Sri Gayathri Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)
Bangalore ITAT: Bank Interest Earned by Credit Co-operative Society Eligible for Section 80P Deduction; Nominal Members Cannot Defeat Mutuality
The assessee, a credit co-operative society providing credit facilities to its members, claimed deduction under Section 80P(2)(a)(i) on interest earned from deposits placed with a District Central Co-operative Bank. The AO denied the entire deduction, alleging that the presence of nominal members defeated the principle of mutuality and that the deposit interest was taxable as income from other sources.
The Bangalore ITAT held that nominal and associate members are included within the definition of “member” under the Karnataka Co-operative Societies Act, 1959. Since the Income-tax Act makes no distinction between regular and nominal members, the deduction could not be denied merely because the society had collected a nominal-membership fee of ₹900. The Tribunal relied on the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd.
The Tribunal further held that money temporarily not required for lending to members cannot be expected to remain idle. Interest earned by depositing such business funds with co-operative or commercial banks is attributable to the business of providing credit facilities to members and is therefore deductible under Section 80P(2)(a)(i). The decision in Totgars Co-operative Sale Society was distinguished because that case involved amounts payable to members and reflected as liabilities.
Accordingly, the AO was directed to allow deduction on the entire interest income, and the assessee’s appeal was allowed.
List of Cases Discussed / Relied Upon
- Sri Gayathri Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)
- M/s. Citizen Co-operative Society Ltd. Vs. ACIT, Civil Appeal No. 10245 of 2017, dated 08.08.2017
- Mavilayi Service Co-operative Bank Ltd v. CIT, Calicut, reported in 431 ITR 1 (SC)
- U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I, [1997] 11 SCC 287 / (1999) 237 ITR 574 (SC)
- Sri Kengal Credit Co-operative Society Limited v. ITO, ITA Nos. 238 & 331/Bang/2026, dated 04/08/2026
- Cambay Electrical Supply Industrial Co. Ltd. Vs. CIT, 113 ITR 84 (SC)
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. Income-tax Officer, Ward-V, Tumkur, [2015] 230 Taxman 309 (Karn.)
- Guttigedarara Credit Co-operative Society Ltd. v. Income-tax Officer, Ward 2(2), Mysore, (2015) 377 ITR 464 / [2016] 234 Taxman 476
- Totgars Co-operative Sale Society Ltd. v. ITO, 322 ITR 283
- PCIT Vs. Totgars Co-operative Sales Society, (2017) 395 ITR 611 (Karn.)
- Lalitamba Pattina Souharda Sahakari Niyamita v. ITO, (Karn-HC) (2019) 307 CTR 770
- CIT v. Andhra Pradesh State Co-operative Bank Ltd., [2011] 336 ITR 516 / 200 Taxman 220 / 12 taxmann.com 66
- Belve Vyavasaya Seva Sahakari Sangha vs. The Commissioner of Income Tax, ITA No. 118 of 2025, dated 21/01/2026
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 03.11.2025 v ide DIN & Order No. ITBA/NFAC/S/250/2025-26/1082243831(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.
2. The assessee has raised the following grounds of appeal:-
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned Addl/JCIT(A)-1, Chennai erred in upholding the total income of the appellant at Rs. 31,24,117/- as against the returned income of Rs. 1,81,770/- by denying entire deduction claimed u/s. 80P[2][a][i] of the Act of Rs. 29,42,348/- under the facts and in the circumstances of the appellant’s case.
3. The learned Addl/JCIT[A]-1, Chennai is not justified in law in upholding the denial of deduction claimed u/s. 80P[2][a][i] of the Act simply by erroneously holding that the appellant received interest income of Rs. 29,42,348/- (actual amount received is Rs. 26,42,517/- as per assessment order) from investments in its member District Co-operative Bank, Hassan under the facts and in the circumstances of the appellant’s case.
4. The learned Addl/JCIT[A]-1, Chennai erred in upholding the disallowance of the entire claim made u/s. 80P[2][a][i] of the Act denied by the A.O. on the ground that the appellant society had two classes of members i.e., Regular and Nominal members thereby defeating the concept of mutuality under the facts and circumstances of the appellant’s case.
5. The learned Addl/JCIT(A)-1, Chennai ought to have appreciated that the interest income earned by the appellant on deposits in banks was part of the business of providing credit facilities to the members of the appellant and hence, the said interest was liable for assessment under the head “Business” and not under the head “Other Sources” and therefore, the deduction claimed by the appellant u/s 80P[2][a][i] of the Act ought to have been allowed under the facts and in the circumstances of the appellant’s case.
6. Without prejudice to the above, the learned Addl/JCIT[A]-1, Chennai ought to have appreciated that the interest earned from co-operative banks was alternatively entitled to deduction u/s. 80P[2][d] of the Act under the facts and in the circumstances of the appellant’s case.
7. Without prejudice to the above, the learned Addl/JCIT[A]-1, Chennai ought to have appreciated that in the event the interest income is assessed under the head “Other Sources”, the appellant was entitled to deduction for cost of funds and therefore, the income assessed is excessive and liable to be reduced substantially.
8. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
9. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. The brief facts of the case are that assessee is a credit co- operative society registered under the Karnataka Co -operative Societies Act, 1959 and engaged in the business of providing the credit facilities only to its members. The assessee society filed its return of income for AY 2017-18 on 17.08.2017 declaring total income of Rs.1,81,770/- after claiming deduction u/s 80P of the Act amounting to Rs.29,42,348/-. The return was thereafter processed u/s 143(1) of the Act on 02.03.2018 accepting the income returned. Subsequently, the case of the assessee was selected for scrutiny through CASS and accordingly notices u/s 143(2) of the Act as well as 142(1) of the Act was issued requiring the assessee to furnish the details. During the course of assessment proceeding, the AO observed that as per the profit & loss account statement, the assessee had earned interest income of Rs.26,42,517/- during the year from the deposits. However, as per the statement of income filed, the assessee had declared business income of Rs.31,24,117/-, however, claimed the deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.29,42,348/- on the ground that interest earned on deposit is attributable to the business activities of the society. During the course of assessment proceeding, the assessee submitted that the assesse e society is providing credit facility to its members and it is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for short duration which has earned interest; therefore, the entire interest is attributable to the business of providing credit facility to its members. The AO on the other hand held that the assessee society is engaged in the business of banking and providing credit facility to its members which is covered u/s 80P(2)(a)(i) of the Act. However, as per the profit & loss account, the assessee is in receipt of fee of Rs.900/- from nominal members and hence i t is evident that the assessee is providing credit facility to two categories of members i.e. (i) regular members & (ii) nominal members. The powers and the privileges of the permanent members and the nominal members is diverse and not identical. The ld. A.O. held that the principle of mutuality gets defeated as two classes of members with distinguishing characteristics are found operational in which one category of nominal members contribute s and other category of permanent/regular members benefits. The AO relied upon the decision of Hon’ble Supreme Court in the Case of M/s. Citizen Co-operative Society Ltd. Vs. ACIT in Civil appeal no.10245 of 2017 dated 08.08.2017. The AO observed from the Balance sheet and P & L account, that the assessee is getting profit by providing credit facilities to associate members/co members/non members apart from earning income from its regular members, there by defeating the concept of Principle of Mutuality. Accordingly not eligible for deduction u/s 80P(2)(a)(i) of the Act.
3.1 Further, the AO also observed that as per income & expenditure statement submitted, the assessee has declared income on deposits of Rs.26,42,517/- and hence it is evident that the assessee is having interest income which has to be considered under the head ‘income from other sources’. It is also held that the interest earned by the assessee from surplus deposits kept with a co-operative bank is not eligible for deduction u/s 80P(2)(d) of the Act as held by Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sales Society (2017) reported in 395 ITR 611 (Kar.). In view of this, the AO held that the assessee does not qualify to claim the deduction u/s 80P(2)(d) of the Act also. Thus, the AO completed the assessment proceedings on a total assessed income of Rs.31,24,117/- by completely disallowing the claim of deduction u/s 80P of the Act.
4. Aggrieved by the order of AO dated 16.12.2019 passed u/s 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.
5. The ld. CIT(A)/NFAC dismissed the appeal of the assessee by categorically observing that the assessee society kept its money as a deposit with its Member District Co-operative Bank, Hassan and earned interest out of the same. The assessee received Rs.29,42,348/- as interest income. As per section 80P(2)(a)(i) of the Act, a Co-operative society can claim a 100% deduction on its profit & gains, if it is engaged in providing credit facilities to its members not for the interest earned out of deposits. In this case, the assessee co-operative society kept FD with its members (District Central Co- operative Bank Ltd., Hassan) and earned interest and hence, the appeal of the assessee is dismissed.
6. Again aggrieved by the order of ld. CIT(A)/NFAC da ted 03.11.2025, the assessee has filed the present appeal before this Tribunal.
7. Before us, the ld. A.R. of the assessee vehemently submitted that the assessee society had claimed deduction of Rs.29,42,348/- u/s 80P(2)(a)(i) of the Act as the entire interest received is attributable to the business of the assessee. The ld. A.R. of the assessee also relied upon the decision of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Cred it Co- operative Ltd. v. ITO (2015) 230 Taxman 309 (Karn). Further, the ld. A.R. of the assessee submitted that the assessee society is in the business of providing credit facilities to its members only and there is no bar under the Karnataka Co-operative Society Act to accept nominal or associate members in the society. Lastly, the ld. A.R. of the assessee submitted that in the present case, the assessee has deposited substantial amount of money with District Co-operative Bank, Hassan, which is a member of the assessee society and therefore, it is definitely a profit or business gain allowable for deduction.
8. The ld. D.R. on the other hand vehemently supported the orders of authorities below and vehemently submitted that as the assessee has earned interest income from co-operative bank and therefore, the interest income should be taxed unde r the head “income from other sources” and no deduction either u/s 80P(2)(a)(i) of the Act or u/s 80P(2)(d) of the Act shall be allowed to the assessee. The ld. D.R. also relied upon the recent decision of the jurisdictional Karnataka High Court in the case of Belve Vyavasaya Seva Sahakari Sangha vs. The Commissioner of Income Tax in ITA No. 118 of 2025 dated 21/01/2026.
9. We have heard the rival submissions and perused the materials available on record. Undisputedly, in the present case, the assessee had claimed deduction u/s 80P(2)(a)(i) of the Act while filing the return of income on the ground that the interest income earned from the District Central Co-operative Bank, Hassan were out of the amount which was used by the assessee for providing credit facilities to its members and therefore, the said interest amount is attributable to the credit facilities provided by the assessee and forms part of profit & gains of business.
9.1 Coming to the first contention of the A.O. that as the assessee is in receipt of fee of Rs.900/- from nominal members and therefore, the principle of mutuality gets defeated. The main contentions of the AO is that the assessee is providing credit facility to two categories of members i.e. (i) regular members & (ii) nominal members. The powers and the privileges of the permanent members and the nominal members are diverse and not identic al. The ld. A.O. held that the principle of mutuality gets defeated as two classes of members with distinguishing characteristics are found operational in which one category of nominal members contributes and other category of permanent/regular members benefits. The AO relied upon the decision of Hon’ble Supreme Court in the case of M/s. Citizen Co-operative Society Ltd. Vs. ACIT in Civil appeal no.10245 of 2017 dated 08.08.2017. We are of the co nsidered opinion that the judgment of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd v. CIT, Calicut reported in 431 ITR 1 (SC) clearly supports the case of the assessee and the mere presence of nominal/associate members cannot b e a ground to deny the deduction claimed by the assessee. The relevant paragraph of the judgment is reproduced below for ease of reference and convenience:-
[Remaining supplied Full Text continues unchanged; verified links are to be inserted only on the same occurrences of the above cases where they appear, without any other alteration.]
