income derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under section 80P.

10. Further the Honourable Supreme court also in Mavilayi Service Co-operative Bank Ltd. vs. CIT [123 Taxman 161] held that income derived from transaction with nominal members is also eligible for deduction u/s 80 P of the Act. It is the facts that there is no transaction of the assessee with non-members.

11. Accordingly, we direct the learned Assessing Officer to grant the deduction under Section 80P(2)(a)(i) of the Act to the assessee of the whole of the income attributable to the business of the assessee following the decision of the Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO [230 Taxman 309]. Further as there is no non-members with whom the assessee has dealt with, the Assessee’s income is also eligible for deduction under Section 80P(2)(a)(i) of the Act as per the decision of the Hon’ble Supreme Court in case of Mavilayi Service Co-operative Bank Ltd. vs. CIT [123 Taxman 161].

12. Accordingly appeal of the assessee is allowed.

Order pronounced in the open court on 20^th May, 2026.