ITAT Bangalore Allows Section 80P Deduction for Bank Interest; Reserve Fund Issue Remanded

By CA Vijayakumar Shetty Income Tax Judiciary September 17, 2026

TaxGuru Citation: 2026 taxguru.in 13242
Case Name: Laxmi Venkatesh Credit Co-operative Society Limited Vs ITO (ITAT Bangalore)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Related Assessment Year: 2020-21
Courts: All ITAT, ITAT Bangalore

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Laxmi Venkatesh Credit Co-op Society Limited Vs ITO (ITAT Bangalore)

Interest on Statutory Deposits & Surplus Business Funds Qualifies u/s 80P: Karnataka Credit Society Wins ₹14.99 Lakh Deduction

The Bangalore Bench of the ITAT has held that interest earned by a co-operative credit society from fixed deposits and savings bank accounts, out of funds belonging to its credit business, qualifies for deduction u/s 80P(2)(a)(i). Interest from reserve-fund investments mandated under the Karnataka Co-operative Societies Act, 1959 would also qualify to the extent the deposits were statutorily required.

The Tribunal distinguished the Supreme Court’s decision in Totagars’ Co-operative Sale Society Ltd. v. ITO [322 ITR 283 (SC)], observing that the funds in the present case belonged to the credit society’s business and did not represent amounts payable to its members.

₹14.99 Lakh Interest Excluded From Section 80P Deduction

Shri Laxmi Venkatesh Credit Co-operative Society Ltd., Udupi, was registered under the Karnataka Co-operative Societies Act, 1959 and was engaged in providing credit facilities to its members.

For AY 2020-21, it declared gross total income of ₹59,84,428 and claimed deduction of the entire amount u/s 80P(2)(a)(i), resulting in nil taxable income.

During scrutiny, the AO noticed that the society had earned interest aggregating to approximately ₹14,99,844, comprising:

₹8,01,867 from reserve-fund investments;
₹6,70,286 from fixed deposits; and
₹27,691 from savings bank accounts.

The deposits were maintained with scheduled banks and co-operative banks. The society explained that a portion represented deposits compulsorily maintained under the Karnataka Co-operative Societies Act and applicable rules & circulars. Had the money not been statutorily invested, it would have been used for advancing loans to members.

The AO, however, relied upon the Supreme Court’s decision in Totagars and denied deduction u/s 80P(2)(a)(i) on the entire interest income.

Statutory Deposits Are Integral to Credit Business

The society contended that the Registrar of Co-operative Societies had prescribed maintenance of a Statutory Liquid Ratio fund of not less than 25% of total demand & time liabilities.

Further, u/s 57 of the Karnataka Co-operative Societies Act, every society was required to transfer at least 25% of its annual net profit to a reserve fund. Such reserve could not be freely used as working capital and had to be invested in the prescribed manner.

Thus, the society did not make these deposits merely as an independent investor seeking a higher return. The investments were compelled by law and were necessary for carrying on its credit operations.

Following Shri Shanteshwar Vividoddeshagala Sahakara Sangha Niyamit v. ITO [2026] 186 taxmann.com 733 (Bang.-Trib.), the ITAT held that interest from statutorily mandated deposits is attributable to the society’s business and qualifies u/s 80P(2)(a)(i).

However, since the precise amount required to be maintained under the State law had not been worked out before the AO, the issue concerning reserve-fund interest was restored for verification. The AO was directed to determine the required statutory investment and allow deduction on the corresponding interest.

Surplus From Credit Business Does Not Lose Its Character

In respect of interest from fixed deposits and savings accounts, the Tribunal noted that the assessee carried on only the business of providing credit facilities to members. The deposits were made from members’ funds having a direct nexus with that business.

Money temporarily not required for immediate lending could not reasonably be kept idle. Its short-term placement in banks did not amount to carrying on a separate investment activity. Interest arising from such placement remained business income attributable to the activity of providing credit facilities to members.

The word “attributable” in section 80P(2)(a)(i) has a wider meaning than the expression “derived from”. Therefore, the deduction is not confined only to interest directly received from loans advanced to members. It extends to income having a proximate business connection with the credit activity.

The Tribunal accordingly allowed deduction on the interest earned from fixed deposits and savings bank accounts. It further directed that even where deposits exceeded the minimum statutory requirement, the corresponding interest should qualify if the deposits represented business funds of the credit society.

Why Totagars Did Not Apply

In Totagars, the society was engaged in marketing agricultural produce belonging to its members. Sale proceeds retained by the society were amounts payable to members and appeared as liabilities in its balance sheet. Interest earned by investing those liabilities was therefore assessed as income from other sources.

The facts here were materially different. The deposited amounts were not liabilities representing money due to members. They constituted funds of the assessee’s credit business that were either statutorily required to be invested or temporarily surplus pending deployment in loans.

The ITAT therefore followed the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO [2015] 55 taxmann.com 447 (Karn.), which held that interest earned by a credit society from temporarily depositing business funds is attributable to its activity of providing credit facilities and qualifies u/s 80P(2)(a)(i).

Section 80P(2)(d) Decision Also Distinguished

The Department relied on PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karn.). The Tribunal found that the ruling concerned a claim u/s 80P(2)(d) for interest from investments with another co-operative society.

The present claim was made u/s 80P(2)(a)(i) as business income attributable to providing credit facilities to members. Therefore, the decision concerning section 80P(2)(d) did not govern the present controversy.

The impugned order was set aside and the society’s appeal was allowed. A delay of ten days in filing the appeal was also condoned.

Author’s Comments

This ruling provides an important distinction for Karnataka credit co-operative societies. The decisive question is not merely where the deposit was made, but whose funds were deposited and why.

If the deposit is mandated by the Karnataka Co-operative Societies Act, the business nexus is particularly strong. Even for deposits exceeding the statutory minimum, deduction may be available where the funds arose from and remained connected with the credit business.

Societies should nevertheless maintain a clear year-wise computation separating statutory reserves, SLR investments, temporary surplus business funds and amounts representing liabilities to members. Totagars applies strongly where another person’s money is temporarily retained; it does not automatically govern every bank deposit made by a credit society.

Cases Discussed

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE

1. The assessee has filed the present appeal against the impugned order dated 23/07/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2020-21.

2. At the outset, it is noticed from the appeal record that there is a delay of 10 days in filing the appeal before the Tribunal. After considering the reasons stated in the affidavit filed by the Secretary of the assessee society, we are of the considered view that there was sufficient cause which prevented the assessee from filing the present appeal within the prescribed statutory period. Accordingly, the delay in filing the appeal is condoned, and we proceed to decide the present appeal on merits.

3. In this appeal, the assessee has raised the following grounds: –

1. The Ld. Respondent misread and misconceived the impugned Order passed by CIT(A) dt. 23-07-2025 and proceeded to pass the OGE to the order of CIT (A) dt. 25-07-2025 in a tearing hurry sustaining the entire addition of Rs. 14,99,840/- in respect of Interest on Investments derived by the appellant from Co-operative Banks grossly ignoring that CIT(A) had partly allowed the appeal of the appellant.

2. The Respondent had passed OGE dt. 25-07-2025 without soliciting any information or explanation from the appellant and also without providing an opportunity of hearing and hence the OGE dt. 25-07-2025 is bad in law.

3. The Respondent has misread and misconstrued the Appellate Order as in Para 5.1 it was stated that the material facts of appeal for A.Y. 2020-21 are pari-materia with the material facts of appeal in respect of A.Y. 2018-19 which was disposed of as per Order of even date and the findings of appeal order for A.Y. 2018-19 will apply mutatis-mutandis to the instant appeal. The Respondent turned a blind eye to the observation of Hon’ble CIT (A) in para 15.6 at Page No. 36 (in bold letters) r/w. Page No. 8 of Appellate Order dt. 23-07-2025 for A.Y. 2018-19 (Appeal No. NFAC/2017-18/10006630) while passing OGE dt. 25-07-2025.

4. It is trite law that interest income derived from statutory deposits shall be considered as operational income derived in the course of regular activities and consequently qualifies for deduction u/s. 80P(2)(a)(i) of the Act and the interest income derived from investment over and above the statutory limit, shall be considered as Income from Other Sources under Sec. 56 of the Act against which an Assessee is eligible to claim proportionate cost of funds as deduction under Sec. 57(iii) of the Act. It is submitted, the appellant is entitled to get this relief as per the order of CIT (A) dt. 25-07-2025.

5. The appellant submits, the issue as to interest income derived from co-operative banks stands covered by the judgement of this Hon’ble Tribunal in ITA No. 1929 & 1930/Bang/2024 in ITO, Ward -1, Udupi vs. Khambadakone Rytara Seva Sahakari Sangha Ltd., Kundapur dated 12-06-2025 and ITA No. 1982 & 1983/Bang/2024 in Maravanthe Badakere Vyavasaya Seva Sahakari Sangha Ltd., Navunda, Byndoor vs. ITO, Ward -1, Udupi dated 30-04-2025.

4. The assessee also raised the following additional concise grounds of appeal: –

1. Whether the Assessing Officer and the CIT(Appeals) were right in denying the benefit of deduction of interest income of Rs. 14,99,840/- (Rs. 8,01,867/- earned from Reserve Fund Investment + Rs. 6,70,286/- earned from Fixed Deposits + Rs. 27,691/- earned from SB Accounts) in Co-operative Banks/Schedule Banks and thereby levying Tax to the tune of Rs. 4,64,830/-.

In the alternative

Whether the Assessing Officer and the CIT(Appeals) were right in denying the benefit of deduction of cost expenses incurred by the Assessee in earning interest income of Rs. 14,99,840/-.

5. The sole issue that arises for our consideration, in the present case, pertains to the disallowance of deduction claimed under section 80P(2)(a)(i) of the Act.

6. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a co-operative credit society registered under the Karnataka Co-Operative Societies Act, 1959, and is engaged in providing credit facilities to its members. For the year under consideration, the assessee filed its return of income on 12/01/2021, declaring a gross total income of ₹ 59,84,428 and return total income of ₹ Nil after claiming ₹ 59,84,428 as deduction under section 80P(2)(a)(i) of the Act. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Upon perusal of the details filed by the assessee, it was observed that the assessee has earned interest on bank deposits of ₹ 6,70,286, interest on reserved fund deposit of ₹ 8,01,867 and interest on saving bank account of ₹ 27,691, i.e. totalling ₹ 14,99,844, from Scheduled Banks and Co-operative Banks. Accordingly, the assessee was asked to show cause as to why the deduction claimed to the tune of ₹ 59,84,428 should not be reduced to ₹ 44,84,584 after disallowing the total interest income of ₹ 14,99,844 from Scheduled Banks and Co-operative Banks. In response, the assessee submitted that the deposits were kept as security deposits, as required by statute. Otherwise, the money would have been used to grant loans to the members.

7. The Assessing Officer (“AO”), vide order dated 23/08/2022 passed under section 143(3) read with section 144B of the Act, following the decision of the Hon’ble Supreme Court in the Totagars’ Co-operative Sale Society Ltd. vs. ITO, reported in 322 ITR 283 (SC), disallowed the deduction claimed under section 80P(2)(a)(i) on the interest income of ₹ 14,99,844. As even after the order passed by the learned CIT(A), no relief was received, the assessee filed the present appeal.

8. We have considered the submissions of both sides and perused the material available on record. The assessee is a co-operative credit society engaged in providing credit facilities to its members. The assessee is registered under the Karnataka Co-Operative Societies Act, 1959. For the year under consideration, the assessee claimed deduction under section 80P(2)(a)(i) of the Act on an amount of ₹ 59,84,428. Out of the said amount, an amount of ₹ 14,99,844 was received by the assessee as interest from deposits in Scheduled Banks and Co-operative Banks. As per the assessee, the interest of ₹ 8,01,867 was earned from reserve fund investment, the interest of ₹ 6,70,286 was earned from fixed deposits, and interest of ₹ 27,691 was earned from savings bank accounts maintained with Scheduled Banks and Co-operative Banks.

9. Insofar as interest earned from reserve fund investment is concerned, as per the assessee being a credit co-operative society, it has to comply with the provisions of the Karnataka Co-Operative Societies Act, 1959, and rules made thereunder and the circulars and notifications issued by the Government of Karnataka. It is the plea of the assessee that, as per Notification/Circular 104:XMC:92-93 dated 29/09/1992 issued by the Registrar of Co-Operative Societies, Government of Karnataka, the credit co-operative society has to keep a Statutory Liquid Ratio fund not less than 25% of the total Demand and Time Liabilities. Further, as per section 57 of the Karnataka Co-Operative Societies Act, 1959, every year a co-operative society shall, out of its net profit in any year, transfer an amount not less than 25% of the profits to the reserve fund and such reserve fund cannot be used as working capital of the society and shall be deposited into the co-operative bank. Therefore, it is claimed by the assessee that there is a business nexus to the earning of interest income on statutory deposits, and hence, the same is eligible for deduction under 80P(2)(a)(i) of the Act.

10. We find that while considering a similar issue, the Coordinate Bench of the Tribunal in Shri Shanteshwar VividoddeshagalaSahakara Sangha Niyamit vs. ITO, reported in [2026] 186 taxmann.com 733 (Bang.-Trib.), observed as follows: –

“9.2 Further, on considering the argument raised by the AR of the assessee that the assessee is entitled for the deduction u/s 80P(2)(a)(i) of the Act to such portion of the interest from cooperative banks in respect of mandatorily maintenance of fluid resources as statutorily required under the Karnataka Cooperative Societies Act and rules thereunder and only the balance of interest over and above the mandatory SLR was liable to be charged u/s 56 of the Act, we take a note of the fact that the certain deposits in question as contended by the AR of the assessee was not voluntarily made by the assessee society for the investment purposes but were instead statutorily mandated by the Karnataka Cooperative Societies Act, 1959. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operation without prior approval from the Registrar of Cooperative Society. We also take note of the fact that if the statutory funds are not invested in the prescribed mode, the business of the assessee may also get hampered/effected due to the violation of these statutory provisions. Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the Cooperative 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 judgement of Hon’ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) 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”

9.3 Further, we also draw support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 118 Taxman 321 / 251 ITR 194 (SC) wherein 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 purpose of carrying on the banking business, the income derived there from 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 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.”

9.4 Further, the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 119 Taxman 785/ 251 ITR 522 (SC) had again reiterated by relying on its own judgment delivered in the case of Karnataka State Co-operative Apex Bank’s case (supra) as under-

“Insofar as the interest income upon statutory reserves is concerned, the question must be answered in favour of the assessee, in the light of the judgment delivered by us in Karnataka State Co-operative Apex Bank’s case (supra).”

In view of the above principles laid down by Hon’ble Supreme Court if the income is attributable to the profits & gains of business of the society, then the assessee society is entitled for deduction u/s 80P(2)(a)(i) of the Act.

9.5 Further, In the case of ClT v. Nawanshahar Central Cooperative Bank Ltd. [2007] 160 Taxman 48 (SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head “Profits and Gains of Business and Profession”. Even though the abovementioned decision was in the context of cooperative societies /Banks claiming deduction under section 80P (2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 as per the CBDT Circular No. 18/2015 dated 02/11/2015.

9.6 The Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer [2015] 55 taxmann.com 447 / 230 Taxman 309 (Karnataka) 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.”

9.7 However, we are also conscious to the fact that the details of quantum of amount necessary to be deposited to comply with the Karnataka Co-operative Society Act, 1959 is not provided by the assessee to the AO. Therefore, we, in the interest of justice and fair play are inclined to set aside this issue to the file of AO with a direction to compute the required quantum of amounts needs to be deposited as per the statutory requirement and allow the claim of the deduction u/s 80P(2)(a)(i) of the Act of the corresponding interest income irrespective of the fact that the investment were made by the co-operative society in co-operative Banks or scheduled banks.“

11. Accordingly, respectfully following the decision of the Coordinate Bench cited supra, we restore the issue of deduction claimed under section 80P(2)(a)(i) of the Act in respect of interest earned from reserve fund investment to the file of the Jurisdictional AO with similar directions as rendered by the Coordinate Bench in the aforesaid decision. Needless to mention, no order shall be passed without affording reasonable opportunity of hearing to the assessee.

12. As regards the interest earned from fixed deposits and interest earned from savings bank account, it is pertinent to note that as per the provisions of section 80P(1) of the Act, the income referred to in sub-section (2) to section 80P shall be allowed as a deduction to an assessee being a co-operative society. According to the provisions of section 80P(2)(a)(i) of the Act, the assessee carrying on the business of banking or providing credit facilities to its members is allowed the deduction of the whole of the amount of the profits and gains of business attributable to such activity. In the present case, it is undisputed that the assessee is engaged only in providing credit facilities to its members. Thus, the interest earned from deposits is part of the profits and gains attributable to the business of the assessee. It is worth noting that the interest was earned from members’ funds, which have a direct nexus with the assessee’s business, and such income can only be regarded as business income.

13. We find that while deciding a similar issue the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO, Ward-V, Tumkur, reported in (2015) 55 taxmann.com 447 (Kar), after considering the decision of the Hon’ble Supreme Court in Totgar’s Co-operative Sale Society Ltd vs ITO., reported in [2010] 322 ITR 283 (SC), held that the interest earned by the Co-operative Society, which is engaged in the business of providing credit facilities to its members, from deposit of excess amount for short term in bank is eligible for deduction under section 80P(2)(a)(i) of the Act. The relevant findings of the Hon’ble Jurisdictional High Court, in the aforesaid decision, are reproduced as follows: –

“6. From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1,77,305/- represents the interest earned from short-term deposits and from savings bank account. The assessee is a Cooperative Society providing credit facilities to its members. 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 a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i):

“Deduction in respect of income of co-operative societies:

80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely:

(a) in the case of co-operative society engaged in—

(i) carrying on the business of banking or providing credit facilities to its members, or

(ii) to (vii)

the whole of the amount of profits and gains of business attributable to any one or more of such activities.”

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.’

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 220/12 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. The substantial question of law is answered in favour of the assessee and against the revenue.”

14. During the hearing, the learned Departmental Representative (“learned DR”) placed reliance upon the decision of the Hon’ble Jurisdictional High Court in Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka). From the perusal of the said decision, we find that in that case the deduction was claimed under section 80P(2)(d) and not under 80P(2)(a)(i) of the Act. The said fact is evident from the following observations of the Hon’ble Jurisdictional High Court in the aforesaid decision: –

“11. The Assessment Years involved in the present batch of appeals are Assessment Years 2007-2008 to 2011- 2012. The bone of contention is that the deduction under Section 80P(2) of the Act is now claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act. The reason is that now the investments and deposits after the Supreme Court’s decision against the assessee Totgar’s Co-operative Sale Society Ltd. (supra), the assessee has shifted the deposits and investments from Schedule Banks to Co-operative Bank and such Co-operative Bank is essentially a Co-operative Society also and Clause (d) allows deduction of income by way of interest or dividends derived by the assessee Co-operative Society from its investments with any other Co-operative Society.”

(Emphasis supplied)

15. Since the assessee’s claim is under section 80P(2)(a)(i) of the Act, we are of the considered view that the decision relied upon by the learned DR is not applicable to the facts of the present case. On the other hand, the decision of the Hon’ble Jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. (supra) squarely covers the issue in favour of the assessee. Accordingly, we are of the considered view that the assessee is entitled to claim deduction under section 80P(2)(a)(i) in respect of the interest earned from fixed deposits and interest earned from savings bank account. By the same reasoning, we direct that if, upon verification, it is found that the assessee has deposited more than the statutory requirement, then the corresponding interest should also be allowed as a deduction under section 80P(2)(a)(i), as the interest is earned from deposits, which is part of the business of the assessee. Accordingly, the impugned order is set aside, and the AO is directed to allow the deduction claimed under section 80P(2)(a)(i) of the Act.

16. In the result, the appeal by the assessee is allowed.

Order pronounced in the open court on 15-Sept-2026.