Interest on Surplus Funds with Banks Eligible for Section 80P Deduction: ITAT Nagpur

Keshao Nagari Co-operative Vs ITO (ITAT Nagpur)

Summary: These three appeals filed by the assessee concerned Assessment Years 2017-18, 2020-21 and 2018-19 and arose from separate appellate orders passed by the Addl./JCIT(A)-4, Bengaluru and the National Faceless Appeal Centre (NFAC), Delhi. The common grievance in all the appeals was denial of deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 in respect of interest income earned on deposits with nationalized banks and cooperative banks.

For AY 2017-18, ITA No.373/NAG/2026 was directed against the order dated 02.02.2026 arising from the assessment order dated 18.11.2019 passed under section 143(3). For AY 2020-21, ITA No.478/NAG/2026 arose from the order dated 09.03.2026 passed by NFAC, Delhi, arising from the assessment order dated 20.09.2022 under section 143(3) read with section 144B. For AY 2018-19, ITA No.532/NAG/2026 arose from the order dated 29.04.2026 passed by NFAC, Delhi, arising from the assessment order dated 09.03.2021 under sections 143(3), 143(3A) and 143(3B).

The Assessing Officer had denied the assessees’ claims of deduction under section 80P(2)(a)(i) on interest income earned on deposits with nationalized banks and other cooperative banks, and the Ld. CIT(A) had confirmed the additions.

Before the Tribunal, the assessee relied upon judicial precedents placed in the paper book. The Tribunal noted that the only issue requiring adjudication was the allowability of deduction under section 80P(2)(a)(i) on interest income received from deposits with nationalized banks and cooperative banks.

The Tribunal observed that the Pune Bench had consistently taken the view that interest income earned on deposits with nationalized banks and other cooperative banks was allowable as deduction under section 80P(2)(a)(i). It specifically relied upon the Pune Bench decision in Nashik Road Nagari Sahkari Patsanstha Limited Vs. ITO, ITA No.1700/PUN/2017.

The Tribunal also considered the decision in ITO vs. M/s. Shri Bhairavnath Multistate Cooperative Credit Society Ltd., ITA No.2484/PUN/2017 dated 27.06.2024 for AY 2014-15, where the Pune Bench had allowed the claim under section 80P(2)(a)(i) on interest earned on investments made out of surplus funds with cooperative banks, cooperative societies and nationalized banks.

Respectfully following the decision relied upon, the Tribunal held that the respective assessee(s) were entitled to claim deduction under section 80P(2)(a)(i) on interest income earned on investments made out of surplus funds with cooperative banks, cooperative societies and nationalized banks. The grounds raised by the respective assessee(s) were allowed and all three appeals were allowed.

Appeals Before the ITAT Nagpur

ITA No.373/NAG/2026 was filed by the assessee for AY 2017-18 against the order dated 02.02.2026 framed by Addl./JCIT(A)-4, Bengaluru, arising from the assessment order dated 18.11.2019 passed under section 143(3) of the Act.

ITA No.478/NAG/2026 was filed by the assessee for AY 2020-21 against the order dated 09.03.2026 framed by NFAC, Delhi, arising from the assessment order dated 20.09.2022 passed under section 143(3) read with section 144B.

ITA No.532/NAG/2026 was filed by the assessee for AY 2018-19 against the order dated 29.04.2026 framed by NFAC, Delhi, arising from the assessment order dated 09.03.2021 passed under sections 143(3), 143(3A) and 143(3B).

Common Issue Regarding Section 80P Deduction

The common grievance in all three appeals concerned denial of deduction under section 80P(2)(a)(i) on interest income earned from nationalized banks and cooperative banks.

The Tribunal noted that the respective assessee(s) had claimed deduction under section 80P(2)(a)(i) in respect of interest income earned on deposits with nationalized banks and other cooperative banks. The Assessing Officer had denied the deduction and the Ld. CIT(A) had confirmed the addition made by the Assessing Officer.

The Tribunal identified the issue for determination as the allowability of deduction under section 80P(2)(a)(i) in respect of interest income received on deposits with nationalized banks and other cooperative banks.

Pune ITAT Decisions Relied Upon

The Tribunal noted that the Pune Bench had, in a number of decisions, consistently taken the view that interest income earned on deposits with nationalized banks and other cooperative banks was allowable as deduction under section 80P(2)(a)(i).

The Tribunal specifically referred to the decision in ITO vs. M/s. Shri Bhairavnath Multistate Cooperative Credit Society Ltd., ITA No.2484/PUN/2017, order dated 27.06.2024 for AY 2014-15.

In that case, the Pune Bench had allowed the claim of exemption under section 80P(2)(a)(i) on interest earned on investments made out of surplus funds with cooperative banks, cooperative societies and nationalized banks.

Nashik Road Nagari Sahkari Patsanstha Decision

The decision in Nashik Road Nagari Sahkari Patsanstha Limited Vs. ITO, ITA No.1700/PUN/2017, was also considered.

In that decision, as reproduced in the supplied order, the assessee was a cooperative society formed under the Maharashtra Cooperative Societies Act, 1960 with the objective of accepting deposits and lending money to its members. Funds not immediately required for lending to members had been deposited with Bank of Baroda in the form of fixed deposits.

The Pune Bench considered whether the interest earned qualified for exemption under section 80P(2)(a)(i). It noted differing judicial views on the eligibility of interest income from surplus funds invested in banks and followed the view of the Coordinate Bench in favour of the assessee, which had relied upon the decision of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd.

The Pune Bench accordingly held that interest income earned on investment of surplus money with banks was eligible for exemption under section 80P(2)(a)(i).

The Pune Bench thereafter affirmed the order of the Ld. CIT(A) directing the Assessing Officer to allow the claim under sections 80P(2)(a)(i) and 80P(2)(d) on interest income earned from investments made out of surplus funds with cooperative banks, cooperative societies and nationalized banks.

Judicial Precedents Considered in the Pune Decision

The material reproduced in the order records that several High Court decisions had taken a view that income arising from surplus invested in short-term deposits and securities could not be attributed to the activities of the society and therefore was not eligible for exemption under section 80P(2)(a)(i).

These included CIT vs. Punjab State Cooperative Federation of Housing Building Societies Ltd., 11 taxmann.com 448; State Bank of India Vs. CIT, 389 ITR 578 (Guj.); Mantola Cooperative Thrift & Credit Society Ltd. Vs. CIT, 50 taxmann.com 278; CIT Vs. Punjab State Cooperative Agricultural Development Bank Ltd., 389 ITR 68; and CIT Vs. Southern Eastern Employees Cooperative Credit Society Ltd., 390 ITR 524.

The material also records contrary views of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO, (2015) 230 taxmann 309 (Kar.), and the Telangana and Andhra Pradesh High Court in Vaveru Co-operative Rural Bank Ltd. v CIT, [(2017) 396 ITR], holding that such interest income was attributable to the activities of the society and therefore eligible for exemption under section 80P(2)(a)(i).

The Pune Bench had also followed its earlier decision in M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit Vs. ITO, ITA Nos.559/560/PUN/2018, dated 11-12-2018, which had taken a view in favour of the assessee following the Karnataka High Court decision in Tumkur Merchants Souharda Credit Cooperative Ltd.

ITAT Nagpur’s Findings

The ITAT Nagpur heard the rival contentions and perused the record placed before it.

The Tribunal found that the only issue in the appeals concerned the allowability of deduction under section 80P(2)(a)(i) on interest income received on deposits with nationalized banks and other cooperative banks.

After considering the judicial precedents filed by the assessee and the consistent view taken by the Pune Bench, the Tribunal followed the decision in ITO vs. M/s. Shri Bhairavnath Multistate Cooperative Credit Society Ltd.

The Tribunal held that the assessee was entitled to claim deduction under section 80P(2)(a)(i) on interest income earned on investments made out of surplus funds with cooperative banks, cooperative societies and nationalized banks.

Final Decision

The ITAT Nagpur allowed the grounds raised by the respective assessee(s) in all three appeals.

Accordingly, deduction under section 80P(2)(a)(i) was held allowable on the interest income earned on investments made out of surplus funds with cooperative banks, cooperative societies and nationalized banks.

In the result, all three appeals of the respective assessee(s) were allowed.

Order pronounced on this 7th day of August, 2026.

Cases Discussed

• ITO vs. M/s. Shri Bhairavnath Multistate Cooperative Credit Society Ltd., ITA No.2484/PUN/2017, order dated 27.06.2024
• Nashik Road Nagari Sahkari Patsanstha Limited Vs. ITO, ITA No.1700/PUN/2017
• CIT vs. Punjab State Cooperative Federation of Housing Building Societies Ltd., 11 taxmann.com 448
• State Bank of India Vs. CIT, 389 ITR 578 (Guj.)
• Mantola Cooperative Thrift & Credit Society Ltd. Vs. CIT, 50 taxmann.com 278
• CIT Vs. Punjab State Cooperative Agricultural Development Bank Ltd., 389 ITR 68
• CIT Vs. Southern Eastern Employees Cooperative Credit Society Ltd., 390 ITR 524
• Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO, (2015) 230 taxmann 309 (Kar.)
• Vaveru Co-operative Rural Bank Ltd. v CIT, [(2017) 396 ITR
• M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit Vs. ITO, ITA Nos.559/560/PUN/2018, dated 11-12-2018

FULL TEXT OF THE ORDER OF ITAT NAGPUR

ITA No.373/NAG/2026 at the instance of assessee pertaining to A.Y. 2017-18 is directed against the order dated 02.02.2026 framed by Addl / JCIT(A)-4, Bengaluru arising out of Assessment Order dated 18.11.2019 passed u/s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’). ITA No.478/NAG/2026 at the instance of assessee pertaining to A.Y. 2020-21 is directed against the order dated 09.03.2026 framed by National Faceless Appeal Centre (NFAC), Delhi arising out of Assessment Order dated 20.09.2022 passed u/s. 143(3) r.w.s. 144B of the Act. ITA No.532/NAG/2026 at the instance of assessee pertaining to A.Y. 2018-19 is directed against the order dated 29.04.2026 framed by National Faceless Appeal Centre (NFAC), Delhi arising out of Assessment Order dated 09.03.2021 passed u/s. 143(3) r.w.s. 143(3A) & 143(3B) of the Act.

2. The common grievance in all these appeals is denial of deduction u/s 80P(2)(a)(i) of the Act on the interest income earned from the nationalized banks or cooperative banks.

3. I have heard the rival contentions and perused the record placed before me. I note that the respective assessee(s) in the instant case have claimed deduction u/s 80P(2)(a)(i) in respect of interest income earned on deposits with nationalized bank and other cooperative banks. However, the AO has denied the said deduction. The Ld. CIT(A) also confirmed the addition made by the Assessing Officer.

4. I have gone through the judicial precedents filed in the paper book by the assessee. I find the only issue to be decided in the present appeals is regarding the allowability of deduction u/s 80P(2)(a)(i) on account of interest income received on deposits with the nationalized banks and other Co- operative Banks.

5. I find the Pune Bench of the Tribunal in plethora of decisions consistently has taken a view that the interest income earned on deposits with the nationalized banks and the other cooperative banks is an allowable deduction u/s 80P(2)(a)(i) of the Act.

6. I further find an identical issue had come up before the Pune Bench of the Tribunal in the case of ITO vs. M/s. Shri Bhairavnath Multistate Cooperative Credit Society Ltd. vide ITA No.2484/PUN/2017 order dated 27.06.2024 for assessment year 2014-15. The Tribunal has allowed the claim of exemption u/s 80P(2)(a)(i) of the Act on the interest earned on investments made out of surplus funds with the cooperative banks, cooperative banks and nationalized banks. The relevant observations of the Tribunal from para 5 onwards read as under:

“5. We heard the rival submissions and perused the material on record. We find this issue is no more res integra by virtue of catena of decisions passed by the Coordinate Benches of this Tribunal. In the present case, we find that admittedly the interest income was earned from the investments out of surplus funds made with cooperative banks/societies, the cooperative bank is also a specie of cooperative society, therefore, the interest income earned by the cooperative society from the cooperative banks qualifies for deduction u/s.80(P)(2)(d) of the Act. Such interest also qualifies for exemption u/s.80P(2)(a)(i) as held by the Co-ordinate Bench of Pune Tribunal in the case of Nashik Road Nagari Sahkari Patsanstha Limited Vs. ITO in ITA No.1700/PUN/2017 wherein the Trib unal held as under:-

“9. We heard the rival submissions and perused the material on record. Admittedly, the appellant is a Cooperative society formed under the provisions of Maharashtra Cooperative Societies Act,1960 with the objective of accepting deposits and lending money to its members. The money which is not immediately required for the purpose of lending to the members is deposited with Bank of Baroda in the form of Fixed Deposit. The question is whether the interest so earned qualifies for exemption u/s. 80P(2)(a)(i) of the Act. The AO as well as the CIT(A) were of the opinion that the interest earned from third parties or nonmembers does not quality for exemption u/s.80P. It is an admitted position that the interest so earned should be taxed as ‘income from other sources’ There is a cleavage of judicial opinion among several High Courts on the issue of eligibility of this kind of income for exemption u/s. 80P(2)(a)(i) of the Act. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Punjab State Cooperative Federation of Housing Building Societies Ltd. 11 taxmann.com 448, the Hon’ble Gujarat High Court in the case of State Bank of India Vs. CIT 389 ITR 578 (Guj.), the Hon’ble Delhi High Court in the case of Mantola Cooperative Thrift & Credit Society Ltd. Vs. CIT 50 taxmann.com 278, the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Punjab State Cooperative Agricultural Development Bank Ltd. 389 ITR 68 and the Hon’ble Kolkata High Court in the case of CIT Vs. Southern Eastern Employees Cooperative Credit Society Ltd. 390 ITR 524 took a view that the income arising on the surplus invested in short term deposits and securities cannot be attributed to the activities of the society and, therefore, not eligible for exemption u/s.80P(2)(a)(i) of the Act. However, the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO (2015) 230 taxmann 309 (Kar.) and the Hon’ble Telangana and Hon’ble Andhra Pradesh High Court in the case of Vaveru Co-operative Rural Bank Ltd. v CIT [(2017) 396 ITR took a view that such interest income is attributable to the activities of the society and, therefore, eligible for exemption u/s.80P(2)(a)(i) of the Act. The Coordinate Bench of Pune Benches in the case of M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit Vs. ITO (ITA Nos.559/560/PUN/2018, dated 11 -12- 2018) has taken view in favour of the assessee following the judgment of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Respectfully following the decision of the Coordinate Bench, we hold that the interest income earned on the investment of surplus money with banks is also eligible for exemption u/s.80P(2)(a)(i) of the Act. Thus, the grounds of appeal No. 1 & 2 stands allowed.”

6. Thus, the order passed by the ld.CIT(A) is in conformity with the settled position of law by virtue of the above discussion. Therefore, we affirm the impugned order directing the Assessing Officer to allow the claim of exemption u/s.80P(2)(a)(i)/80P(2)(d) on the interest income earned on investments made out of surplus funds made with Cooperative banks, Cooperative Societies and Nationalised banks.

7. In the result, the appeal filed by the Revenue is dismissed.”

7. Respectfully following the above decision, I hold that the assessee is entitled to claim deduction u/s 80P(2)(a)(i) on the interest income earned on investments made out of surplus funds made with Cooperative banks, Cooperative Societies and Nationalised banks. The grounds raised by the respective assessee(s) are accordingly allowed.

8. In the result, all the three appeals of the respective assessee(s) are allowed.

Order pronounced on this 7th day of August, 2026.