Nagini Cooperative Credit Society Limited Vs ITO (ITAT Bangalore)
Mandatory Reserve Funds Kept in Banks: Interest Retains Its Link with Credit Society’s Business
A credit co-operative society is required to maintain and invest certain funds under the Karnataka co-operative law. If those funds earn interest in bank deposits, does the interest become “income from other sources” merely because a bank, rather than a borrowing member, pays it? In Nagini Cooperative Credit Society Limited, the Bangalore Tribunal held that the interest of ₹77,31,599 remained attributable to the society’s business of providing credit facilities to its members and qualified for deduction under section 80P(2)(a)(i).
The deduction disputed by the AO
Nagini Cooperative Credit Society Limited is registered under the Karnataka Co-operative Societies Act, 1959. Its business is providing credit facilities to members. It filed its return for AY 2023–24 declaring nil total income after claiming deduction under section 80P(2)(a)(i).
In scrutiny proceedings, the AO examined its accounts and sought information from the banks where it maintained deposits. He noted that the society had earned interest on investments and savings accounts. In his view, section 80P(2)(a)(i) covered interest arising from credit provided to members, but did not cover interest paid by banks on deposits. He proposed to treat the latter as income from other sources.
The AO disallowed deduction on bank interest totalling ₹77,31,599 and assessed that amount as the society’s total income. The society responded that its deposits had been made from funds connected with its credit business, including funds it was required to maintain under co-operative law. It contended that the statutory phrase “profits and gains attributable to” its business was wide enough to cover the resulting interest.
Partial relief before the CIT(A)
The CIT(A) accepted that the source and purpose of the deposits mattered. Interest on statutory deposits and deposits with other co-operative societies was held eligible for deduction. However, the CIT(A) directed that interest on deposits with commercial banks and other financial institutions be assessed as income from other sources.
The society appealed against the remaining denial. Its principal case before the Tribunal was that the disputed ₹77,31,599 arose from deposits of statutory reserve funds and other mandatory funds required under the Karnataka Co-operative Societies Act and its rules. The Tribunal’s order records that this factual position was undisputed.
The Tribunal also condoned a 49-day delay in filing the appeal. The society had supported its condonation request with an affidavit explaining that its Chief Executive Officer, who handled statutory and tax matters, had been seriously ill and unable to monitor the filing deadline. The Bench accepted this as sufficient cause and heard the appeal on merits.
“Attributable to” is wider than “derived from”
The Tribunal relied on the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO. That decision explained that a society carrying on the business of providing credit to members need not leave funds idle when they are temporarily not required for lending. Depositing those funds with a bank to earn interest does not necessarily amount to undertaking a separate business.
The language of section 80P(2)(a)(i) was important. It refers to profits and gains “attributable to” the eligible activity, an expression wider than “derived from”. The question is therefore whether the bank deposit interest has a sufficient connection with the society’s credit business, not simply whether the payer is a member.
The Tribunal also referred to Gateway Terminals India Pvt. Ltd. v. DCIT, 479 ITR 726 (Bombay); (2025) 177 taxmann.com 707 (Bombay), where the Bombay High Court considered interest from deposits having a direct nexus with an eligible business under a different deduction provision. For the present section 80P claim, however, Tumkur Merchants, the jurisdictional High Court ruling, supplied the central reasoning.
Why Totgars did not defeat the claim
The Revenue’s reliance on Totgars Co-operative Sale Society Ltd. v. ITO was considered in light of the distinction drawn by the Karnataka High Court in Tumkur Merchants. In Totgars, the funds invested included sale proceeds of members’ agricultural produce that were payable to those members and shown as liabilities. The nature of those funds was therefore material to the treatment of the interest.
Here, the Tribunal found that the distinguishing features of Totgars were absent. The deposits were stated to comprise reserve and other mandatory funds maintained in connection with the society’s activities. The Bench held that the interest bore the characteristics of income attributable to the society’s business of providing credit facilities.
It accordingly directed the AO to grant deduction under section 80P(2)(a)(i) on ₹77,31,599. Although an alternative ground had referred to section 80P(2)(d), the society stated at the hearing that it had made no claim under that provision. The Tribunal granted relief under section 80P(2)(a)(i) alone.
Author’s comments
The important feature of this decision is the character of the deposited funds. The Tribunal did not allow the claim simply because the assessee was a credit society or because interest had been earned from a bank account. It proceeded on the recorded position that the deposits represented statutory reserve and other mandatory funds linked to the society’s credit business, a factual assertion the order describes as undisputed.
The decision is particularly useful where the Department divides interest according to the type of bank holding the deposit. For section 80P(2)(a)(i), the enquiry also has to address the source, purpose and business connection of the funds. A society relying on this ruling should therefore be ready with its statutory requirements, reserve fund accounts, deposit details and fund flow. Those records establish why the interest is claimed as attributable to its eligible business. On the facts before it, the Bangalore Tribunal allowed the society’s substantive claim for the full ₹77.31 lakh.
Cases Discussed
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, (2015) 55 taxmann.com 447 (Karnataka); (2015) 230 Taxman 309 (Karnataka), decided on 28.10.2014
- Cambay Electric Supply Industrial Co. Ltd. v. CIT, 113 ITR 84
- Totgars Co-operative Sale Society Ltd. v. ITO, 322 ITR 283; 188 Taxman 282 (SC)
- Gateway Terminals India Pvt. Ltd. v. DCIT, 479 ITR 726 (Bombay); (2025) 177 taxmann.com 707 (Bombay)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. The assessee, Nagini Cooperative Credit Society Limited, has filed this appeal for assessment year 2023–24 against the order of the National Faceless Appeal Centre, Delhi (the learned CIT(A)). That order partly allowed the assessee’s appeal against the assessment order dated 17 February 2025, passed by the National Faceless Assessment Centre (the learned AO) under section 143(3) read with section 144B of the Income-tax Act, 1961 (the Act). Aggrieved by the appellate order, the assessee is now before us.
2. The Assessee has raised the following grounds of appeal:
1. The order passed by the learned Commissioner of Income Tax (Appeals) under section 250 of the Income-tax Act, 1961, and the assessment order under section 143(3), are opposed to law, facts, equity, principles of natural justice, and probabilities of the case, and are therefore liable to be quashed in entirety. The appellant denies each and every addition, disallowance, and adverse inference drawn therein.
2. The learned CIT(A) erred in disallowing the deduction claimed under section 80P(2)(a)(i), despite the appellant being a duly registered credit cooperative society engaged exclusively in providing credit facilities to its members. All statutory conditions prescribed for availing deduction under section 80P(2)(a)(i) are fully satisfied.
3. Interest income of Rs. 77,31,599 pertains to statutory/reserve fund deposits, and other mandatory funds which the appellant is mandatorily required to maintain under the Karnataka Co-operative Societies Act, 1959, and the Rules framed thereunder. Such interest income is wholly eligible for deduction under section 80P(2)(a)(i).
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- Siddhartha Pattina Sahakari Sangha Niyamita v. ITO (ITA No. 2113/Bang/2024, order dated 29.05.2025) – Interest earned on statutory/reserve fund deposits maintained as per the Karnataka Соoperative Societies Act qualifies for deduction under section 80P(2)(a)(i).
- Yedamangala Vyavasaya Seva Sahakari PACS Ltd. v. ITO – Statutory reserve funds compulsorily maintained under the Act do not represent surplus funds, and interest earned retains the character of business income.
- Shree Sharada Credit Co-operative Society Ltd. v. ITO (ITA Nos. 1315 & 1316/Bang/2025, order dated 05.12.2025) – Interest earned on operational business fund deposits temporarily parked with co-operative banks is business income eligible for deduction under section 80P(2)(a)(i).
- M/s. Sree Maruthi Cooperative Housing Society, Bengaluru v. ITO, Ward7(2)(3), Bengaluru – Interest earned on deposits pursuant to statutory requirements does not lose its character as business income.
4. The learned CIT(A) erred in mechanically applying the ratio of Totgars Co-operative Sale Society Ltd. v. ITO (322 ITR 283) without appreciating that the said decision pertains to a marketing co-operative society and is factually distinguishable from a credit co-operative society engaged exclusively in providing credit facilities to members.
5. The learned Assessing Officer and CIT(A) failed to follow binding and persuasive judicial precedents of the ITAT, Bangalore Bench, which consistently hold that interest earned by credit co-operative societies on statutory/reserve funds and operational business funds has a direct nexus with the business of providing credit facilities and qualifies for deduction under section 80P(2)(a)(i).
6. The learned CIT(A) erred in treating the interest income as assessable under section 56, ignoring the settled legal position that where funds form part of the business cycle of a credit co-operative society, the resultant interest income cannot be treated as “Income from Other Sources.”
7. Without prejudice to the above, under section 80P(2)(d): The learned CIT(A) erred in not adjudicating and allowing the appellant’s statutory alternative claim in respect of interest earned from deposits made with cooperative banks, which are themselves co-operative societies.
8. Without prejudice to the primary contention under section 80P(2)(a)(i), the learned CIT(A) erred in rejecting the alternative claim for deduction under section 57(iii) in respect of interest paid to members and administrative expenses wholly and exclusively incurred for earning interest income.
9. The learned authorities failed to consider relevant documents placed on record, including byelaws, statutory investment provisions, fund-flow statements, and interest ledgers, resulting in violation of principles of natural justice.
10.The learned CIT(A) erred in passing a mechanical and non-speaking order without properly examining the appellant’s factual matrix and the judicial precedents relied upon.
11.The initiation of penalty proceedings under section 270A is bad in law and unsustainable, as the appellant made a bona fide claim under section 80P(2)(a)(i) based on full disclosure, audited accounts, and binding judicial precedents.
12.The appellant denies the correctness, legality, and validity of the computation of income, tax, interest, and consequential demand.
13.The appellant craves leave to add, amend, modify, alter, or delete any of the above grounds at the time of hearing, in the interest of justice.
3. The Registry has noted a delay of 49 days in filing the appeal. The assessee received the appellate order on 7 October 2025 and filed the appeal on 18 February 2026. It has filed a petition seeking condonation of the delay, supported by an affidavit. The delay is attributed to the serious illness of the assessee’s Chief Executive Officer, who was responsible for statutory and tax matters and was therefore unable to monitor the filing deadline. The assessee submits that his temporary unavailability caused the unintentional delay and constitutes sufficient cause for condonation. After hearing Shri Girish T. A., Chartered Accountant, for the assessee, and Shri Pradeep S., Additional Commissioner of Income Tax and learned Senior Departmental Representative, we find that the CEO’s ill-health is supported by the affidavit and constitutes sufficient cause. Accordingly, the delay is condoned and the appeal is admitted.
4. The brief facts are as follows. The assessee filed its return of income on 19 September 2023, declaring nil total income. The return was selected for scrutiny because it involved a recurring question of law. The assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959, and its sole business is providing credit facilities to its members. During the assessment proceedings, the assessee submitted its annual accounts, which the learned Assessing Officer examined. The Assessing Officer also issued notices under section 133(6) to Karnataka Gramin Bank and other banks with which the assessee maintained accounts. The information from Karnataka Gramin Bank reflected total credits of ₹2.86 crore, including current-year credits of ₹2.65 crore, and interest credited of ₹44,771. From the return, the Assessing Officer noted that the assessee had earned income of ₹3.68 crore and claimed an equivalent deduction under section 80P(2)(a)(i) of the Income-tax Act, resulting in nil total income. He further noted that the net profit included interest of ₹76,91,291 on investments of ₹12.91 crore, including savings-bank interest. In his view, only interest earned from providing credit facilities to members qualified for deduction under section 80P(2)(a)(i); the remaining interest was taxable as income from other sources and was not eligible for deduction under section 80P. Accordingly, he issued a show-cause notice proposing to disallow the deduction of ₹76,91,299 in respect of bank interest. He also proposed to disallow interest of ₹40,300 earned from Karnataka Gramin Bank. In reply, the assessee explained that section 80P(2)(a)(i) permits deduction of income attributable to its business. It contended that, because its sole business is providing credit facilities to members and the deposits were made from members’ funds, the resulting interest formed part of its business income and was therefore deductible. The Assessing Officer rejected this explanation and, relying on a decision of the Hon’ble Karnataka High Court, held that the interest income was not eligible for deduction under section 80P(2)(d). He accordingly made additions of ₹76,91,299 and ₹40,300, determined the assessee’s total income at ₹77,31,599, and passed the assessment order on 17 February 2025 under section 143(3) read with section 144B of the Income-tax Act.
5. Aggrieved by the assessment order, the assessee appealed to the learned CIT(A). The CIT(A) held that interest earned on deposits directly attributable to the assessee’s core business of providing credit facilities to its members was deductible under section 80P. The Assessing Officer was directed to recompute the interest earned on deposits with commercial banks and other financial institutions and assess it as income from other sources under the Income-tax Act. However, interest earned on deposits with other co-operative societies and on statutory deposits was held eligible for deduction under section 80P. Accordingly, the CIT(A) denied the deduction under section 80P(2)(a)(i) only in respect of interest earned on deposits with commercial banks and other financial institutions.
6. Aggrieved by the CIT(A)’s order, the assessee is in appeal before us. Its principal grievance, raised in ground No. 3, is that interest income of ₹77,31,599 arose from deposits of statutory reserve funds and other mandatory funds required to be maintained under the Karnataka Co-operative Societies Act, 1959, and the rules framed thereunder. The assessee therefore contends that this interest income is eligible for deduction under section 80P(2)(a)(i) of the Act. In ground No. 6, the assessee challenges the CIT(A)’s treatment of the interest as income from other sources under section 56, arguing that interest earned on funds forming part of its business cycle cannot be assessed under that head. Ground Nos. 7 to 10 raise alternative contentions.
7. The learned authorized representative submitted that the issue is squarely covered in the assessee’s favour by the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd., which held that such interest constitutes taxable business income and is therefore eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act. He further submitted that the assessee had never claimed a deduction under section 80P(2)(d) of the Act.
8. The learned departmental representative strongly supported the orders of the lower authorities.
9. 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.
10. 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.
11. In ground No. 3, the 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.
12. Accordingly, applying the decisions of the Hon’ble Karnataka and Bombay High Courts, we hold that the interest income of ₹77,31,599 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.
13. The assessee made no claim under section 80P(2)(d) of the Act; that provision therefore does not apply to the present case.
14. In view of the above finding, we allow ground No. 3 and 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 ₹77,31,599.
15. In light of our decision on ground No. 3, ground No. 1, being general, is dismissed. Ground No. 2 supports our finding on ground No. 3; ground No. 4 concerns the Supreme Court decision already considered; and ground No. 5 relies on judicial precedents that are covered by our consideration of the binding jurisdictional High Court decision. Grounds Nos. 6 to 11 raise alternative contentions, while grounds Nos. 12 and 13 are general. Accordingly, these grounds are dismissed.
16. In the result, the assessee’s appeal is allowed to the extent indicated above.
Order pronounced in the open court on 28th September, 2026.
