ITAT Bangalore Allows Section 80P Deduction for Nominal Member Credit and Bank Interest

Naravi Vyavasaya Seva Sahakari Bank Limited Vs ITO (ITAT Bangalore)

Summary: M/s Naravi Vyavasaya Seva Sahakari Bank Limited filed ITA Nos. 2552 & 2553/Bang/2025 for Assessment Years 2017-18 and 2018-19 against separate orders of the National Faceless Appeal Centre under section 250 of the Income-tax Act, 1961. The appeals were heard together by the Bangalore Bench ‘B’ of the Income Tax Appellate Tribunal. The order was pronounced on 19.05.2026.

For AY 2017-18, the effective dispute concerned deduction under section 80P(2)(a)(i) in respect of income attributable to Class ‘C’ nominal members. The assessee is a primary agricultural society governed by the Karnataka Co-operative Societies Act, 1959. Its membership comprised 1,687 regular members, 4,070 nominal members and 4 associate members. The Assessing Officer treated the large number of nominal members as a violation of section 18 of the Karnataka Co-operative Societies Act and held that the society had lost the principle of mutuality. Relying on Citizen Co-operative Society Ltd., the AO disallowed the section 80P deduction.

The assessee contended that the 15% restriction in amended section 18 applied to associate members and not nominal members, and that nominal members were expressly recognised under the State law and the society’s bye-laws. The CIT(A) rejected the main claim but directed proportionate restriction of the section 80P deduction to income attributable to Class ‘C’ members.

The Tribunal held that the AO’s reading of section 18 was incorrect. The statutory ceiling applied to associate members, of whom there were only four, and not to nominal members. The Tribunal further relied on Mavilayi Service Co-operative Bank Ltd. and the principle that the expression “members” in section 80P(2)(a)(i), which is not defined in the Income-tax Act, has to be understood with reference to the governing State co-operative law. Since Karnataka law recognised nominal and associate members, and there was no finding by the statutory co-operative authority that their admission was illegal, they could not be treated as strangers or the general public merely because they had restricted voting, management or profit-sharing rights.

The Tribunal distinguished Citizen Co-operative Society Ltd. on facts, noting that the Supreme Court decision involved a society functioning in violation of its governing co-operative law and dealing with persons who were not genuine members. The Tribunal held that Citizen could not be mechanically applied to every case involving nominal members. It also rejected the view that mutuality was automatically destroyed merely because nominal members lacked voting or profit-sharing rights. Accordingly, the Tribunal directed the AO to allow deduction under section 80P(2)(a)(i) on income arising from credit facilities provided to members, including Class ‘C’ nominal members.

For AY 2018-19, the dispute concerned interest and dividend income of Rs.20,76,951 received from South Canara District Cooperative Bank Ltd. The amount comprised saving-bank interest of Rs.75,837, term-deposit interest of Rs.17,09,464 and dividend of Rs.2,91,650. The assessee claimed deduction under section 80P(2)(a)(i), contending that major deposits were maintained pursuant to mandatory requirements under the Karnataka Co-operative Societies Act and that other short-term deposits represented temporary deployment of business surplus. Alternatively, deduction was claimed under section 80P(2)(d), and, if neither provision applied, expenditure under section 57 was claimed.

The AO treated the income as income from other sources, relying principally on Totgars Co-operative Sale Society Ltd. and Southern Technologies Ltd. The CIT(A) upheld the disallowance. Before the Tribunal, the assessee relied on the Karnataka High Court decisions in Tumkur Merchants Souharda Credit Cooperative Ltd., Guttigedarara Credit Co-operative Society Ltd. and Lalitamba Pattina Souharda Sahakari Niyamita, among others.

The Tribunal undertook an extensive examination of the competing judicial authorities. It distinguished Totgars on the basis that the Supreme Court case involved surplus arising from retained sale proceeds of members’ agricultural produce, whereas the present assessee was a primary agricultural credit society engaged in providing credit facilities to members and the deposits in question represented business funds, including funds required to be maintained under statutory requirements. Following the binding jurisdictional decision in Tumkur Merchants Souharda Credit Cooperative Ltd., the Tribunal held that interest on compulsory deposits, fixed deposits and saving-bank deposits was attributable to the assessee’s eligible banking/credit business and qualified for deduction under section 80P(2)(a)(i).

The Tribunal also considered the recent Karnataka High Court decision in BELVE Vyavasaya Seva Sahakari Sangha Ltd. v. ITO, ITA No.118 of 2025 dated 21.01.2026. It distinguished that decision because it concerned deduction under section 80P(2)(d) for interest and dividend from investments with a co-operative bank, whereas the present dispute was under section 80P(2)(a)(i). The Tribunal therefore held that the ratio of Tumkur Merchants remained applicable to the present facts.

Ultimately, the Tribunal set aside the CIT(A)’s findings, directed the AO to allow the section 80P(2)(a)(i) deduction on the relevant income and delete the addition for AY 2018-19. Both appeals of the assessee were consequently allowed. :contentReference[oaicite:1]{index=1}

Cases Discussed

• Citizen Co-operative Society Ltd. v. ACIT (397 ITR 1 (SC))
• Mavilayi Service Co-operative Bank Ltd. v. CIT (431 ITR 1 (SC))
• U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT (1997) 11 SCC 287
• CIT v. Kumbakonam Mutual Benefit Fund Ltd. (53 ITR 241 (SC))
• Indian Tea Planters’ Association v. CIT (82 ITR 322)
• Cuttack Club Ltd. v. CIT (196 ITR 407)
• Quepem Urban Co-operative Credit Society Ltd. v. ACIT
• Totgars Co-operative Sale Society Ltd. v. ITO (322 ITR 283 (SC))
• Southern Technologies Ltd. v. JCIT (187 Taxman 346 (SC))
• Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO (55 taxmann.com 447 (Karnataka))
• Guttigedarara Credit Co-operative Society Ltd. v. ITO (60 taxmann.com 215 (Karnataka))
• Lalitamba Pattina Souharda Sahakari Niyamita v. ITO (ITA No. 100004 of 2018)
• CIT v. Andhra Pradesh State Cooperative Bank Ltd. (12 taxmann.com 66)
• PCIT v. Sahyadri Co-operative Credit Society Ltd. (166 taxmann.com 445 (Kerala))
• West Bengal State Co-Operative Agriculture & Rural Development Bank Ltd. v. DCIT (177 taxmann.com 469 (Calcutta))
• State Bank of India (SBI) v. CIT (72 taxmann.com 64)
• CIT v. Karnataka State Cooperative Apex Bank (251 ITR 194 (SC))
• East India Commercial Co. Ltd. v. Collector of Customs (AIR 1962 SC 1893)
• CIT v. Thana Electricity Supply Ltd.
• Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company (2018) 9 SCC 1
• BELVE Vyavasaya Seva Sahakari Sangha Ltd. v. ITO, ITA No.118 of 2025 dated 21.01.2026
• M/s Judicial Employees House Building Co-operative Society Limited v. ITO, ITA No.93/2024 dated 16.09.2025

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH

These two appeals filed at the instance of the assessee for the A.Y. 2017-18 and 2018-19 are directed against separate orders of the learned Commissioner of Income Tax Appeal (hereafter- learned CIT-A), at National Faceless Appeal Centre-NFAC, under section 250 of the Income Act, 1961 (hereafter- The Act) and both of them were head together.

First, we take up assessee’s appeal in ITA No. 2552/Bang/2025 for A.Y. 2017-18.

2. The assessee in the appeal memo has raised as many as 6 grounds of appeal. However, Ground Nos. 1 & 6 of the assessee’s appeal are general grounds and the same do not require any separate and independent adjudication.

3. The Ground No. 5 of the appeal relates to levy of interest under section 234B of the Act which is consequential in nature and the same does not require any sperate adjudication. Hence, Ground No. 5 is dismissed as infructuous.

4. The effective issue raised by the assessee through Ground Nos. 2 to 4 are that the learned CIT(A) erred in directing the AO to disallow the deduction under section 80P(2)(a)(i) of the Act in respect of income attributable to ‘C’ class members.

5. The facts in brief are that the assessee is a primary agricultural society. As per the bye-laws, the assessee society can have 4 categories of members which are detailed as under:

– A Class Member: These are permanent/regular members operating in the jurisdictional area of the assessee society.

– B class member: Capital by state Governemnt

– C Class Member: Nominal Members

– D Class Member: Associate Member

5.1 During the year under dispute, the assessee society has A, C and D class members i.e. Regular, Nominal and Associate members. The total members as stood at the end of the year is 5761 which comprises 1687 regular members, 4070 nominal members and 4 associate members. The AO noted that as per the amended provisions of section 18 of the Karnataka Cooperative Society Act, 1959, nominal members should be within 15% of regular members. On the contrary, the nominal members are 2 times more than regular members. Hence, there is violation of provisions of Karnataka Cooperative Society Act.

5.2 The AO further noted that the nominal members does not contribute to the society by way of subscription of shares of the assessee society, not entitled to share in profit, have no role in management, neither have voting right. They only entitle to make deposit and take loan. Furthermore, the AO observed that as per the byelaws of the assessee society, the nominal members are those who do not possess A Class shares and they are non-members or nominal members or so to say general public. Accordingly, the AO was of the view that the assessee society has not only just violated the provision of Karnataka Cooperative Societies Act but also violated the principles of mutuality. The AO also held that the facts of the assessee society are covered by the ratio laid down by the Hon’ble Supreme Court in the case of Citizen Cooperative Society Ltd. in Civil Appeal No. 10245 of 2017 reported in 397 ITR 1. Hence, the AO proposed to disallow the deduction claimed under section 80P(2) of the Act.

5.3 The assessee in response submitted that the reliance placed by the AO on the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. (397 ITR 1) is wholly misplaced, as the facts of the present case are materially different and distinguishable on core aspects of functioning, membership structure and compliance with the governing co-operative laws.

5.4 It was submitted by the assessee that in the case of Citizen Co-operative Society Ltd., the Hon’ble Supreme Court denied deduction u/s 80P of the Act primarily on the finding that the said society was functioning in violation of the co-operative law under which it was formed. The society had created a separate and carved out a class of “nominal members”, accepted deposits predominantly from such nominal members and extended loans to the public who were neither regular nor nominal members. Further, it had carried on banking-like activities without requisite approvals and thereby lost the basic character of mutuality.

5.5 In contrast, the assessee society is strictly governed by the provisions of the Karnataka Co-operative Societies Act, 1959 and the rules framed thereunder. The bye-laws of the society, which are duly approved by the Registrar of Co-operative Societies, specifically permit admission of nominal and associate members. Such admission is not a “carved out” category as alleged in the case of Citizen Co-operative Society Ltd., but is expressly recognized under the statute itself. Section 2(f) read with section 18 of the Karnataka Co-operative Societies Act clearly includes nominal and associate members within the definition and framework of membership. Therefore, the very foundation on which the Hon’ble Supreme Court proceeded in Citizen Co-operative Society Ltd. does not exist in the present case.

5.6 It is further submitted that as per the bye-laws, nominal and associate members do not enjoy full voting rights or rights in profits and assets, but they are nevertheless members of the society for the purpose of availing credit facilities within the regulatory framework. The society operates strictly within its notified area of operation and extends credit facilities only to its members, including nominal and associate members, in accordance with NABARD guidelines and statutory norms. No loans or advances have been extended to the general public. This is a fundamental distinction from the facts in Citizen Co-operative Society Ltd., where the society was found to be dealing with non-members.

5.7 The allegation that deposits have been accepted from non-members is also incorrect. All depositors are admitted as members in accordance with the bye-laws and the governing statute. There is no violation of the provisions of the Co-operative Societies Act. Further, all amendments to the bye-laws have been duly approved by the Registrar, leaving no scope for any regulatory breach. Thus, the assessee continues to function as a genuine co-operative society and not as a commercial bank in disguise.

5.8 The concept of “member” for the purpose of section 80P of the Act has also been judicially interpreted to include nominal and associate members, where such inclusion is recognized under the relevant State Act. The Hon’ble Bombay High Court in the case of Jalgaon District Central Co-operative Bank Ltd in Writ Petition No. 563 of 2003 has clearly held that the term “member” is not defined under the Income-tax Act and must be understood in the context of the State Co-operative Societies Act. It has been further held that nominal members are also included within the definition of “member” and CBDT Circular No. 9/2002 dated 11-09-2002, to the extent it restricts such meaning, is beyond the powers conferred u/s 119 of the Act.

5.9 Further, the Hon’ble Supreme Court in the case of U.P. Co-operative Cane Union Federation vs. CIT (AIR 1999 SC 1597) has also held that the meaning of “member” for the purpose of section 80P of the Act must be gathered from the relevant Co-operative law. Similarly, various decisions of the Hon’ble High Courts and Tribunals have consistently held that where nominal members are recognized under the statute and the society carries on its activities within the framework of such law, deduction u/s 80P cannot be denied.

5.10 In the present case, there is complete adherence to the statutory provisions, no dealing with non-members, no violation of regulatory approvals, and no loss of mutuality. The society is carrying on the business of providing credit facilities only to its members in accordance with its bye-laws and the governing Act. Therefore, the essential conditions of section 80P(2)(a)(i) of the Act are fully satisfied.

5.11 In view of the above factual and legal position, it is respectfully submitted that the decision in Citizen Co-operative Society Ltd. is clearly distinguishable and not applicable to the present case. The assessee is entitled to deduction u/s 80P(2)(a)(i) of the Act and the proposed disallowance deserves to be dropped.

5.12 The AO considered the submissions of the assessee, however, found that the same are not acceptable. The AO observed that the assessee society has structured its membership into different categories, namely A class (regular members), and C and D class members (nominal and associate members). The regular members alone enjoy full rights such as voting rights, participation in administration and entitlement to dividend. On the other hand, the nominal and associate members are not entitled to voting rights, cannot participate in management, and are not eligible to share in profits of the society. Thus, there is a clear distinction in rights and obligations among members.

5.13 The AO held that the concept of mutuality requires complete identity between contributors and participants. In the present case, nominal and associate members contribute funds by way of deposits but are not entitled to participate in profits or decision making. Therefore, the essential condition of mutuality, namely identity between contributors and beneficiaries, is clearly missing. The AO observed that such members are merely contributors and not participants in the surplus, which breaks the mutual character of the society.

5.14 The AO referred to the definition of co-operative society under section 2(19) of the Act and also the provisions of the Co-operative Societies Act, which emphasize functioning based on co-operative principles. The AO further relied on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Kumbakonam Mutual Benefit Fund Ltd. (53 ITR 241), wherein it was held that the foundation of mutuality lies in the complete identity between contributors and participants sharing the surplus. In the present case, such identity is absent as nominal/ associate members do not share in profits.

5.15 The AO also relied on the decisions in Indian Tea Planters’ Association vs. CIT (82 ITR 322) and Cuttack Club Ltd. vs. CIT (196 ITR 407), wherein it has been laid down that for mutuality to exist, three conditions must be satisfied, namely identity of contributors and recipients, the entity acting as an instrument of members, and absence of profit motive. According to the AO, these conditions are not satisfied in the present case.

5.16 Further, the AO observed that nominal and associate members have no voting rights and no right in the property or surplus of the society. They are only allowed to deposit money and avail loans. This indicates that the society is effectively mobilizing funds from such members and using the same for earning profits, which are ultimately enjoyed by regular members. Thus, the AO held that the society is functioning more like a finance business entity rather than a mutual co-operative society.

5.17 The AO placed strong reliance on the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. vs. ACIT (397 ITR 1). In the said decision, the Hon’ble Supreme Court held that where a society creates a category of nominal members who are not real members in the true sense and carry out business with such persons, the principle of mutuality is lost, and the society is not eligible for deduction under section 80P of the Act. The AO observed that the facts of the assessee are similar, as the assessee has admitted a large number of nominal members who are not entitled to full membership rights but are used for accepting deposits and granting loans.

5.18 The AO further noted that the number of nominal members is very high compared to regular members and exceeds the permissible limits of 15% of the regular member as prescribed under the relevant Co-operative Societies Act. This indicates violation of statutory provisions and strengthens the conclusion that the assessee is not functioning as a genuine co-operative society.

5.19 The AO also observed from the details furnished that nominal members cannot subscribe to shares in the same manner as regular members and are not allowed to participate in administration or access full financial information of the society. This clearly establishes that there is no equality among members and hence the principle of mutuality is absent.

5.20 In view of the above discussion, the AO concluded that the assessee society does not satisfy the basic condition of mutuality and is engaged in activities akin to a finance business by dealing with nominal members. Accordingly, the AO held that the assessee society is not entitled to deduction under section 80P(2)(a)(i) of the Act and disallowed the entire claim of deduction.

6. The aggrieved assessee preferred an appeal before the learned CIT(A).

7. The assessee before the Ld. CIT(A) submitted that the AO has wrongly assumed that the assessee has violated the provisions of the Karnataka Co-operative Societies Act, 1959 by admitting nominal members in excess of prescribed limits. The assessee clarified that as per proviso to section 18(1) of the Karnataka Co-operative Societies (Amendment) Act, 2014, the restriction of 15% applies only to associate members and not to nominal members. The assessee has admitted only 4 associate members out of total membership of 5,761, which is negligible and well within limits. Therefore, there is no violation of the State Act.

7.1 The assessee further submitted that the AO has wrongly denied deduction claimed u/s 80P(2)(a)(i) of the Act, even though the income has been earned from providing credit facilities to members. It was argued that the term “member” is not defined under the Income Tax Act, and therefore it has to be understood in the context of the State Co-operative Societies Act under which the assessee is registered. As per section 2(f) of the Karnataka Co-operative Societies Act, the definition of “member” includes nominal and associate members. Hence, the AO was not justified in excluding such members.

7.2 The assessee also submitted that merely because nominal members do not have voting rights or profit-sharing rights, it cannot be said that the principle of mutuality is violated. These conditions are specifically provided under the State Act itself. The assessee has admitted such members strictly in accordance with the Act and its bye-laws. Therefore, the AO’s conclusion that mutuality is lost is incorrect.

7.3 It was further argued that the AO has wrongly relied on the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. The assessee submitted that the facts of that case are completely different. In that case, the society was dealing with the general public and not restricted to members. However, in the present case, the assessee has not dealt with the general public and all transactions are restricted to members as per law.

7.4 The assessee also submitted that the AO has failed to consider several recent judicial decisions where it has been held that the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. is distinguishable in the case of primary credit co-operative societies like the assessee.

7.5 Without prejudice, the assessee argued that even if nominal members are assumed not to be “members”, the deduction u/s 80P should have been restricted only to the proportion of transactions relating to such members and not denied in full. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Quepem Urban Co-operative Credit Society Ltd. in ITA Nos. 22 to 24 of 2015, wherein proportionate disallowance was considered.

7.6 However, the learned CIT(A) rejected the main argument of the assessee but allowed the alternative plea of disallowances of section 80P(2) of the Act to the income proportionate to nominal members only. The relevant finding of the learned CIT(A) reads as follows:

5.3.2. Out of total 5,761 members of the appellant society, the class ‘A’ members are 1,687 i.e. 29.28% of the total members. There is said to be no member in class ‘B’. In class ‘C’ there are 4,070 members i.e. 70.64%. In class ‘D’ there are only 4 members which is very minuscule and come to only 0.06% of the total membership. Thus, the society has predominantly nominal members i.e. class ‘C’ members which are not allowed to contribute to society by way of subscription of shares nor are they entitled to receive any dividend/profit. Such members have no voting rights and hence no say in management of the society. This has been construed as violation of the Karnataka Co-operative Society Act, 1959.

5.3.3. This matter is directly and squarely covered by the decision of Hon’ble Apex court of the land in the case of ‘The Citizen Co-operative Society Limited vs. Assistant Commissioner of Income Tax (2017) 397 ITR 1 (SC). In this landmark case, the Hon’ble Supreme Court denied deduction under Section 80P(2)(a)(i) to a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960. The society accepted deposits from nominal members (who were not genuine members entitled to voting rights or mutuality benefits) and provided loans to both members and the general public, violating state law and co-operative principles. The Court held that such activities transformed the society into a commercial entity akin to a finance business, disqualifying it from exemption. The ratio underscores that registration alone is insufficient; actual operations must align with mutuality and bye-laws. This directly applies where the assessee/appellant has similar dealings with nominal/non-members, rendering the claim unsustainable.

5.3.4. The favorable judgements cited by the appellant are not tenable because the full bench decision of Hon’ble Supreme Court in the case of Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar and Company and Ors. (2018) 9 SCC 1 (FB)(SC) where the Hon’ble Apex Court, inter alia, laid down the fundamental principle of interpretation of tax statute and held that “Any ambiguity in a taxation provision, therefore, is interpreted in favour of the subject/assessee. But, in a situation where the tax exemption has to be interpreted, the benefit of doubt should go in favour of the revenue”.

5.3.5. In the case laws cited by the appellant; the aforesaid decision of the Hon’ble Apex Court has not been argued and brought up to the notice of the authorities cited, hence the benefit of exemption u/s 80P(2) has to be allowed/disallowed strictly relying on the statute and law of interpretation laid down by the Hon’ble Supreme Court in ‘Dilip Kumar’ (supra)

5.3.6. The appellant has taken an alternate plea vide the ground no. 8 as follows:

“Without prejudice to the above, even if it is accepted, for the sake of argument, that the “nominal members” are not to be treated as “Member”, the deduction u/s 80P should have been denied only to the proportionate extent of dealings with such nominal members, as held by the Hon’ble Bombay High Court in the case of M/s Quepem Urban Co Op Credit Credit Society Ltd in ITA No : 22 to 24 of 2015 ; Order dated : 17-04-2015. The learned AO has erred in disallowing the claim of deduction u/s 80P in entirety.”

5.3.7. In view of the foregoing discussion from para 5.3.1 to 5.3.5 and the alternate plea taken by the appellant as reproduced in para 5.3.6; the AO is directed to re-compute and restrict the disallowance u/s 80P to the extent of income attributable and received by the appellant from its members in class ‘C’ during the year/period relevant here. The ground no. 8 of appeal against the quantum disallowance is thus allowed in view of facts and circumstances of the case and the law pronounced by the Hon’ble Supreme Court as already discussed. The appellant is required to produce the relevant information to the AO in support of the ground of appeal taken by it and allowed. The ground no. 1 to 7 and 9 and 10 are dismissed.

5.4. Ground no. 11 is general in nature and does not merit any specific adjudication. Accordingly, the same is dismissed.

6. In the result, the appeal is partly allowed.

8. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

9. The learned AR before us submitted that the assessee is a primary agricultural co-operative society duly registered under the Karnataka Co-operative Societies Act, 1959 and is eligible for deduction u/s 80P(2)(a)(i) of the Act. It was argued that the AO wrongly assumed that the restriction of 15% under section 18 applies to nominal members, whereas the said restriction applies only to associate members. Since the assessee had only 4 associate members, there was no violation of the State Act. The learned AR further submitted that nominal members are specifically recognized as members under section 18 of the Karnataka Co-operative Societies Act and therefore cannot be treated as non-members for the purpose of section 80P of the Act. Reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. to contend that the meaning of “member” must be understood in the context of the State Co-operative law. It was also submitted that the decision in Citizen Co-operative Society Ltd. is distinguishable on facts.

10. On the other hand, the learned DR before us relied upon the orders of the AO and the Ld. CIT(A). The learned DR submitted that the assessee had admitted a very large number of nominal members who neither possess voting rights nor participate in the management or profits of the society. Therefore, the essential principle of mutuality was absent. It was argued that the assessee was effectively functioning like a finance entity by accepting deposits and granting loans through nominal members. Reliance was placed on the judgment of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. to contend that dealings with such nominal members disentitle the assessee from claiming deduction u/s 80P(2)(a)(i) of the Act.

11. We have heard the rival contentions of both the parties and perused the materials available on record. The short controversy before us is whether the assessee society is eligible for deduction u/s 80P(2)(a)(i) of the Act on income arising from credit facilities provided to its nominal members (class ‘C’ members). The AO denied the claim mainly on the ground that the nominal members do not have voting rights, are not entitled to participate in the management of the society and are not entitled to share in the profits. The AO further held that the assessee had violated the provisions of the Karnataka Co-operative Societies Act, 1959 and that the case was covered by the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. reported in 397 ITR 1. The Ld. CIT(A), while not accepting the main plea of the assessee, directed the AO to restrict the disallowance only to the income attributable to class ‘C’ members. The relevant facts, including the membership pattern, the AO’s reasoning, the assessee’s submissions and the finding of the Ld. CIT(A), are borne out from the record placed before us.

11.1 At the outset, we note that the assessee is a primary agricultural co-operative society registered under the Karnataka Co-operative Societies Act, 1959. The assessee has regular members, nominal members and associate members. During the relevant year, the total membership stood at 5,761, out of which regular members were 1,687, nominal members were 4,070 and associate members were only 4. The allegation of the AO is that the number of nominal members exceeded 15% of regular members and therefore there was violation of the Karnataka Co-operative Societies Act. However, in our considered view, this finding proceeds on an incorrect reading of section 18 of the Karnataka Co-operative Societies Act, 1959 as amended in the year 2014. For ready reference the relevant provision of section 18 of the Karnataka Co-operative Societies Act, 1959 reads as under:

18. Nominal or associate members.-

(1) Notwithstanding anything contained in section 16, a co-operative society may admit,— (a) any individual as a nominal or associate member; (b) any banking company as a nominal member. (c) any firm, company, co-operative society, or any body or corporation constituted by or under any law for the time being in force, as a nominal or associate member; (d) Self help group as nominal members [Provided that the number of associate members under clause (a) in any Co-operative Society shall not exceed fifteen percent of the total membership of the society. However, in case of Co-operative Societies already having more than fifteen percent of their total membership as associate members, the excess associate members shall be either made as member, if eligible under the section 16 or shall be removed from the associate membership within six months from the date of commencement of the Karnataka Co-operative Societies (Amendment) Act, 2014.] Explanation.—In this sub-section ―banking company‖ shall have the same meaning as is assigned to it in the Deposit Insurance Corporation Act, 1961 (Central Act 47 of 1961)

(2) A nominal member shall not be entitled to any share in any form whatsoever in the assets or profits of the society and a nominal member who is an individual shall not also be entitled to become an [office bearer] of the society.

(3) An associate member may hold shares but shall not be entitled to become an [office bearer] of the society.

(4) Save as provided in this section, a nominal or associate member shall have such privileges and rights of a member and be subject to such liabilities of a member, as may be specified in the bye-laws of the society.

11.2 From the perusal of the above, it is transpired that the proviso to section 18, after amendment, places restriction on the number of associate members and provides that the number of associate members shall not exceed 15% of the total regular members. The said restriction is not on nominal members. In the present case, the associate members are only 4 as against 1,687 regular members. Therefore, even on facts, the number of associate members is far below the prescribed statutory ceiling. Once this position is accepted, the very foundation of the AO’s allegation that there is violation of the State Co-operative law does not survive. The Ld. CIT(A) has also noticed that class ‘D’/associate members are only 4 and constitute only a minuscule portion of the total membership. However, the Ld. CIT(A) proceeded to uphold disallowance in respect of class ‘C’/nominal members by applying the decision of Citizen Co-operative Society Ltd., which, in our view, is not justified in the facts of the present case.

11.3 Section 80P(2)(a)(i) of the Act grants deduction to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. The condition under the provision is that the business of banking or providing credit facilities should be with members. The term “member” is not defined under the Income-tax Act. Therefore, the meaning of the word “member” has to be gathered from the Co-operative Societies Act under which the assessee society is registered. This legal position is no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. reported in 431 ITR 1. The Hon’ble Supreme Court has held that, for the purpose of section 80P(2)(a)(i) of the Act, the expression “members” has to be understood with reference to the provisions of the concerned State Co-operative Societies Act. Therefore, once the State Act recognizes nominal members or associate members as members, the Income-tax authorities cannot import a narrower meaning into section 80P of the Act merely because such members do not enjoy all rights available to regular members.

11.4 In this regard, we find that section 18 of the Karnataka Co-operative Societies Act, 1959 recognizes admission of nominal and associate members. The statute itself permits the society to admit such members. It is also not the case of the Revenue that the Registrar of Co-operative Societies has cancelled the registration of the assessee or has held that the admission of nominal members by the assessee is illegal. The bye-laws of the assessee society, as noticed in the orders of the lower authorities, also recognize different classes of members. Once nominal members are admitted as per the bye-laws and the State Act, they cannot be treated as strangers or as general public for the limited purpose of denying deduction u/s 80P(2)(a)(i) of the Act.

11.5 The AO has placed much emphasis on the fact that nominal members do not have voting rights, do not participate in management and do not have right to receive dividend or share in profits. In our view, these factors by themselves cannot convert a statutory member into a non-member. The State legislature itself has created different classes of members with different rights and restrictions. A regular member may have full voting rights and management rights. A nominal member may have limited rights. An associate member may also have restricted rights. But the absence of complete rights does not mean that such persons are not members, when the State Act and the bye-laws recognize them as members. The Income-tax authorities cannot sit in judgment over the wisdom of the State legislature or rewrite the definition of membership for the purpose of section 80P of the Act.

11.6 We also find merit in the submission of the assessee that the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd., in our humble understanding, has been wrongly applied by the lower authorities. In Citizen Co-operative Society Ltd., the Hon’ble Supreme Court found that the society was functioning in violation of the concerned co-operative law. The society had carved out a class of nominal members in a manner not contemplated by law and was also dealing with persons who were not genuine members. In that factual background, the deduction u/s 80P of the Act was denied. However, in Mavilayi Service Co-operative Bank Ltd.(supra), the Hon’ble Supreme Court considered Citizen Co-operative Society Ltd. and explained that Citizen Co-operative Society Ltd. was rendered on its own peculiar facts where the society had violated the governing co-operative law and had dealings with non-members. Therefore, Citizen Co-operative Society Ltd. cannot be applied mechanically to every case where there are nominal members. The relevant observation of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd.(supra) is extracted as under:

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. v. CIT [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 80P(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).

47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows:

“59. Restrictions on loans.— (1) A society shall not make a loan to any person or a society other than a member: Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society. (2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit. (3) Granting of loans to members or to non-members under sub-section (2) and recovery thereof shall be in the manner as may be specified by the Registrar.”

11.7 In the present case, there is no finding that the assessee has advanced loans to the general public without admitting them as members. There is also no finding by any statutory authority under the Karnataka Co-operative Societies Act that the assessee has violated its bye-laws or the provisions of the State Act. The entire objection of the AO is based on the status and rights of nominal members. As noted above, such rights are restricted by the State Act itself. Therefore, once the persons are admitted as nominal members in accordance with the State Act and the bye-laws, the income earned from providing credit facilities to such members cannot be excluded from the ambit of section 80P(2)(a)(i) of the Act.

11.8 We further observe that the AO has proceeded on the assumption that the 15% restriction applies to nominal members. This assumption is factually and legally incorrect. The amendment made in the year 2014 places the ceiling on associate members and not on nominal members. Even otherwise, the amendment does not lay down any automatic procedure for removal of existing nominal or associate members who were already admitted under the earlier regime. In the present case, the associate members are only 4. Thus, even if the amended provision is applied, there is no violation in the case of the assessee. Therefore, the Revenue cannot deny deduction u/s 80P of the Act on the basis of an alleged breach which is not established under the State law.

11.9 The Ld. CIT(A) has also referred to the decision of the Hon’ble Supreme Court in Dilip Kumar and Company (supra) for the proposition that exemption provisions must be strictly construed. There can be no dispute regarding the said principle. However, strict interpretation does not mean that a statutory expression used in the Income-tax Act should be given a meaning contrary to the governing State Act, particularly when the Income-tax Act itself does not define the term “member”. In the present case, the assessee has to satisfy the condition that credit facilities are provided to members. Once the concerned State Act recognizes nominal members as members, and there is no dealing with non-members, the assessee satisfies the requirement of section 80P(2)(a)(i) of the Act. The rule of strict interpretation cannot be used to create a new disability which is not found either in the Income-tax Act or in the Karnataka Co-operative Societies Act.

11.10 We also do not approve the reasoning that mutuality is lost merely because nominal members do not have voting rights or profit-sharing rights. In the context of deduction u/s 80P(2)(a)(i) of the Act, the primary test is whether the assessee is a co-operative society engaged in the business of banking or providing credit facilities to its members. The doctrine of mutuality may be relevant in a given case where the society deals with outsiders or carries on activities contrary to its objects and governing statute. But where the persons with whom the assessee deal are admitted as members under the State Act and the bye-laws, the deduction cannot be denied merely by applying a general test of mutuality detached from the statutory scheme of section 80P of the Act. The Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. has clarified this position and has held that the Revenue authorities must examine the facts in the light of the State Act and not merely deny deduction on the ground that nominal members have limited rights.

11.11 In view of the above discussion, we hold that the nominal members/class ‘C’ members of the assessee society cannot be treated as non-members for the purpose of section 80P(2)(a)(i) of the Act merely because they do not have voting rights, management rights or profit-sharing rights. They are recognized under the Karnataka Co-operative Societies Act, 1959 and are admitted as per the bye-laws of the assessee society. Further, the restriction of 15% under the amended section 18 applies to associate members and not to nominal members. Since the associate members in the present case are only 4, there is no violation of the said provision. Consequently, the reliance placed by the AO and the Ld. CIT(A) on Citizen Co-operative Society Ltd. is misplaced and the assessee’s case is governed by the principle laid down by the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd.

11.12 Accordingly, we set aside the order of the Ld. CIT(A) on this issue and direct the AO to allow the deduction claimed by the assessee u/s 80P(2)(a)(i) of the Act in respect of income arising from providing credit facilities to its members, including nominal members/class ‘C’ members. The grounds raised by the assessee on this issue are allowed.

13. In the result, the appeal of the assessee is hereby allowed.

Coming to assessee’s appeal in ITA No. 2553/Bang/2025 for A.Y. 2018-19

14. The assessee in the appeal memo has raised as many as 7 grounds of appeal. However, the effective issue raised through Ground Nos. 3 to 6 which pertains to disallowances of deduction under section 80P(2)(a)(i) of the Act on interest and dividend income earned from South Canara District Cooperative Bank Ltd. for Rs. 20,76,951/- only. Hence, we proceed to adjudicate the issue raised through Ground Nos. 3 to 6 which are interconnected.

15. The relevant facts are that during the year under consideration the assessee has earned following incomes from South Canara District Cooperative Bank Ltd (hereinafter-SCDCC Bank):

– Interest on Saving Bank Account Rs. 75,837/-

– Interest on Term Deposit (multiple Account) Rs. 17,09,464/-

– Dividend Rs. 2,91,650/-

– Total Rs. 20,76,951/-

15.1 The above stated interest and dividend income from SCDCC Bank was claimed as deduction under section 80P(2)(a)(i) of the Act. During the assessment, the AO proposes to treat the impugned interest & dividend income as income from other sources by alleging that the same was not derived from the activity of credit facility to the members.

15.2 In response, the assessee made submission at length. The crux of the argument advance by the assessee is that a major part of deposits or investments made with SCDCC Bank are idle surplus funds but were made in compliance with mandatory SLR requirement of the Karnataka Cooperative Societies Act (KCS Act). The assessee submitted that as per the KCS Act certain mandatory deposits or investments were required to be made which are as follows:

– 25% of Total deposit accepted from the members required to be kept as FD with district cooperative bank.

– A minimum of 25% of net profit and credited it to reserve fund account every year shall be invested in designated term deposits with district cooperative bank.

– 3% of Total deposit accepted from the members as Cash Reserve should be held in saving bank/current bank account with Banks.

– In case of Primary Agricultural Society who avail refinance from District cooperative bank for the purpose of relending to the member, required to investment 5% of refinance amount in the equity share of the Bank.

15.3 The assessee further submitted that sometimes it has surplus funds which are not immediately required for lending, they are invested into short term deposit only as a prudent to mobilize the funds instead of keeping the same as idle.

15.4 Accordingly, the assessee argued that the interest and dividend income received from the SCDCC Bank is attributable to the business of providing credit facilities to the members. Therefore, the same is eligible for deduction under section 80P(2)(a)(i) of the Act.

15.5 Alternatively, the assessee submitted that if deduction under 80P(2)(a)(i) of the Act was not allowed then deduction under section 80P(2)(d) of the Act ought to be allowed as the interest and dividend was received from deposit and investment with cooperatives bank which is another arm of the cooperative society.

15.6 The assessee further alternatively submitted that if interest and dividend income is neither allowed u/s 80P(2)(a)(i) of the Act nor u/s 80P(2)(d) of the Act and treated as income from other sources, then expenses under section 57 of the Act shall be allowed.

15.7 However, the AO did not admit the argument advanced by the assessee. The AO observed that deduction u/s 80P(2)(a)(i) of the Act is available only to a co-operative society engaged in the business of banking or providing credit facilities to its members, and only in respect of profits and gains attributable to such activity.

15.8 The AO noted that the interest income in question was not earned from members for providing credit facilities to them. According to the AO, the assessee had earned interest on surplus funds invested with co-operative banks (SCDCC Bank). Such interest, in the view of the AO, was not part of the operational income of the assessee from the business of providing credit facilities to its members.

15.9 The AO further held that the assessee was also not eligible for deduction u/s 80P(2)(d) of the Act, since interest earned from investments with co-operative banks does not qualify for deduction under the said provision. The AO also observed that SCDCC Bank Ltd. was not a member of the assessee-society, and therefore, the interest earned from such bank could not be treated as income eligible for deduction u/s 80P(2)(d) of the Act.

15.10 The AO relied on the decision of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. v. ITO, Karnataka [2010] 188 Taxman 282 (SC), wherein it was held that interest earned on funds not immediately required for business purposes is assessable as “income from other sources” u/s 56 of the Act and cannot be treated as profits and gains attributable to the business activity of the society.

15.11 Regarding the contention of the assessee that such deposits were made during normal business operations and that it was required to keep funds in banks as per KCS Act guidelines for SLR requirement, the AO rejected this contention by relying on the decision of the Hon’ble Supreme Court in Southern Technologies Ltd. v. JCIT [2010] 187 Taxman 346 (SC), wherein it was held that RBI directions do not override the provisions of the Income-tax Act, 1961.

15.12 Accordingly, the AO held that the interest income earned by the assessee from deposits with co-operative banks and other financial institutions was not operational income attributable to the activity of providing credit facilities to members. Therefore, the AO treated such interest income as “income from other sources” u/s 56 of the Act and denied deduction u/s 80P(2)(a)(i) of the Act.

15.13 The AO also rejected the alternative plea of the assessee for allowances of deduction of expenditure under section 57 of the Act. The AO held that the assessee has not demonstrated that expenditure was exclusively incurred for earning interest & dividends from SCDCC Bank.

16. The aggrieved assessee preferred an appeal before the learned CIT(A) but there was no success. Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.

17. The learned AR before us submitted that the authorities below erred in denying deduction under section 80P(2)(a)(i) of the Act on interest and dividend income earned from SCDCC Bank. It was contended that substantial deposits were maintained pursuant to statutory requirements under the Karnataka Co-operative Societies Act relating to SLR, reserve funds and refinance conditions. The learned AR submitted that temporary parking of surplus funds not immediately required for lending is part of prudent business activity and therefore the interest income is attributable to the business of providing credit facilities to members. Reliance was also placed on the judgments of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd., Guttigedarara Credit Co-operative Society Ltd. and Lalitamba Pattina Souharda Sahakari Niyamita.

18. On the other hand, the learned DR before us supported the orders of the lower authorities and submitted that the interest income earned from deposits with SCDCC Bank cannot be treated as operational income attributable to the activity of providing credit facilities to members. According to the learned DR, such income arose from investment of surplus funds and therefore was taxable under the head “Income from other sources” in view of the judgment of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. The learned DR further contended that deduction under section 80P(2)(d) was also not allowable since interest received from a co-operative bank does not qualify for deduction under the said provision.

19. We heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the assessee has received interest and dividend income from deposits and investment made with SCDCC Bank for an amount aggregated to Rs. 20,76,951/- only. The assessee before the AO has contended that the major portion of the deposit or investment with the SCDCC bank was in accordance with the compulsory requirements under the provisions of KCS Act. Further the other short term deposit was made during ordinary course of the business to avoid keeping surplus fund idle when not immediately required for lending. However the AO disallowed the claim of deduction under section 80P of the Act on impugned interest and dividend income.

19.1 The views of the AO are that such interest income from banks or cooperative banks cannot be said to be attributed to the carrying on banking business or providing credit facility as it is not arising from the members. Therefore, such income shall not be eligible for deduction under section 80P(2)(a)(i) of the Act. The views of the Revenue authorities are largely based on the ruling of Hon’ble Supreme Court in the case of Totgars, Co-Operative Sales Society Ltd Vs. ITO in Civil Appeal Nos. 1622 to 1629 of 2010, dated 8th February 2010, reported in 322 ITR 283/ 188 Taxman 282.

19.2 Going through the above stated judgment of Hon’ble Supreme Court, we note the assessee i.e. Totgars, Co-Operative Sale Society Ltd at the relevant time (A.Y. 1991-92 to 1999-2000) was engaged in two activities viz marketing of agricultural produce of its members and providing credit facilities to them. The assessment for the A.Ys. 1991-92 to 1994-95 and 1996-97 to 1999-2000 stood reopened under section 147 of the Act. During the relevant assessment years, the assessee i.e. Totgars, Co-Operative Sale Society Ltd has earned interest income from short term deposit with the bank and in the government securities. Before the AO, it was argued by the assessee that it had invested the funds on short-term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman. Therefore, such interest income was liable to be taxed under section 28 of the Act and not under section 56 of the Act, and, consequently, the assessee was entitled to deduction under section 80P(2)(a)(i) of the Act. This argument of the assessee was rejected by the AO by holding that the assessee-society had invested the surplus funds as and by way of, investment by an ordinary investor, hence, interest on such investment has got to be taxed under the head “Income from other sources”. The finding of the AO was confirmed by the Tribunal as well by the Hon’ble Karnataka High Court. The dispute reached to the Hon’ble Supreme Court through the civil appeal filed by the assessee. The Bench of Hon’ble Supreme Court observed that the assessee markets the produce of its member and sale proceeds of the same which liable to remitted to the member were sometimes retained by the assessee. The surplus fund created by such retention, not immediately required for business purposes, was invested in specified securities.

10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under section 80P(2)(a)(i ) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is – whether interest on such deposits/securities, which strictly speaking accrues to the members’ account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of “Income from other sources”, hence, such interest income would be taxable under section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with “Deductions in respect of certain incomes”. The headnote to section 80P indicates that the said section deals with deductions in respect of income of co-operative Societies. Section 80P(1), inter alia, states that where the gross total income of a co-operative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in section 80P(2) of the Act, would be eligible for deduction. The word “income” has been defined under
section 2(24)( i) of the Act to include profits and gains.

This sub-section is an inclusive provision. The Parliament has included specifically “business profits” into the definition of the word “income”. Therefore, we are required to give a precise meaning to the words “profits and gains of business” mentioned in section 80P(2) of the Act. In the present case, as stated above, assessee-Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression “profits and gains of business”. Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under section 80P(2)(a) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as “investment”. Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this “retained amount” which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. 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 in section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under section 56 of the Act.

11. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by section 56 of the Act, even then, the assessee-Society is entitled to the benefit of section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to section 80HHC, section 80HHD(3) and section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of section 80HHC is, therefore, different from the scope of section 80P of the Act, which deals with deduction in respect of income of co-operative Societies. Even Explanation (baa) to section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to section 80HHC, therefore, cannot be compared with the words used in section 80P of the Act which grants deduction in respect of “the whole of the amount of profits and gains of business”. A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of section 80P of the Act. We find no merit because all the judgments cited were cases relating to Co-operative Banks and assessee-Society is not carrying on Banking business. We are confining this judgment to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of section 80P of the Act would not be correct because we need to give weightage to the words “the whole of the amount of profits and gains of business” attributable to one of the activities specified in section 80P(2)(a) of the Act. An important point needs to be mentioned. The words “the whole of the amount of profits and gains of business” emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee-Society earns interest on funds which are not required for business purposes at the given point in time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the
category of “Other Income” which has been rightly taxed by the Department under section 56 of the Act. 

19.3 The Tribunal notes that the facts of the present case are materially different from the facts in Totgars Co-operative Sale Society Ltd. The assessee before us is a primary agricultural credit society whose main and principal activity is providing credit facilities to its members. The surplus funds deposited with SCDCC Bank are not amounts retained from sale proceeds payable to members. They are business funds of the assessee society.

19.4 The Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. considered an identical issue and held that where a co-operative society is engaged in providing credit facilities to its members and has surplus funds which are not immediately required for lending, the interest earned by depositing such funds with banks is attributable to the business of providing credit facilities.

19.5 The relevant finding of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. reads as follows:

“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 220/12 taxmann.com 66. 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.”

19.6 The Hon’ble High Court in the above stated case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) also found that ratio laid down by the Hon’ble Supreme in Totgars Co-operative Sale Society (supra) was in different context. It was found that said assessee retained the sale proceed payable to the members and deposited such retained money. The fund deposited was the liability of the said cooperative society and interest earned on such deposit was held to be not attributable to the business of the cooperative society. Hence, the Hon’ble High Court held that ratio laid down by the Hon’ble Supreme Court in Totgars Co-operative Sale Society(supra) shall not be applicable where cooperative society is carrying banking business or providing credit facility to members and earns interest on deposit of surplus/idle fund out of profit & gains or capital.

19.7 It is also noted that the identical view was taken by the Hon’ble Jurisdictional High Court of the Karnataka in the subsequent decision in case of Guttigedarara Credit Co-operative Society Ltd. vs. ITO, Ward 2(2), Mysore dated 9th June 2015 reported in [2015] 60 taxmann.com 215.

19.8 Furthermore, the Hon’ble Karnataka High Court followed the principle laid down Tumkur Merchants Souharda Credit Cooperative Ltd(supra) in the subsequent judgment dated 19th February 2018 in the case of Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO in ITA No. 100004 of 2018.

19.9 We also find that the identical view was taken by the Hon’ble High Court of Andhra Pradesh in the case of Commissioner of Income-tax-III, Hyderabad vs. Andhra Pradesh State Cooperative Bank Ltd. dated 7th June 2011 reported in 12 taxmann.com 66. This decision of Hon’ble Andhra High Court was passed after considering the ratio of the Hon’ble Supreme Court in Totgars Co-operative Sale Society(supra) and before the ratio of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd(supra). The relevant extract stands as under:

11. Does section 80P(2)(a) of the Act make a distinction between income received by a cooperative bank from statutory deposits and the income from non-statutory deposit of surplus funds? The answer must be in the negative. The income earned by the cooperative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainly attributable to the business of banking. Indeed as a prudent business practice, no banking company or no entity engaged in the business of banking would keep its amount idle. By parking the funds, immediately not required for the business in other banks, interest can be earned to the benefit of the cooperative society. Every cooperative society is expected to make profits for the benefit of its members. As long as the deposit of the surplus funds in the other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable statutes, the income is certainly attributable to the business of banking. There is no concept of voluntary or non-statutory reserves as urged by the Revenue.

19.10 We further note that the ratio laid down by the Hon’ble Jurisdictional High Court of the Karnataka in Tumkur Merchants Souharda Credit Cooperative Ltd(supra) was subsequently followed by the Hon’ble Kerala High Court in the case of the PCIT vs. Sahyadri Co-operative Credit Society Ltd. reported in [2024] 166 taxmann.com 445 (Kerala) and further by the Hon’ble Calcutta High Court in West Bengal State Co-Operative Agriculture & Rural Development Bank Ltd. vs. DCIT reported [2025] 177 taxmann.com 469 (Calcutta)[06-08-2025]. The relevant finding of the Hon’ble Kerala High Court in above stated case is extracted as under:

7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T.

19.11 Likewise, the relevant finding of the Hon’ble Calcutta High Court in the above stated case is extracted as under:

11. In terms of the above decision, the expression ‘attributable to’ being a wider in 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. The facts in the said case were more or less identical to the facts before us. As the interest income so derived or the capital, if not immediately required to be lent to the members, the society/assessee cannot keep the said amount idle and 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. Bearing in mind the meaning of the words ‘attributable to’ the court proceeded to consider as to the applicability of the judgment of the Hon’ble Supreme Court in Totgars, Co-operative Sale Society Ltd. (supra). It was pointed out that the Hon’ble Supreme Court was dealing with the case where the assessee therein, apart from providing credit facility to the members, was also in the business of marketing of agricultural produce grown by its members and the sale consideration received from marketing agricultural produce of its members was retained in many cases and retained amount which was payable to its members from whom produce was bought, was invested in a short term deposit/security.

12. The facts of the case of the assessee before us is entirely different as the amount which was deposited in the bank was not an amount due to the members and it was not the liability of the society to the members and, therefore, the interest earned from such deposits in the bank should be held to be eligible for deduction under section 80P(2)(a)(i) of the Act. Yet again in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO [2015] 55 taxmann.com 447/ 230 Taxman 309 (Kar) identical issue was considered and it was held that where Cooperative Society was engaged in the business of providing credit facilities to its members, they deposited excess amount for short term in banks, interest earned was entitled to be deducted under section 80P of the Act.

19.12 At this point, we also find it pertinent to refer the decision of Hon’ble Gujarat High Court in the case of State Bank of India (SBI) vs. CIT reported [2016] 72 taxmann.com 64 wherein ratio of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) was distinguished by holding the ratio of the Hon’ble Supreme Court in Totgars Co-operative Sale Society(supra) was properly interpreted. The relevant finding of the Hon’ble Gujarat High Court in this respect reads as under:

13. In the opinion of this court, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned under section 80P(2)(a) of the Act. In the case of Totgars Co-operative Sale Society (supra), as rightly submitted by the learned counsel for the respondent, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. This is further clear when one peruses the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. This court is, therefore, of the view that the above decision is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression “profits and gains of business” and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income.

19.13 However, the Hon’ble Gujarat High Court in the above stated case of State Bank of India (SBI) vs. CIT was dealing with the issue where the assessee had invested its funds with State Bank of India which was not a co-operative bank. Further, the Hon’ble Gujarat High Court has distinguished the case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) on facts and held that the interest income earned from the investment made with State Bank of India was not eligible for deduction under section 80P(2)(a)(i) of the Act.

19.14 The Tribunal also notes that in the present case, a substantial part of the deposits with SCDCC Bank was made in compliance with statutory requirements under the Karnataka Co-operative Societies Act. The assessee was required to maintain prescribed percentages of deposits, reserve funds and other mandatory investments. Such deposits were not made voluntarily merely for earning interest; they were connected with the regulatory framework governing the assessee’s banking/credit activity.

19.15 The expression “attributable to” occurring in section 80P(2)(a)(i) is wider than the expression “derived from”. The interest earned on funds which are statutorily required to be maintained in the course of carrying on the eligible banking/credit activity has a direct and proximate nexus with that activity.

19.16 We also take note of the settled principle of judicial discipline. A decision of the jurisdictional High Court is binding on the Tribunal. The Tribunal is required to follow the law laid down by the jurisdictional High Court unless the same has been overruled or otherwise departed from by a subsequent binding decision.

19.17 In the absence of a decision of the jurisdictional High Court, the Tribunal may rely upon judgments of other Hon’ble High Courts as persuasive precedents. The Hon’ble Bombay High Court in CIT v. Thana Electricity Supply Ltd. (supra) explained that when conflicting decisions of Hon’ble Non-Jurisdictional High Courts exist, the Tribunal may adopt the view it considers more reasonable.

19.18 Thus, under the constitutional scheme and the doctrine of judicial discipline, a decision of the Hon’ble jurisdictional High Court is binding on the Tribunal, while decisions of other Hon’ble High Courts carry persuasive value and may be followed in the absence of a contrary jurisdictional precedent.

19.19 Hence in our considered view, while deciding the issue of deductibility of interest income from deposit of surplus/idle fund by the cooperative societies engaged in providing credit facilities, we are bound to follow the principles laid down in the case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra), unless material brought on record that the said principle/finding has been overruled by the Hon’ble Supreme Court or the larger bench of the Hon’ble Karnataka High Court or disturbed by the Hon’ble Karnataka High Court in subsequent case.

19.20 Be that as may be and without prejudice to the above, we find that there is statutory requirement & legal obligation imposed on the cooperative society into the business of carrying banking business or providing credit facility to maintain certain deposits, thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the Registrar of Co-operative Societies. Given this statutory compulsion, we find that the interest income arising from these deposits cannot be said that the same is not attributable to carrying banking business or providing credit facility to the members. Therefore, in our considered opinion, such interest income earned from such statutory deposits should be considered as operational income derived in the course of the assessee’s business and consequently qualifies for deduction under section 80P(2)(a)(i) of the Act. In holding so, we also draw support and guidance from the Judgment of Hon’ble Supreme court in case CIT versus Karnataka State cooperative apex bank reported in 251 ITR 194 where in it was held as under:

There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)( i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee’s business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.

19.21 Applying the principle culled out from the elaborate discussion of various judicial pronouncements in the preceding paragraphs of this order, we hold that the assessee is eligible for deduction under section 80P(2)(a)(i) of the Act on the above-compulsory deposit, fixed deposit as well as saving bank interest and dividend income.

19.22 At this juncture it is equally important to note that in several earlier decisions, this Tribunal had taken a view that interest income earned by a co-operative society from deposits placed with banks would not qualify for deduction under section 80P(2)(a)(i) of the Act and the same was liable to be taxed under the head “Income from other sources”. Accordingly, the claim of deduction under section 80P(2)(a)(i) in respect of such interest income was rejected in those cases.

19.23 However, the legal position now stands clarified by the judgment of the Hon’ble jurisdictional High Court of Karnataka in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra), and other case laws as discussed in preceding paragraphs wherein it has been held that where a co-operative society engaged in the business of providing credit facilities to its members temporarily parks its surplus funds with banks, the interest earned therefrom is attributable to the business of the society and is therefore eligible for deduction under section 80P(2)(a)(i) of the Act.

19.24 Since the decision of the Hon’ble Jurisdictional High Court is binding on this Tribunal, judicial discipline requires that the same be followed. Therefore, to the extent our earlier decisions have taken a contrary view, we respectfully depart from the earlier stand and follow the ratio laid down by the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Accordingly, the issue is now decided in favour of the assessee by granting deduction under section 80P(2)(a)(i) in respect of the interest income in question.

19.25 Before parting it is also equally important to highlight that the learned DR before us quoted the recent judgment of Hon’ble Jurisdictional High Court of Karnataka in the case of BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO in ITA No. 118 of 2025 dated 21st January 2026. The relevant finding of the Hon’ble High Court in the said case is extracted as under:

6. Section 80P(1) of the I.T. Act enables a co operative society to claim deduction of the income referred to in sub-section (2). Sub-section (2) provides for deduction in respect of the profits and gains of business attributable to the business of banking or providing credit facilities to its members. Section 80P(2)(d) provides deduction of interest income derived by the Co-operative Societies from its investments with any other Co-operative societies. The assessee as made investments in SCDCC Bank which is a Co-operative Bank. Interest income derived from Co-operative Bank is not included as deduction under Section 80P of the I.T. Act. This Court, in M/s. Judicial Employees House Building Co-operative Society Limited v. Income Tax Officer [ITA No.93/2024, dated 16.09.2025], has held that the interest income received from co-operative banks is not eligible for deduction under Section 80P of the I.T. Act. We find that the facts and the legal position considered in the aforesaid decision apply to the present case in all force.

19.26 From the perusal of the said finding we note that the decision of the Hon’ble High Court in the case of BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO (supra) was in relation to deduction under section 80P(2)(d) of the Act which deals with deduction of interest and dividend income on investments with other cooperatives society/bank. As the SCDCC bank is a cooperative bank and not cooperative society, it was held that interest income from such cooperative bank is not eligible for deduction u/s 80P(2)(d) of the Act. However, in the present case, we are dealing with deduction under section 80P(2)(a)(i) of the Act which state the whole of the amount of profits and gains of business attributable to business of banking or providing credit facilities to its members shall be deducted. Therefore, the ratio of the Hon’ble Karnataka High court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. is applicable in the given fact whereas ratio in case of BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO (supra) is distinguished.

19.27 In view of the above detailed discussion, we hereby set aside the findings of the learned CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal raised by the assessee is hereby allowed.

20. In the result, the appeal of the assessee is allowed.

21. In the combined result, both the appeals of the assessee are hereby allowed.

Order pronounced in court on 19th day of May, 2026