VSS Bank Makkandur Vs ITO (ITAT Bangalore)
Bank Deposit Interest of a Credit Society: The Source of the Funds Makes the Difference
Interest earned from a bank deposit is often assessed as “income from other sources”. But where a credit co-operative society temporarily deposits funds belonging to its business, can the interest retain its character as income attributable to providing credit facilities to members? The Bangalore Tribunal answered yes on the facts of this case and allowed deduction under section 80P(2)(a)(i).
The dispute over ₹25.10 lakh
VSS Bank Makkandur is an agricultural credit co-operative society registered under the Karnataka Co-operative Societies Act, 1959. It provides credit facilities to its members. For AY 2020–21, it claimed deduction under section 80P, including deduction in respect of interest earned on funds placed with banks.
The Assessing Officer held that interest on bank deposits was not received from members for credit facilities provided to them. He treated the disputed ₹25,10,475 as taxable under section 56, denied deduction under section 80P(2)(a)(i), and increased the assessed income accordingly. The CIT(A) upheld that view.
The society argued that its bank deposits were connected with its credit business. According to it, the deposits were made from members’ funds and funds maintained under the requirements of the Karnataka co-operative law. Money not immediately needed for lending had been placed with banks; earning interest on that money did not amount to carrying on a separate activity.
The question was whether the interest was “attributable to” the business
Section 80P(2)(a)(i) allows a qualifying co-operative society deduction for profits and gains attributable to the business of providing credit facilities to its members. The dispute therefore required more than identifying the payer of the interest. It required an examination of why the funds were held and deposited.
The society relied principally on the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO. In that case, the High Court held that interest on funds temporarily deposited with banks could be attributable to a society’s business of providing credit facilities to members. Funds not immediately required for lending need not remain idle. Their temporary placement in a bank did not necessarily create an independent source of income divorced from the credit business.
The expression “attributable to” was central to that reasoning. It has a wider reach than “derived from”. Thus, the fact that interest was paid by a bank, rather than directly by a borrowing member, did not by itself decide the deduction claim.
Why Totgars did not govern these facts
The Revenue had relied on the Totgars line of decisions to deny the deduction. The Tribunal, following the distinction explained in Tumkur Merchants, examined the nature of the money deposited.
In Totgars Co-operative Sale Society Ltd. v. ITO, the Supreme Court dealt with amounts retained from the sale proceeds of members’ agricultural produce. Those amounts were payable to the members and appeared as liabilities in the society’s balance sheet. Interest earned by investing such amounts was treated differently from income arising out of funds belonging to the society’s own business.
The Tribunal held that those distinguishing features were absent in VSS Bank Makkandur’s case. It accepted that the deposited funds were connected with the society’s credit activities and referred to the society’s submission that reserve and other mandatory funds had to be invested under section 58 of the Karnataka Co-operative Societies Act. The order records that this factual position was undisputed.
The Tribunal also referred to the Bombay High Court’s decision in Gateway Terminals India Pvt. Ltd. v. DCIT, concerning interest on deposits directly connected with an eligible business under section 80-IA. Its operative conclusion in the present case, however, rested on the character of this society’s funds and the Karnataka High Court’s reasoning in Tumkur Merchants.
Relief granted under section 80P(2)(a)(i)
The Tribunal held that the disputed interest of ₹25,10,475 was attributable to the society’s business of providing credit facilities to members. It directed the AO to grant deduction under section 80P(2)(a)(i) for that amount.
Although an alternative ground referred to section 80P(2)(d), the society stated before the Tribunal that it had not claimed deduction under that provision. The Tribunal therefore did not decide the case on the basis that a deposit with a co-operative bank qualifies under section 80P(2)(d). The appeal was recorded as partly allowed, with the substantive deduction grounds succeeding.
Author’s comments
The ruling should be read through its funds-based factual distinction. It does not establish that every item of bank interest earned by every co-operative society automatically qualifies under section 80P. The important question is whether the deposited money represents funds of the eligible credit business temporarily awaiting use, or amounts owed to members or others and held as liabilities.
For a society making this claim, the bank deposit ledger alone may not tell the full story. The source of the deposit, its treatment in the balance sheet, the reason for holding it, and any statutory requirement to maintain or invest the funds can determine whether Tumkur Merchants assists the case or the Totgars reasoning presents an obstacle. Here, those facts enabled the Tribunal to treat the interest as part of the society’s credit business and allow the deduction.
Cases Discussed
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, (2015) 55 taxmann.com 447 (Karnataka); (2015) 230 Taxman 309 (Karnataka), decided on 28 October 2014
- Cambay Electric Supply Industrial Co. Ltd. v. CIT, 113 ITR 84 (SC)
- Totgars Co-operative Sale Society Ltd. v. ITO, 322 ITR 283; 188 Taxman 282 (SC)
- Gateway Terminals India Private Limited v. Deputy Commissioner of Income Tax,
- Principal Commissioner of Income Tax v. Totagars Cooperative Society, 395 ITR 611 (Karnataka)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by the Assessee against appellate order passed by the Commissioner of income tax appeal being National faceless appeal Centre Delhi for assessment year 2020 – 21 No. 2025 wherein the appeal filed by the assessee against the assessment order passed on 19 September 2022 passed under section 143 (3) read with section 144B of the income tax act, 1961 (the act) by the learned assessing officer was dismissed.
2. The Assessee has raised the following grounds of appeal:
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in law in upholding the disallowance of deduction u/s. 80P[2][a][i] of the Act by erroneously holding that the appellant received interest income from co-operative banks and not co-operative societies under the facts and in the circumstances of the appellant’s case.
3. The learned CIT[A] ought to have appreciated that the interest income earned by the appellant on deposits in banks was part of the business of providing credit facilities to the members of the appellant and hence, the said interest was liable for assessment under the head “Business” and not under the head “Other Sources” and therefore, the deduction claimed by the appellant u/s 80P[2][a][i] of the Act ought to have been allowed under the facts and in the circumstances of the appellant’s case.
4. Without prejudice to the above, the learned CIT[A] ought to have appreciated that the interest earned from co-operative banks was alternatively entitled to deduction u/s. 80P[2][d] of the Act under the facts and in the circumstances of the appellant’s case.
5. Without prejudice to the above, the learned CIT[A] ought to have appreciated that in the event the interest income is assessed under the head “Other Sources”, the appellant was entitled to deduction for cost of funds and therefore, the income assessed is excessive and liable to be reduced substantially.
6. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-Bof the Act, under the facts and in the circumstances of the appellant’s case.
7. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. The assessee, a co-operative society serving its members, filed its return on 3 October 2020, declaring gross total income of ₹2,981,717 and total income of ₹421,240 after claiming a deduction of ₹2,560,475 under section 80P of the Income-tax Act. The return was selected for scrutiny on account of this claim. The learned Assessing Officer observed that the profit and loss account filed with the return reported fixed-deposit interest of ₹9,443,908, whereas the account attached to Form No. 3CD reported ₹4,963,090. In response to a request for details, the assessee stated that it invested with Canara Bank and Syndicate Bank during the financial year, which were not co-operative banks. It also stated that all investments made during the year were with co-operative banks and that the related interest qualified for deduction under section 80P. The assessee further explained that it maintained savings accounts with Canara Bank and Syndicate Bank and earned interest on those accounts. It therefore claimed a deduction of ₹2,560,475 under section 80P(2)(a)(i) and submitted supporting details during the assessment proceedings.
4. The learned Assessing Officer held that section 80P(2)(a)(i) permits a co-operative society engaged in banking or in providing credit facilities to its members to deduct the entire profits and gains attributable to those activities. However, in this case, the interest was not received from members in connection with credit facilities provided to them. The officer therefore treated the interest on surplus funds invested in co-operative banks and financial institutions other than co-operative societies as income from other sources, taxable under section 56, rather than as business profits. Accordingly, the officer denied the deduction under section 80P(2)(a)(i), disallowed ₹2,510,475, and assessed total income at ₹2,931,715 by order dated 19 September 2022.
5. Aggrieved by the assessment order, the assessee appealed to the learned CIT(A), who affirmed the Assessing Officer’s decision.
6. We have carefully considered the submissions of Ms. Hari Priya, Advocate, for the assessee and Mr. Sandeep Kumar, Additional Commissioner of Income Tax and Senior Departmental Representative, for the Revenue.
7. The assessee is an agricultural credit co-operative society registered under the Karnataka Co-operative Societies Act, 1959, which provides credit facilities to its members. For assessment year 2020–21, it filed its return on 3 October 2020, declaring total income of ₹421,240 after claiming a deduction of ₹2,560,477 under section 80P(2)(a)(i) of the Income-tax Act.
8. Relying on the Hon’ble Karnataka High Court’s decision in Principal Commissioner of Income Tax v. Totagars Cooperative Society, reported in 395 ITR 611 (Karnataka), the learned Assessing Officer denied the deduction. The officer treated the assessee’s interest income as income from other sources, taxable under section 56, rather than as business income. The officer further held that, because the interest had not been received from a co-operative bank or any other bank, the assessee was not entitled to a deduction under section 80P(2)(d).
9. The assessee contends that the Income Tax Department consistently allowed the deduction under section 80P in earlier years but denied it in the present assessment year. It submits that the investments with various banks were made from members’ funds and, in some cases, were mandated by the Karnataka Co-operative Societies Act. Relying on the jurisdictional High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Society, the assessee claims a deduction under section 80P(2)(a)(i). It also states that it has never claimed a deduction under section 80P(2)(d) of the Income-tax Act. The learned authorised representative submitted that the issue is squarely covered in the assessee’s favour by the Hon’ble Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd., which held that such interest is business income eligible for deduction under section 80P(2)(a)(i). He further stated that the assessee has never claimed a deduction under section 80P(2)(d).
10. We have carefully considered the rival contentions and examined the orders of the lower authorities. The assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959, and provides credit facilities to its members. It claimed a deduction under section 80P(2)(a)(i) of the Income-tax Act on its entire income. In Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO (2015) 55 taxmann.com 447 (Karnataka); (2015) 230 Taxman 309 (Karnataka), decided on 28 October 2014, the Hon’ble Karnataka High Court held that interest earned by a co-operative society engaged in providing credit facilities to its members on funds temporarily deposited with banks is attributable to that business and is therefore deductible under section 80P. The Hon. Court reasoned that funds not immediately required for lending cannot remain idle and that depositing them to earn interest does not constitute a separate business. It further noted that the deposited amount represented society’s profits and gains rather than a liability owed to its members. Relying on Cambay Electric Supply Industrial Co. Ltd. v. CIT (113 ITR 84), the Court explained that the expression “attributable to” is wider than “derived from.” It also distinguished Totgars Co-operative Sale Society Ltd. v. ITO (322 ITR 283; 188 Taxman 282 (SC)), where amounts retained from the sale proceeds of members’ agricultural produce were payable to those members and shown as liabilities in the balance sheet. On that basis, the Karnataka High Court held that Totgars Co-operative Sale Society Ltd. v. ITO (322 ITR 283; 188 Taxman 282 (SC) did not apply and that the interest income could not be assessed under section 56 of the Act.
11. The honourable Bombay High Court had also an occasion to deal with such an issue in case of Gateway terminals India private limited versus deputy Commissioner of income tax 479 ITR 726 (Bombay) (2025) 177 taxmann.com 707 (Bombay) wherein it was held that where the assessee company is engaged in operating and maintaining a container terminal at the Jawaharlal Nehru Port trust, and interest income from fixed deposits maintained with banks, since placement of fixed deposits was imperative for purpose of carrying on eligible business of assessee and there was a direct Nexus between fixed deposits and eligible business of assessee assessee would be entitled to deduction under section 80 IA of the income tax act on interest earned from such fixed deposits. The honourable High Court had also an occasion to consider that where the tax deduction at source was wrongly deducted by the vendor’s from payments made to the assessee company for using its port facility was a part of sale receipt of the assessee and thus assessee would also be entitled to deduction under section 80 IA on interest received by it on tax deduction at source refunded to it. Therefore, in this case the honourable High Court even considers that when the interest is received by way of refund in the form of excess TDS deducted by the clients of the assessee, it also encompasses interest thereon such interest received is also part of the business receipt of the assessee.
12. Assessee states that section 58 of the Karnataka Co-operative Societies Act, 1959, requires it to invest or deposit its funds in specified securities. It contends that the investments were made from reserve funds and other mandatory funds required to be maintained under the Act and the rules framed thereunder. This factual position is undisputed.
13. Accordingly, applying the decisions of the Hon’ble Karnataka and Bombay High Courts, we hold that the interest income of ₹2,510,475 is attributable to the assessee’s business because it bears the same characteristics as the income considered by the Karnataka High Court. That Court also explained the Supreme Court decision relied upon by the lower authorities. The distinguishing features present in the Supreme Court case are absent here.
14. The assessee made no claim under section 80P(2)(d) of the Act; that provision therefore does not apply to the present case.
15. In view of the above findings, we allow direct the learned Assessing Officer to grant the assessee a deduction under section 80P(2)(a)(i) of the Act in respect of interest income of ₹2,510,475. Ground No. 2 and three of the appeal of the assessee are allowed.
16. Ground No. 1 is general in nature, ground No. 4 – 6 are alternative grounds, ground No. seven is once again general in nature, therefore those are dismissed.
17. In the result, appeal filed by the Assessee is partly allowed.
Order pronounced in the open court on 28th September, 2026.
