Sri Gayathri Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)
Bangalore ITAT: Bank Interest Earned by Credit Co-operative Society Eligible for Section 80P Deduction; Nominal Members Cannot Defeat Mutuality
The assessee, a credit co-operative society providing credit facilities to its members, claimed deduction under Section 80P(2)(a)(i) on interest earned from deposits placed with a District Central Co-operative Bank. The AO denied the entire deduction, alleging that the presence of nominal members defeated the principle of mutuality and that the deposit interest was taxable as income from other sources.
The Bangalore ITAT held that nominal and associate members are included within the definition of “member” under the Karnataka Co-operative Societies Act, 1959. Since the Income-tax Act makes no distinction between regular and nominal members, the deduction could not be denied merely because the society had collected a nominal-membership fee of ₹900. The Tribunal relied on the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd.
The Tribunal further held that money temporarily not required for lending to members cannot be expected to remain idle. Interest earned by depositing such business funds with co-operative or commercial banks is attributable to the business of providing credit facilities to members and is therefore deductible under Section 80P(2)(a)(i). The decision in Totgars Co-operative Sale Society was distinguished because that case involved amounts payable to members and reflected as liabilities.
Accordingly, the AO was directed to allow deduction on the entire interest income, and the assessee’s appeal was allowed.
List of Cases Discussed / Relied Upon
- Sri Gayathri Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)
- M/s. Citizen Co-operative Society Ltd. Vs. ACIT, Civil Appeal No. 10245 of 2017, dated 08.08.2017
- Mavilayi Service Co-operative Bank Ltd v. CIT, Calicut, reported in 431 ITR 1 (SC)
- U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I, [1997] 11 SCC 287 / (1999) 237 ITR 574 (SC)
- Sri Kengal Credit Co-operative Society Limited v. ITO, ITA Nos. 238 & 331/Bang/2026, dated 04/08/2026
- Cambay Electrical Supply Industrial Co. Ltd. Vs. CIT, 113 ITR 84 (SC)
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. Income-tax Officer, Ward-V, Tumkur, [2015] 230 Taxman 309 (Karn.)
- Guttigedarara Credit Co-operative Society Ltd. v. Income-tax Officer, Ward 2(2), Mysore, (2015) 377 ITR 464 / [2016] 234 Taxman 476
- Totgars Co-operative Sale Society Ltd. v. ITO, 322 ITR 283
- PCIT Vs. Totgars Co-operative Sales Society, (2017) 395 ITR 611 (Karn.)
- Lalitamba Pattina Souharda Sahakari Niyamita v. ITO, (Karn-HC) (2019) 307 CTR 770
- CIT v. Andhra Pradesh State Co-operative Bank Ltd., [2011] 336 ITR 516 / 200 Taxman 220 / 12 taxmann.com 66
- Belve Vyavasaya Seva Sahakari Sangha vs. The Commissioner of Income Tax, ITA No. 118 of 2025, dated 21/01/2026
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 03.11.2025 v ide DIN & Order No. ITBA/NFAC/S/250/2025-26/1082243831(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.
2. The assessee has raised the following grounds of appeal:-
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned Addl/JCIT(A)-1, Chennai erred in upholding the total income of the appellant at Rs. 31,24,117/- as against the returned income of Rs. 1,81,770/- by denying entire deduction claimed u/s. 80P[2][a][i] of the Act of Rs. 29,42,348/- under the facts and in the circumstances of the appellant’s case.
3. The learned Addl/JCIT[A]-1, Chennai is not justified in law in upholding the denial of deduction claimed u/s. 80P[2][a][i] of the Act simply by erroneously holding that the appellant received interest income of Rs. 29,42,348/- (actual amount received is Rs. 26,42,517/- as per assessment order) from investments in its member District Co-operative Bank, Hassan under the facts and in the circumstances of the appellant’s case.
4. The learned Addl/JCIT[A]-1, Chennai erred in upholding the disallowance of the entire claim made u/s. 80P[2][a][i] of the Act denied by the A.O. on the ground that the appellant society had two classes of members i.e., Regular and Nominal members thereby defeating the concept of mutuality under the facts and circumstances of the appellant’s case.
5. The learned Addl/JCIT(A)-1, Chennai ought to have appreciated that the interest income earned by the appellant on deposits in banks was part of the business of providing credit facilities to the members of the appellant and hence, the said interest was liable for assessment under the head “Business” and not under the head “Other Sources” and therefore, the deduction claimed by the appellant u/s 80P[2][a][i] of the Act ought to have been allowed under the facts and in the circumstances of the appellant’s case.
6. Without prejudice to the above, the learned Addl/JCIT[A]-1, Chennai ought to have appreciated that the interest earned from co-operative banks was alternatively entitled to deduction u/s. 80P[2][d] of the Act under the facts and in the circumstances of the appellant’s case.
7. Without prejudice to the above, the learned Addl/JCIT[A]-1, Chennai ought to have appreciated that in the event the interest income is assessed under the head “Other Sources”, the appellant was entitled to deduction for cost of funds and therefore, the income assessed is excessive and liable to be reduced substantially.
8. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
9. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. The brief facts of the case are that assessee is a credit co- operative society registered under the Karnataka Co -operative Societies Act, 1959 and engaged in the business of providing the credit facilities only to its members. The assessee society filed its return of income for AY 2017-18 on 17.08.2017 declaring total income of Rs.1,81,770/- after claiming deduction u/s 80P of the Act amounting to Rs.29,42,348/-. The return was thereafter processed u/s 143(1) of the Act on 02.03.2018 accepting the income returned. Subsequently, the case of the assessee was selected for scrutiny through CASS and accordingly notices u/s 143(2) of the Act as well as 142(1) of the Act was issued requiring the assessee to furnish the details. During the course of assessment proceeding, the AO observed that as per the profit & loss account statement, the assessee had earned interest income of Rs.26,42,517/- during the year from the deposits. However, as per the statement of income filed, the assessee had declared business income of Rs.31,24,117/-, however, claimed the deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.29,42,348/- on the ground that interest earned on deposit is attributable to the business activities of the society. During the course of assessment proceeding, the assessee submitted that the assesse e society is providing credit facility to its members and it is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for short duration which has earned interest; therefore, the entire interest is attributable to the business of providing credit facility to its members. The AO on the other hand held that the assessee society is engaged in the business of banking and providing credit facility to its members which is covered u/s 80P(2)(a)(i) of the Act. However, as per the profit & loss account, the assessee is in receipt of fee of Rs.900/- from nominal members and hence i t is evident that the assessee is providing credit facility to two categories of members i.e. (i) regular members & (ii) nominal members. The powers and the privileges of the permanent members and the nominal members is diverse and not identical. The ld. A.O. held that the principle of mutuality gets defeated as two classes of members with distinguishing characteristics are found operational in which one category of nominal members contribute s and other category of permanent/regular members benefits. The AO relied upon the decision of Hon’ble Supreme Court in the Case of M/s. Citizen Co-operative Society Ltd. Vs. ACIT in Civil appeal no.10245 of 2017 dated 08.08.2017. The AO observed from the Balance sheet and P & L account, that the assessee is getting profit by providing credit facilities to associate members/co members/non members apart from earning income from its regular members, there by defeating the concept of Principle of Mutuality. Accordingly not eligible for deduction u/s 80P(2)(a)(i) of the Act.
3.1 Further, the AO also observed that as per income & expenditure statement submitted, the assessee has declared income on deposits of Rs.26,42,517/- and hence it is evident that the assessee is having interest income which has to be considered under the head ‘income from other sources’. It is also held that the interest earned by the assessee from surplus deposits kept with a co-operative bank is not eligible for deduction u/s 80P(2)(d) of the Act as held by Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sales Society (2017) reported in 395 ITR 611 (Kar.). In view of this, the AO held that the assessee does not qualify to claim the deduction u/s 80P(2)(d) of the Act also. Thus, the AO completed the assessment proceedings on a total assessed income of Rs.31,24,117/- by completely disallowing the claim of deduction u/s 80P of the Act.
4. Aggrieved by the order of AO dated 16.12.2019 passed u/s 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.
5. The ld. CIT(A)/NFAC dismissed the appeal of the assessee by categorically observing that the assessee society kept its money as a deposit with its Member District Co-operative Bank, Hassan and earned interest out of the same. The assessee received Rs.29,42,348/- as interest income. As per section 80P(2)(a)(i) of the Act, a Co-operative society can claim a 100% deduction on its profit & gains, if it is engaged in providing credit facilities to its members not for the interest earned out of deposits. In this case, the assessee co-operative society kept FD with its members (District Central Co- operative Bank Ltd., Hassan) and earned interest and hence, the appeal of the assessee is dismissed.
6. Again aggrieved by the order of ld. CIT(A)/NFAC da ted 03.11.2025, the assessee has filed the present appeal before this Tribunal.
7. Before us, the ld. A.R. of the assessee vehemently submitted that the assessee society had claimed deduction of Rs.29,42,348/- u/s 80P(2)(a)(i) of the Act as the entire interest received is attributable to the business of the assessee. The ld. A.R. of the assessee also relied upon the decision of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Cred it Co- operative Ltd. v. ITO (2015) 230 Taxman 309 (Karn). Further, the ld. A.R. of the assessee submitted that the assessee society is in the business of providing credit facilities to its members only and there is no bar under the Karnataka Co-operative Society Act to accept nominal or associate members in the society. Lastly, the ld. A.R. of the assessee submitted that in the present case, the assessee has deposited substantial amount of money with District Co-operative Bank, Hassan, which is a member of the assessee society and therefore, it is definitely a profit or business gain allowable for deduction.
8. The ld. D.R. on the other hand vehemently supported the orders of authorities below and vehemently submitted that as the assessee has earned interest income from co-operative bank and therefore, the interest income should be taxed unde r the head “income from other sources” and no deduction either u/s 80P(2)(a)(i) of the Act or u/s 80P(2)(d) of the Act shall be allowed to the assessee. The ld. D.R. also relied upon the recent decision of the jurisdictional Karnataka High Court in the case of Belve Vyavasaya Seva Sahakari Sangha vs. The Commissioner of Income Tax in ITA No. 118 of 2025 dated 21/01/2026.
9. We have heard the rival submissions and perused the materials available on record. Undisputedly, in the present case, the assessee had claimed deduction u/s 80P(2)(a)(i) of the Act while filing the return of income on the ground that the interest income earned from the District Central Co-operative Bank, Hassan were out of the amount which was used by the assessee for providing credit facilities to its members and therefore, the said interest amount is attributable to the credit facilities provided by the assessee and forms part of profit & gains of business.
9.1 Coming to the first contention of the A.O. that as the assessee is in receipt of fee of Rs.900/- from nominal members and therefore, the principle of mutuality gets defeated. The main contentions of the AO is that the assessee is providing credit facility to two categories of members i.e. (i) regular members & (ii) nominal members. The powers and the privileges of the permanent members and the nominal members are diverse and not identic al. The ld. A.O. held that the principle of mutuality gets defeated as two classes of members with distinguishing characteristics are found operational in which one category of nominal members contributes and other category of permanent/regular members benefits. The AO relied upon the decision of Hon’ble Supreme Court in the case of M/s. Citizen Co-operative Society Ltd. Vs. ACIT in Civil appeal no.10245 of 2017 dated 08.08.2017. We are of the co nsidered opinion that the judgment of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd v. CIT, Calicut reported in 431 ITR 1 (SC) clearly supports the case of the assessee and the mere presence of nominal/associate members cannot b e a ground to deny the deduction claimed by the assessee. The relevant paragraph of the judgment is reproduced below for ease of reference and convenience:-
“45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co- operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.
46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I [1997] 11 SCC 287 referred to section 80P of the IT Act and then held:
“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under: “2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;”” Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).”
We are also of the considered opinion that the expression “Member” is not defined in the Income Tax Act. Therefore, it has to be construed in the context of provision of law enacted under the State Legislature. The definition of Member given u/s 2 ( f) of the Karnataka Co-operative Societies Act, 1959 also includes nominal and associate member. The Income Tax Act has not drawn any distinction between regular member and nominal or associate member. Therefore, the transaction with nominal or associate member cannot be considered as the one with non-members or public and the assessee shall be given benefit of section 80P of the Act as held by the Apex Court in the case of Mavilayi Service Co- operative Bank Ltd. (supra) and accordingly we held that the AO is not justified in not granting the deduction u/s 80P(2)(a)(i) of the Act by saying that the concept of principle of mutuality is defeated.
9.2 Now with regard to the contention of the assessee that the entire interest earned from the Co-operative Banks is attributable to the business of the assessee, we are of the considered opinion that under the identical issue, the coordinate bench of this Tribunal very recently in the case of Sri Kengal Credit Co-operative Society Limited v. ITO in ITA Nos. 238 & 331/Bang/2026 date d 04/08/2026 has held as under:-
“6.3 We note that primary issue in dispute pertains to the eligibility of deduction u/s 80P(2)(a)(i) of the Act in respect of interest income earned from deposit made with co- operative banks and/or district co-operative banks/Scheduled banks. Thus, the crux of the matter is whether such interest income is to be considered as “business income” eligible for deduction u/s 80P(2)(a)(i) of the Act or not? We are of the considered opinion that the assessee is a co-operative society providing credit facilities to its members. It is not carrying out any other business. The Income earned by the assessee by providing credit facilities to its members was only deposited in banks for a short duration which earned interest. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore, they had deposited the money in a bank so as to earn interest. In our opinion, since the interest on deposits in bank was amount of profits and gains attributable to activity of carrying on business of providing credit facilities to its members by the assessee-society, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the deposits made with the banks are entitled for deductions u/s 80P(2)(a)(i) of the Act. In holding so, we also draw our support and guidance from the judgment of the Hon’ble Supreme Court reported in 113 ITR 84 in the case of Cambay Electrical Supply Industrial Co. Ltd. Vs. CIT which has considered the term “attributable” and held as follows:
“As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business” of the specific industry (here generation and distribution of society) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from” been used, it could have with some force been contented that a balance charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression “derived from”, as for instance, in Section 80J. In our view, since the expression of wider import, namely “attributable to” has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity”
6.4 Further, the Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer Ward-V, Tumkur reported in [2015] 230 Taxman 309 had also held as under-
“7. The word ‘attributable’ used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v.CIT [1978] 113 ITR 84 (SC) as under:
‘As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor- General relied, it will be pertinent to observe that the legislature, has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression ”derived from”, as, for instance, in section-80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.’
8. Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative 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. The society is not carrying on any separate business for earning such interest income. The income so 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 of the Act.
9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee – Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220 In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside….”
6.5 Further, the Hon’ble High Court of Karnataka in the case of Guttigedarara Credit Co-operative Society Ltd. v. Income-tax Officer, Ward 2(2), Mysore reported in (2015) 377 ITR 464: [2016] 234 Taxman 476 had also held as under-
9. The word ‘attributable’ used in the said Section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (at page 93) as under:—
‘As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of” the specified industry (here generation and distribution of electricity) on which the learned Solicitor- General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor- General, it has used the expression “derived from”, as, for instance, in section 80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.’
10. Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Co-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, the society 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. The society is not carrying on any separate business for earning such interest income. The income so 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 of the Act.
11. In this context when we look at the judgment of the Apex Court in Totgars Co- operative Sale Society’s case (supra), on which reliance is placed, the Supreme Court was dealing with a case where the assessee/Co-operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security.
Such an amount which was retained by the assessee-Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
12. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to its members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State Co-operative Bank Ltd. [2011] 336 ITR 516/200 Taxman 220/12 taxmann.com 66.”
6.6 Again the Hon’ble jurisdictional High Court of Karnataka in the case of Lalitamba Pattina Souharda sahakari Niyamita v. ITO reported in (Karn-HC): (2019) 307 CTR 770 by following the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer Ward-V, Tumkur (cited supra) has held as under:-
12. We have given our thoughtful consideration to the arguments advanced at the bar and perused the material on record.
13. The Co-ordinate Bench of this Court in Tumkur Merchants Souharda Credit Co- operative Ltd., supra has categorically observed that the interest earned by the society in investing in the Banks is attributable to the activity of carrying on business in the 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 of the Act. The judgment of the Hon’ble Apex Court in the case of Totgars Co-operative Sale Society Ltd., supra is also considered and distinguished. The view taken by the Andhra Pradesh High Court in the CIT v. Andhra Pradesh State Cooperative Bank Ltd. (2011) 336 ITR 516 (AP) is also considered whereby Andhra Pradesh High Court has held that the interest earned by the Co-operative Society by investing the fixed deposits in the Banks is entitled for deduction under section 80P(2)(i)(a) of the Act. It is also pertinent to note that this judgment of the jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd., supra, has reached finality. As submitted by the learned counsel for the assessee, the applicability of this Tumkur Merchants Souharda Credit Co-operative Ltd., supra to the facts of the present case is not considered by the authorities in a right perspective. The Tribunal proceeded to hold that the Commissioner (Appeals) has considered the judgment of Tumkur Merchants Souharda Credit Co-operative Ltd., supra as well as M/s. Totgar’s Co-operative Sale Society Ltd., supra and given the benefit of deduction under section 80P on the interest or dividend received in respect of income by way of deposits with the Co-operative Banks from its investment. The Tribunal proceeded to consider the deduction given under section 80P(2)(d) of the Act as the deduction under section 80P(2)(a)(i) of the Act or in other words deduction given under section 80P(2)(d) of the Act would not further entitle the appellant/assessee to claim deduction under section 80P(2)(a)(i) of the Act. These two provisions being entirely different and distinct, the Tribunal ought to have examined the applicability of section 80P(2)(a)(i) of the Act in the facts and circumstances of the case. Deduction given under section 80P(2)(d) of the Act would not disentitle the assessee to claim deduction under section 80P(2)(a)(i) of the Act. Even assuming as submitted by the learned counsel for the assessee, M/s. Totgar’s Co- operative Sale Society Ltd., supra is applicable to the facts and circumstances of the present case, it was obligatory on the part of the Tribunal being a last fact finding authority to examine the factual aspect in respect of the proportionate costs and administration expenses to be incurred by the appellant regarding the interest earned under section 56 of the Act and the availability of deduction under section 57 of the Act to the assessee. This exercise also not being done by the Tribunal merely upholding the order of the Commissioner of Income Tax as well as the assessing officer is wholly unsustainable.
14. The judgment relied upon by the learned counsel for the revenue in the case of Totgar’s Co-operative Sale Society Ltd., supra, deals with section 80P(2)(d). As aforesaid, section 80P(2)(d) and section 80P(2)(a)(i) of the Act being different, the said judgment is not squarely applicable to the facts of the present case. The applicability of section 80P(2)(a)(i) of the Act has to be considered in terms of the said section. The authorities mixing up the issue of section 80P(2)(a)(i) and section 80P(2)(d) cannot reject the claim of the assessee under section 80P(2)(a)(i) of the Act without giving a proper finding on the issue.”
6.7 Respectfully, following the above decisions of the Hon’ble jurisdictional High Court of Karnataka which has consistently held that the interest earned by the society in investing in the Banks is attributable to the activity of carrying on business in the banking or providing credit facilities to its members by a Co-operative Society and is liable to be deducted from the gross total income u/s 80P(2)(a)(i) of the Act. In view of the above, we have no hesitation to hold that as in the present case the assessee had claimed the entire interest income u/s 80P(2)(a)(i) of the Act & thus the entire interest income earned are attributable to the business of providing credit facilities to its members. Accordingly, we direct the AO to allow the same u/s 80P(2)(a)(i) of the Act as claimed by the assessee.
9.3 Respectfully, following the above decision of the coordinate bench of this Tribunal we held that the interest earned by the society in investing in the Co-operative Banks/commercial banks is attributable to the activity of carrying on business in the banking or providing credit facilities to its members by a Co-operative Society and is liable to be deducted from the gross total income u/s 80P(2)(a)(i) of the Act. In view of the above, we have no hesitation to hold that as in the present case the assessee had claimed the entire interest income u/s 80P(2)(a)(i) of the Act & thus the entire interest income earned are attributable to the business of providing credit facilities to its members. Accordingly, we direct the AO to allow the same u/s 80P(2)(a)(i) of the Act as claimed by the assessee.
10. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 17th Aug, 2026
