Jenukal Pattina Souharda Sahakari NYT Vs ITO (ITAT Bangalore)
Interest on Bank Deposits Also Qualifies for Section 80P Deduction: Bangalore ITAT
A credit society may have funds that are not immediately required for lending to its members. If it places those funds in bank deposits, does the resulting interest cease to be income attributable to its business? The Bangalore ITAT answered this question in favour of the assessee in Sri Jenukal Pattina Souharda Sahakari NYT v. ITO, ITA Nos. 2245 and 2246/Bang/2026, order dated 21 September 2026, for AYs 2020–21 and 2022–23.
The assessee was a Souharda Sahakari society registered under the Karnataka Souharda Sahakari Act, 1997, engaged in providing credit facilities to its members. For AY 2020–21, it claimed deduction under section 80P(2)(a)(i) on income of ₹25,00,518, comprising business income of ₹10,44,832 and interest income of ₹14,55,686 from investments and deposits with scheduled and co-operative banks.
The Assessing Officer treated the interest as income from investing funds that were not immediately needed for lending to members. Relying on the Supreme Court decision in Totgar’s Co-operative Sale Society Ltd. v. ITO, he held that the interest was taxable as “income from other sources” and was not attributable to the business of providing credit facilities. He disallowed the section 80P claim and assessed income at ₹25,00,518.
The CIT(A) granted partial relief. Deduction was allowed in respect of the society’s business income of ₹10,44,832, but denied on the bank interest of ₹14,55,686. The CIT(A) considered the deposits to be investments of surplus funds rather than income arising directly from lending to members. The assessee had also not, in the CIT(A)’s view, established with documents that the deposits were maintained to meet a statutory requirement.
Before the Tribunal, the society argued that the funds arose from its credit activity and that placing them in banks was connected with carrying on that activity. It also sought deduction under section 80P(2)(d) for interest from co-operative banks and, alternatively, deduction under section 57 for expenses incurred in earning the interest.
Why Tumkur Merchants mattered
The Tribunal relied on the jurisdictional Karnataka High Court decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO. In that case, the High Court had considered the Supreme Court’s ruling in Totgar’s and held that interest earned by a society engaged in providing credit facilities to its members, on short-term bank deposits of excess funds, was eligible for deduction under section 80P(2)(a)(i).
The Department relied on a later Karnataka High Court decision in PCIT v. Totagars Co-operative Sale Society. The Tribunal distinguished it on a precise ground: the deduction considered there was claimed under section 80P(2)(d), whereas the present society’s principal claim was under section 80P(2)(a)(i). The Tribunal therefore applied Tumkur Merchants to the issue before it.
Statutory deposits and deposits beyond the requirement
The Tribunal held that the assessee was entitled to deduction under section 80P(2)(a)(i) on interest from deposits with both scheduled banks and co-operative banks. It expressly addressed the CIT(A)’s concern about proof of statutory compulsion.
According to the Tribunal, interest from statutory deposits formed part of the society’s operational income. It further held that interest on deposits exceeding the statutory requirement was also eligible, as the deposits were part of the assessee’s business activity. Consequently, whether a particular deposit was compulsory or made from surplus funds did not alter the result on the facts accepted in this case. The CIT(A)’s observation that the statutory nature of the deposits had not been substantiated was therefore held to be of no consequence.
Having allowed the principal claim under section 80P(2)(a)(i), the Tribunal did not separately decide the alternative claim under section 80P(2)(d) or the claim for expenses under section 57. Its conclusion for AY 2020–21 was applied to the similar appeal for AY 2022–23, and both appeals were allowed.
Author’s comment
The useful distinction in this order is between the provision under which deduction is claimed and the nature of the society’s activity. The Tribunal applied the jurisdictional ruling in Tumkur Merchants to a society providing credit to its members and held that interest on its bank deposits remained attributable to that business, including where deposits exceeded a statutory requirement.
The order should be cited with that factual setting in view. It does not separately settle the society’s alternative section 80P(2)(d) claim concerning interest from co-operative banks. Its direct holding is that, for this credit society, the interest from scheduled and co-operative bank deposits qualified under section 80P(2)(a)(i).
Cases Discussed
- Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, Ward-V, Tumkur, reported in (2015) 55 taxmann.com 447 (Karn.)
- Totgar’s Co-operative Sale Society Ltd. v. ITO, reported in [2010] 322 ITR 283 (SC)
- Principal Commissioner of Income-tax, Hubballi v. Totagars Co-operative Sale Society, reported in [2017] 83 taxmann.com 140 (Karnataka)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed the present appeals against the separate impugned orders dated 25/03/2026 and 12/03/2026, 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 years 2020-21 and 2022-23.
2. As both appeals pertain to the same assessee, involving similar issues arising out of the similar factual matrix, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order.
With the consent of the parties, the assessee’s appeal for the assessment year 2020-21 is considered as a lead case and the decision rendered therein shall apply mutatis mutandis to the other appeal of the assessee before us.
3. In its appeal for the assessment year 2020-21, the assessee has raised the following grounds: –
1. That the order of the learned lower authorities, in so far it is prejudicial to the interests of the appellant, is bad and erroneous in law and against the facts and circumstances of the case.
2. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in not allowing the interest income of Rs. 14,55,686/- as deduction u/s 80P(2)(a)(i) of the Act even though the investments in Nationalised and Co- operative Banks were made out of surplus fund and is attributable to the business activities of the appellant.
3. That the learned CIT(A) erred in law and on facts in not allowing the interest income earned from the deposits maintained with Co- operative Banks as deduction u/s 80P(2)(a)(i) of the Act even though such investment has been made as per the provisions of Karnataka Co – operative Societies Act, 1959 which is a mandatory statutory requirement.
4. That the learned CIT(A) erred in law and on facts in not allowing the interest income of Rs. 8,45,872/- earned from Co- operative Banks as deduction u/s 80P(2)(d) of the Act.
5. Without prejudice to the above grounds, that the learned CIT(A) ought to have provided deduction u/s. 57 of the Act towards expenditure incurred for earning interest income.
4. The issue that arises for our consideration pertains to the disallowance interest income earned by the assessee from its investments/deposits with banks.
5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a Souharda Sahakari society registered under Karnataka Souharda Sahakari Act, 1997. For the assessment year 2020-21, the assessee filed its return of income on 04/11/2020, declaring a total income of ₹ Nil, after claiming deduction of ₹ 25,00,518 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 verification of the details furnished by the assessee, it was observed that the assessee has shown income of ₹ 10,44,832 under the head “ Profits and gains of business or profession” and ₹ 14,55,686 under the head “ Income from Other Sources ”. It was further observed from the Profit and Loss Account that the assessee has shown interest on investments of ₹ 14,55,686 and interest on savings bank account of ₹ 21,137. The assessee has claimed deduction of ₹ 25,00,518 under section 80P(2)(a)(i) of the Act, which represents the interest earned from Fixed Deposits and Deposits held with Co- operative Banks and other Banks. Since the assessee has included this income for the purpose of deduction claimed under section 80P of the Act, the Assessing Officer (“AO ”), vide order dated 20/09/2022 passed under section 143(3) read with section 144B of the Act, held that interest income arising from investment of idle funds, which were not immediately required for lending to its members, in Co-operative Banks and commerin the nature of “Income from Other Sources ” taxable under section 56 of the Act and cannot be categorised as income from business. The AO further held that the interest income under question is not attributable to the business of providing credit facilities to its members. Thus, the AO, relying upon the decision of the Hon’ble Supreme Court in Totagars’ Co- operative Sale Society Ltd. vs. ITO, reported in [2010] 322 ITR 283 (SC), disallowed the deduction claimed under section 80P(2)(a)(i), added a sum of ₹ 25,00,518 to the returned income under section 56 of the Act and assessed the total income at ₹ 25,00,518.
6. The learned CIT(A), vide impugned order, partly allowed the appeal of the assessee. The learned CIT(A) found that the assessment order is silent about the disallowance of deduction under section 80P(2)(a)(i) of the Act on the business income of ₹ 10,44,832, and accordingly allowed the ground raised by the assessee to that extent. However, in respect of the interest income of ₹ 14,55,686, the learned CIT(A) dismissed the grounds raised by the assessee and upheld the disallowance of deduction claimed under section 80P(2) (a)(i) of the Act, holding that the interest earned from deposits placed with Co- Operative Banks and other Banks arises from investment of surplus funds and not directly from the business of providing credit facilities to members, and that the assessee has failed to substantiate, with documentary evidence, that the deposits are maintained as per statutory requirement. Being aggrieved, the assessee is in appeal before us.
7. We have considered the submissions of both sides and perused the material available on record. The admitted facts of the case are that the assessee is a Souharda Sahakari society registered under Karnataka Souharda Sahakari Act, 1997 and is engaged in providing credit facilities to its members. During the year under consideration, the assessee, inter alia, earned interest income of ₹ 14,55,686 from investments in Scheduled Banks and Co-operative Banks. As per the assessee, these investments were made out of surplus funds generated from the activities of providing credit to members and are inextricably linked to the business. Therefore, as per the assessee, the interest earned on these deposits should be treated as business income and is eligible for deduction under section 80P(2)(a)( i) of the Act. However, the AO held that the interest income is chargeable to tax under the head “Income from Other Sources,” not as business income, and the learned CIT(A) upheld the same.
8. 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.
9. 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 tha t in that case the deduction was claimed under section 80P(2)(d) and not under section 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 o f interest or dividends derived by the assessee Co- operative Society from its investments with any other Co-operative Society.” (Emphasis supplied)
10. 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) of the Act in respect of the interest earned from investments in Scheduled Banks and Co- statutory deposits is in the nature of operational income derived by the assessee in the course of its business, and consequently the same also qualifies for deduction under section 80P(2)(a)(i) of the Act. Further, the interest income attributable to deposits which exceeds the statutory requirement is also eligible for deduction under section 80P(2)(a)(i) of the Act, as the interest is earned from deposits, which is part of the business of the assessee. In view of the above, the observation of the learned CIT(A) that the assessee failed to substantiate the statutory nature of the deposits is of no consequence, as the interest income on such deposits, whether statutory or out of surplus funds, is attributable to the business of the assessee. Accordingly, the assessee’s claim of deduction under section 80P(2)(a)(i) of the Act in respect of interest income earned from investments in Scheduled Banks and Co- Operative Banks is allowed. Since the claim is allowed under section 80P(2)(a)(i) of the Act, the alternate claim under section 80P(2)(d) of the Act and the claim of expenditure under section 57 of the Act are rendered academic and do not require separate adjudication. As a result, the impugned order on this issue is set aside, and grounds raised in assessee’s appeal are allowed.
11. In its appeal for the assessment year 2022- 23, the assessee has raised similar grounds. Therefore, our findings/conclusions as rendered in the assessee’s appeal for the assessment year 2020-21 shall apply mutatis mutandis. Accordingly, the impugned order in the appeal for the assessment year 2022- 23 is set aside, and the grounds raised by the assessee are allowed.
12. In the result, both appeals by the assessee are allowed.
Order pronounced in open court on 21-Sept-2026.
