Nagapura Credit Co Operative Society Vs ITO (ITAT Bangalore)
Bangalore ITAT Allows Section 80P Deduction on Interest from Bank Deposits; Distinguishes Totgars Decision and Treats Income as Business Income
The Bangalore ITAT allowed the appeal of Nagapura Credit Co-operative Society, holding that interest income of ₹1.56 crore earned from deposits with co-operative banks, commercial banks and other financial institutions is eligible for deduction under Section 80P(2)(a)(i). The Assessing Officer had treated the interest as “Income from Other Sources” and denied deduction under Section 80P, relying on the Supreme Court’s decision in Totgars Co-operative Sale Society. The Tribunal also condoned a 91-day delay in filing the appeal, accepting that the delay was caused by the serious illness of the society’s Chief Executive Officer.
The Tribunal observed that the assessee was a credit co-operative society exclusively engaged in providing credit facilities to its members and that the deposits represented business funds temporarily parked until deployment in lending operations. Relying on the Karnataka High Court decisions in Tumkur Merchants Souharda Credit Co-operative Ltd. and Principal CIT v. Totagars Co-operative Sale Society (392 ITR 74), it held that interest earned on such deposits is attributable to the business of providing credit facilities and therefore constitutes business income, qualifying for deduction under Section 80P(2)(a)(i).
The Tribunal further clarified that the Revenue had misapplied the Karnataka High Court decision reported in 395 ITR 611, as that case dealt with a claim under Section 80P(2)(d), whereas the present case involved a claim under Section 80P(2)(a)(i). Holding that the assessee’s claim was fully covered by the binding precedents of the Karnataka High Court, the Tribunal reversed the orders of the Assessing Officer and the CIT(A), directed the Assessing Officer to allow the deduction under Section 80P(2)(a)(i), and consequently found it unnecessary to adjudicate the alternative grounds relating to Section 80P(2)(d) and Section 57. The appeal was allowed.
Cases Discussed
- Shree Sharada Credit Co-operative Society Ltd. v. ITO (ITAT Bangalore), ITA Nos. 1315 & 1316/Bang/2025, order dated 05.12.2025
- Siddhartha Pattina Sahakari Sangha Niyamita v. ITO (ITAT Bangalore), ITA No. 2113/Bang/2024, order dated 29.05.2025
- Principal Commissioner of Income-tax, Hubballi v. Totagars Co-operative Sale Society (Karnataka High Court), [2017] 83 taxmann.com 140 (Karnataka) / [2017] 395 ITR 611 (Karnataka) / [2017] 297 CTR 158 (Karnataka)
- Principal Commissioner of Income-tax, Hubli v. Totagars Co-operative Sale Society (Karnataka High Court), [2017] 78 com169 (Karnataka) / [2017] 392 ITR 74 (Karnataka)
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. Income-tax Officer, Ward-V, Tumkur (Karnataka High Court), [2015] 55 taxmann.com 447 (Karnataka) / [2015] 230 Taxman 309 (Karnataka)
- M/s. Sree Maruthi Cooperative Housing Society, Bengaluru v. ITO, Ward-7(2)(3), Bengaluru
- Yedamangala Vyavasaya Seva Sahakari PACS Ltd. v. ITO
- CIT v. Andhra Pradesh State Co-operative Bank Ltd., [2011] 200 Taxman 220 / 12 taxmann.com66
- Totgars Co-operative Sale Society Ltd. v. ITO, (322 ITR 283)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal has been filed by Nagapura Credit Co-operative Society (the assessee/appellant) against the appellate order dated 19 August 2025 passed by the National Faceless Appeal Centre, Delhi [learned CIT(A)]. By the said order, the appeal filed by the assessee against the assessment order dated 7 March 2025, passed under section 143(3) read with section 144B of the Income-tax Act, 1961, was dismissed. The assessment order determined the assessee’s total income at Rs. 1,56,03,018.
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 co-operative 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 251,68,727 pertains to statutory/reserve fund deposits, 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) – Held that interest earned on statutory/reserve fund deposits maintained as per the Karnataka Co-operative Societies Act is attributable to the business of providing credit facilities to members and qualifies for deduction’ under section 80P(2)(a)(i), distinguishing Totgars Co-operative Sale Society Ltd.
- Yedamangala Vyavasaya Seva Sahakari PACS Ltd. v. ITO Held that statutory reserve funds compulsorily maintained under the Karnataka Co-operative Societies Act do not represent surplus funds, and interest earned thereon retains the character of business income eligible for deduction under section 80P(2)(a)(i).
4. The remaining interest income of Rs. 1,04,34,291 pertains to deposits made out of business and operational funds arising from member deposits. These deposits were temporarily parked with co-operative banks pending deployment for lending to members. Such interest income is directly attributable to the appellant’s core business activity.
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- 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, Ward-7(2)(3), Bengaluru – Interest earned on deposits made pursuant to statutory and mandatory requirements under the Co- operative Societies Act does not lose its character as business income and qualifies for deduction under section 80P(2)(a)(i).
5. 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 cooperative society engaged exclusively in providing credit facilities to members.
6. 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).
7. 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.”
7A Without prejudice to the above, section 80P(2)(d) claim: The learned CIT(A) erred in not adjudicating and allowing the appellant’s statutory alternative claim under section 80P(2)(d) in respect of interest earned from deposits made with co-operative 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 bye-laws, 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. Briefly stated, the assessee is a credit co-operative society engaged in providing credit facilities to its members. For Assessment Year 2023-24, it filed its return of income on 15 September 2023 declaring income after claiming deduction under section 80P of the Income-tax Act, 1961. The case was selected for scrutiny on account of a large increase in unsecured loans and high liabilities compared with low income and receipts. Notice under section 143(2) of the Act was issued on 19 June 2024, and the assessee submitted the preliminary information called for.
The Assessing Officer noted that the assessee had earned interest income of Rs. 1,56,03,018 from co-operative banks, commercial banks and other financial institutions, and had claimed the entire amount as deduction under section 80P(2)(a)(i). The Assessing Officer held that such income was taxable under the head “Income from other sources” and that the assessee was not entitled to deduction under section 80P, relying on the decision of the Hon’ble Karnataka High Court. In response, the assessee submitted that it was engaged in the business of banking or providing credit facilities to its members and was therefore entitled to deduction under section 80P(2)(a)(i). It further contended that the interest income constituted its business income and that the entire profit attributable to activities covered under section 80P(2)(a)(i) was eligible for deduction. The assessee clarified that its claim was under section 80P(2)(a)(i) and not under section 80P(2)(d). The Assessing Officer rejected the claim, holding that the interest income was assessable as income from other sources and was not attributable to the assessee’s activity of providing credit facilities to members, in view of the decision of the Hon’ble Supreme Court in 188 Taxman 282. The Assessing Officer also denied deduction under section 80P(2)(d). Accordingly, interest income of Rs. 1,56,03,018 was added to the assessee’s income as “Income from other sources”, and the assessment order was passed on 7 March 2025.
4. Aggrieved, the assessee preferred an appeal before the learned CIT(A). It contended that the issue was covered in its favour by several decisions, including those of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. and Totgars Co-operative Sale Society Ltd. The assessee also submitted that it had not claimed deduction on the basis that the interest income was taxable as income from other sources; rather, its case was that the interest income was taxable as business income. The learned CIT(A) confirmed the action of the Assessing Officer, holding that the interest income was chargeable under the head “Income from other sources” unless the assessee established a nexus with its business activity. The assessee also raised an alternative claim for deduction of cost of funds under section 57(iii) of the Act, which was rejected on the ground that the assessee had not established a nexus between the borrowings and the interest income earned. The appeal was accordingly dismissed.
5. The assessee is now in appeal before us. The appeal is delayed by 91 days. The order of the learned CIT(A) was received by the assessee on 19 August 2025, whereas the appeal was filed on 30 January 2026. The assessee has filed a petition for condonation of delay, supported by an affidavit. It submitted that during the relevant period, the Chief Executive Officer of the appellant society was seriously ill and unable to attend to the society’s statutory and tax-related matters. Owing to his health condition, the society could not monitor the income-tax portal or track updates relating to the pending appeal. When the authorised tax consultant accessed the income-tax portal for routine verification, he immediately advised the assessee to file a second appeal before the Tribunal without delay. The appeal was thereafter filed, resulting in a delay of 91 days. The assessee submitted that the delay was caused by sufficient cause and requested that it be condoned and the appeal admitted for adjudication on merits.
6. The learned Authorised Representative reiterated the assessee’s submissions. The learned Departmental Representative, Shri Nishant Agarwal, strongly opposed the application for condonation of delay, contending that the assessee had failed to show sufficient cause for the 91-day delay in filing the appeal. He submitted that the assessee was required to explain each day’s delay and that the general explanation offered could not constitute sufficient cause.
7. We have carefully considered the rival submissions and perused the assessee’s application for condonation of delay. The appeal has been filed with a delay of 91 days. The assessee has explained that its Chief Executive Officer was unwell and therefore could not attend to the society’s statutory and tax-related matters, including monitoring the income-tax portal and tracking updates relating to the appeal. The appeal was filed after the assessee’s tax consultant accessed the portal during routine verification, which resulted in the delay. We find that the delay was caused by sufficient and bona fide reasons, namely the medical condition of the Chief Executive Officer who was responsible for taxation and appeal-related work. We also find that, for admission of the appeal, the assessee is not required to explain each day’s delay with mathematical precision. Accordingly, the delay is condoned and the appeal is admitted for adjudication on merits.
8. The learned Authorised Representative, Shri Girish T.L., Chartered Accountant, filed a paper book and written submissions. We also heard Shri Nishant Agarwal, learned Departmental Representative, on the issue.
9. We have carefully considered the rival submissions and perused the orders of the lower authorities. The admitted facts are that the assessee is a credit co-operative society engaged in providing credit facilities to its members. The assessee earned interest income of Rs. 1,56,03,018, which it claimed as deduction under section 80P(2)(a)(i) of the Income-tax Act. The interest income comprised interest on savings accounts and fixed deposits maintained with various co-operative societies and other banks. The assessee contended that the deposits were made for the purposes of its business and that the entire profit attributable to its activity of providing banking/credit facilities to members was eligible for deduction under section 80P(2)(a)(i). The Assessing Officer, however, held that the interest income was chargeable to tax as “Income from other sources” and not as business income. Relying on decisions of the Hon’ble Supreme Court and the Hon’ble Karnataka High Court, the Assessing Officer further held that the assessee was not entitled to deduction under section 80P(2)(d). The assessee remained unsuccessful before the learned CIT(A).
10. We find that the issue is covered in favour of the assessee by the decisions of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubli v. Totagars Co-operative Sale Society [2017] 78 com169 (Karnataka) / [2017] 392 ITR 74 (Karnataka), dated 05.01.2017, and Tumkur Merchants Souharda Credit Co-operative Ltd. v. Income-tax Officer, Ward-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka) / [2015] 230 Taxman 309 (Karnataka), dated 28.10.2014. In paragraph 10, the Hon’ble High Court held as under:
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.com66. 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. Hence, we pass the following order:
11. The Revenue authorities relied on the decision of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubballi v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka) / [2017] 395 ITR 611 (Karnataka) / [2017] 297 CTR 158 (Karnataka), dated 16.06.2017. However, the assessee submitted that the said decision is distinguishable because, in that case, the claim was made under section 80P(2)(d) of the Act and not under section 80P(2)(a)(i), as is clear from paragraph 11 of that decision, extracted below:
“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.
12. In view of the above facts, we find that the assessee’s case falls within the category of cases where deduction is claimed under section 80P(2)(a)(i) of the Income-tax Act and not under section 80P(2)(d). Therefore, the decision, relied upon by the Revenue authorities, does not apply to the facts of the present case.
13. In the present case, since the assessee’s claim is for deduction under section 80P(2)(a)(i), the decisions relied upon by the learned Authorized Representative, namely Tumkur Merchants Souharda Credit Co-operative Ltd. and Totagars Co-operative Sale Society Ltd. (supra), squarely cover the issue in favour of the assessee.
14. Accordingly, we hold that the assessee’s interest income of Rs. 1,56,03,018 cannot be taxed as “Income from other sources” and is chargeable as business income. Consequently, the assessee is entitled to deduction under section 80P(2)(a)(i) in respect of profits attributable to its business of providing credit facilities to its members. The orders of the lower authorities are therefore reversed, and the Assessing Officer is directed to allow the deduction under section 80P(2)(a)(i) of the Act.
15. Since all grounds of appeal relate to the assessee’s eligibility for deduction under section 80P(2)(a)(i), the alternative grounds concerning deduction of cost of funds and related issues require no separate adjudication.
16. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 30.07.2026.
