Thermax Employee Co-op. Credit Society Ltd. Vs ITO (ITAT Pune)
Section 80P – Interest Earned by Co-operative Credit Society on Deposits With Banks Eligible for Deduction – Surplus Funds Do Not Lose Their Business Character Merely Because They Are Invested in Fixed Deposits – Pune ITAT
Background of the Case
The assessee, Thermax Employee Co-operative Credit Society Ltd., was a registered co-operative credit society operating exclusively for the employees of Thermax Company. Its principal object was to provide credit facilities to its members.
For AY 2021-22, the assessee filed its return of income declaring Nil income after claiming deduction under Chapter VI-A of the Income-tax Act.
The case was selected for scrutiny specifically to examine the deduction claimed under Section 80P.
During the assessment proceedings, the assessee explained that it was required to maintain funds with co-operative banks and financial institutions in accordance with the applicable regulatory guidelines. Accordingly, the society had deposited its funds with co-operative banks and other banks and earned interest income of ₹22,08,616.
However, the Assessing Officer held that interest earned from deposits with co-operative banks and commercial banks could not be regarded as income attributable to the business of providing credit facilities to members.
According to the Assessing Officer, depositing or investing funds with banks was not part of the society’s principal business activity. Therefore, the interest income was assessable under the head Income from Other Sources and was not eligible for deduction under Section 80P(2)(a)(i).
Relying upon the Supreme Court decision in Totgars Co-operative Sale Society Ltd. v. ITO. (2010) 322 ITR 283 (SC), the Assessing Officer disallowed the deduction of ₹22,08,616.
The CIT(A) subsequently dismissed the assessee’s appeal for non-compliance, following which the assessee approached the Tribunal.
Tribunal Condones Delay of 278 Days – Substantial Justice Must Prevail Over Procedural Delay
There was a delay of 278 days in filing the appeal before the Tribunal.
The assessee filed an application explaining the circumstances responsible for the delay.
After examining the explanation, the Tribunal was satisfied that sufficient cause existed for condonation.
The Tribunal observed that substantial justice is more important than procedural delay and that an assessee ordinarily does not stand to gain by filing an appeal belatedly.
Accordingly, the delay of 278 days was condoned, and the appeal was admitted for adjudication on merits.
Interest on Deposits Maintained in Connection With Business Eligible for Deduction – Supreme Court Decision Considered
The Tribunal examined the decision of the Supreme Court in CIT v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC).
In that case, the Supreme Court considered whether interest earned on investments made out of reserve funds was eligible for deduction under Section 80P(2)(a)(i).
The Supreme Court observed that the co-operative bank was required to place part of its funds with the State Bank or Reserve Bank of India for carrying on its banking business.
Since such placement of funds was necessary for conducting the banking business, the interest earned therefrom constituted income attributable to that business.
The Tribunal noted that the principle emerging from the decision was that interest earned from funds deposited in connection with the carrying on of banking business could qualify as business income eligible for deduction under Section 80P(2)(a)(i).
Totgars Decision Distinguished – Investment of Own Funds Cannot Be Equated With Investment of Amounts Belonging to Members
The Tribunal thereafter referred to the decision of the Andhra Pradesh and Telangana High Court in Vavveru Co-operative Rural Bank Ltd. (2017) 396 ITR 371.
In that decision, the High Court had examined the scope of Section 80P(2)(a)(i) and distinguished the Supreme Court ruling in Totgars Co-operative Sale Society Ltd.
The High Court observed that the facts in Totgars were materially different.
In Totgars, the assessee was engaged in marketing agricultural produce belonging to its members. The sale proceeds payable to members had been retained and invested in banks.
Such amounts represented money belonging to the members and were reflected as liabilities in the society’s accounts.
Consequently, the interest earned on investment of those amounts could not automatically be regarded as profits attributable to the society’s eligible business activities.
However, where a co-operative credit society invests its own funds generated from the business of providing credit facilities to members, the position is different.
The High Court emphasised the significance of the expression “attributable to” appearing in Section 80P(2)(a)(i).
The expression is wider than “derived from” and does not require the income to arise directly from the principal business activity.
Therefore, interest earned on deposits made out of funds attributable to the eligible business activity could retain its character as business income.
The Pune Tribunal relied upon this distinction while examining the assessee’s claim.
Kerala High Court – Prudent Investment of Surplus Funds Cannot Result in Denial of Deduction
The Tribunal placed considerable reliance on the decision of the Kerala High Court in Pr. CIT v. Sahyadri Co-operative Credit Society Ltd. (2024) 301 Taxman 36 (Ker.), dated 04.09.2024.
In that case, the co-operative credit society had deposited surplus funds with banks and financial institutions permitted under the applicable co-operative societies legislation.
The Revenue contended that interest earned on such deposits was not attributable to the business of providing credit facilities to members.
Rejecting this contention, the Kerala High Court held that merely because a co-operative society deposits its surplus business profits in permitted banks or financial institutions, the interest earned therefrom does not necessarily lose its character as income attributable to its principal business.
The High Court observed that the society had not diverted its surplus funds into an unrelated business activity. Instead, it had invested those funds in a manner permitted or mandated by the legislation governing its operations.
Such investment represented prudent management of funds arising from the society’s principal business.
The High Court made an important observation:
“The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.”
Thus, the interest earned from deposits made in accordance with the regulatory framework was regarded as an enhancement of the profits attributable to the society’s business of providing credit facilities to its members.
Telangana High Court Also Supports Deduction Under Section 80P
The Tribunal further referred to the recent decision of the Telangana High Court in Ismailia Co-operative Credit Society Ltd. v. ACIT (2026) 186 taxmann.com 1136 (Telangana).
In that case, the High Court held that the findings of the Assessing Officer, Commissioner and Tribunal denying deduction under Section 80P(2)(a) could not be sustained and answered the substantial question of law in favour of the assessee.
The Pune Tribunal also referred to its earlier decisions in ITO v. Dhanshri Multi State Cooperative Society Ltd., ITA No. 463/PUN/2024, and Arth Nagari Sahakari Patsanstha Ltd. v. ITO, wherein a similar view had been taken.
Tribunal Allows Deduction of ₹22.08 Lakh Under Section 80P(2)(a)(i)
After considering the judicial precedents, the Tribunal held that interest earned by a co-operative credit society registered under the applicable co-operative societies legislation, and engaged in providing credit facilities to its members, from funds deposited with co-operative banks or other banks was eligible for deduction under Section 80P(2)(a)(i).
The Tribunal observed that the facts of the assessee’s case were comparable to those considered in the judicial decisions discussed above.
Accordingly, the Tribunal directed the Assessing Officer to delete the addition of ₹22,08,616 and allow deduction under Section 80P(2)(a)(i).
Since the principal ground relating to deduction was allowed, the remaining grounds were treated as academic.
The appeal was consequently partly allowed.
Author’s Comments – Does Prudent Management of Surplus Funds Change the Character of Business Income?
This decision addresses a recurring controversy concerning the eligibility of co-operative credit societies to claim deduction under Section 80P(2)(a)(i) in respect of interest earned from deposits maintained with co-operative banks and commercial banks.
The Revenue frequently relies upon the Supreme Court decision in Totgars Co-operative Sale Society Ltd. to contend that interest earned on bank deposits must necessarily be assessed as income from other sources.
However, the Totgars decision cannot be applied mechanically without examining the nature of the funds invested and the business activities of the society.
In Totgars, the funds invested represented amounts payable to members towards agricultural produce marketed on their behalf. The society was effectively holding those amounts as liabilities.
On the other hand, where a co-operative credit society invests its own funds generated from the business of providing credit facilities to members, the nature of the investment and its connection with the principal business require separate consideration.
Another important aspect is the language employed in Section 80P(2)(a)(i).
The legislature has deliberately used the expression “attributable to” rather than “derived from”.
The expression “attributable to” has a wider connotation and encompasses income having a sufficient connection with the eligible business activity, even where such income does not arise directly from lending transactions with members.
A co-operative credit society cannot be expected to keep its surplus funds idle merely because they are not immediately required for lending to members.
Where such funds are deposited with banks in accordance with the applicable regulatory framework, the interest earned may legitimately be regarded as income attributable to the business of providing credit facilities.
Merely changing the form in which business funds are held—from cash or bank balances to fixed deposits—does not necessarily change the character of the income attributable to those funds.
The Kerala High Court’s observation in Sahyadri Co-operative Credit Society Ltd. is particularly relevant. The Income-tax Act cannot be interpreted in a manner that penalises prudent financial management.
However, an important distinction must be maintained between funds forming part of the society’s eligible business operations and funds invested independently of such operations. The decision should not be understood as laying down that every interest receipt of every co-operative society automatically qualifies for deduction under Section 80P.
The nature of the society, its activities, the ownership and source of the invested funds, and their connection with the eligible business remain relevant considerations.
Further, Section 80P(4), which excludes specified co-operative banks from the benefit of Section 80P, should not be confused with the eligibility of a co-operative credit society that is not itself a co-operative bank.
In the present case, the assessee was a credit society operating exclusively for employees of Thermax Company. The Tribunal allowed the deduction by following judicial precedents concerning interest earned on deposits maintained by societies engaged in providing credit facilities to members.
The decision is particularly useful in cases where the Assessing Officer seeks to deny deduction solely on the ground that the interest was received from a bank rather than directly from members.
The essential principle is that the character of income must be determined with reference to its connection with the eligible business activity and not merely by identifying the institution from which the interest was received.
At the same time, the position under Section 80P remains subject to the relevant jurisdictional High Court decisions, particularly where the treatment of interest on surplus funds is concerned. The Pune Tribunal’s decision should therefore be applied with due regard to the facts and binding precedents applicable to the assessee.
The broader message emerging from the decision is that a co-operative credit society should not lose the benefit of Section 80P merely because it prudently invests funds arising from its eligible business instead of allowing those funds to remain idle.
Cases Discussed
- Ismailia Co-operative Credit Society Ltd. v. ACIT, (2026) 186 taxmann.com 1136 (Telangana) — followed.
- Pr. CIT v. Sahyadri Co-operative Credit Society Ltd., [2024] 301 Taxman 36 (Kerala), order dated 04.09.2024 — followed.
- Vavveru Co-operative Rural Bank Ltd., [2017] 396 ITR 371 (Andhra Pradesh and Telangana High Court) — followed.
- CIT v. Andhra Pradesh State Co-operative Bank Ltd., [2011] 12 taxmann.com 66 / 336 ITR 516 — cited within the Vavveru extract.
- Totgars Co-operative Sale Society Ltd. v. ITO, [2010] 322 ITR 283 (Supreme Court) — distinguished.
- CIT v. Karnataka State Co-operative Apex Bank, [2001] 251 ITR 194 (Supreme Court) — followed.
- ITO v. Dhanshri Multi State Cooperative Society Ltd., ITA No. 463/PUN/2024 (ITAT Pune) — followed.
- Arth Nagari Sahakari Patsanstha Limited v. ITO, (ITAT Pune; further citation not provided) — followed.
FULL TEXT OF THE ORDER OF ITAT PUNE
This is an appeal filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2021-22 on 10.03.2025, emanating from the Assessment Order u/s 143(3) r.w.s. 144B of the Act, dated 22.12.2022.
2. There was a delay of 278 days in filing of the appeal before this Tribunal. The assessee filed an application explaining the reasons for delay. We have perused the application and convinced that there was sufficient cause for delay. Substantial justice is more important than procedural delay. No assessee is going to gain by filing the appeal belatedly. Accordingly, delay condoned.
3. The assessee has raised the following grounds of appeal:
“1. The CIT(A) erred in law and on facts in dismissing appeal by not condoning the delay without appreciating the facts and circumstances of the case.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in disallowing deduction of Rs 22,08,616/- under section 80P of the Income tax Act, 1961.
3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in holding that the appellant society is hit by the provisions of section 80P(4) of the Act.
4. On the facts and in the circumstances of the case a nd in law, the learned CIT(A) failed to appreciate that the appellant is a co -operative credit society and not a co- operative bank as defined under the Banking Regulation Act 1949.
5. The appellant craves leave to add, alter, amend or withdraw any of the above grounds of appeal at the time of hearing.”
Submission of Ld. AR:
4. The Ld. AR filed paper book. The Ld. AR submitted that assessee, Thermax Employees Co- operative Credit Society, Chinchwad, Pune is registered Credit Co- operative Society. The a rea of operation is restricted with Employees in Thermax Company only. The object of the society is to provide credit facility to its members. The assessee filed its return of income on 31.12.2021 declaring Nil income after claiming exemption under Chapter VIA of the Act. The case of the assessee was selected for scrutiny under CASS with reason deduction u/s 80P of the Act. Subsequently, notice u/s 143(2) of the Act was issued. Accordingly, various notices u/s 142(1) of the Act were issued from time to time.
4.1 During the assessment proceedings, the assessee submitted that as per RBI guidelines, the assessee is required to maintain funds with Co-Institutions. Accordingly, the assessee had maintained the funds with Co-o perative Banks and other Banks. However, the Assessing Officer (AO) held as under:
“4.10 From the above judicial pronouncements and facts of the case, it is clear that the deduction u/s 80P(2)(a) is available only to the income which is attributable tothe business operation of the assessee co – operative society, i.e., providing credit facilities to its members. Depositing / investing funds in a co- operative bank / commercial bank is not a part of the business of providing credit facilities to its membe rs. Such an interest income is not the ‘operational income’ of assessee- society from providing credit facilities to its members. Consequently, the interest income has to be treated as ‘income from other sources’ not eligible for deduction u/s 80P of the Ac t. Respectfully following all of the aforesaid legal precedents, I hold that such interest income earned by the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act.”
4.2 The Assessing Officer following the decision of Hon’ble Supreme Court in the case of Totgars Co- operative Sale Society Ltd. Vs. Income Tax Officer disallowed interest income of Rs.22,08,616/- stating that the the assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act. The Ld. AR relied on the decision of ITAT, Pune and the Hon’ble High Court.
Submission of Ld. DR:
5. The Ld. DR relied on the order of the AO and the Ld. CIT(A).
Findings and Analysis:
6. We have heard both the parties and perused the records. In this case, assessee is a Co-operative Credit Society, Chinchwad, Pune is registered Credit Co-operative Society. The AO has disallowed assessee’s claim for deduction u/s 80P(2)(a)(i) of the Act on interest income of Rs.22,08,616/-. Aggrieved by the assessment order, the assessee filed an appeal before the Ld. CIT(A) the assessee for non-compliance. Aggrieved by the order of the Ld. CIT(A), now, the assessee filed an appeal before this Tribunal.
7. We will discuss various decisions to decide the issue before us.
8. Hon’ble Supreme Court in the case of CIT vs. Karnataka State Co- operative Apex bank [2001] 251 ITR 194 (SC) observed as under:
Quote, “ The question in appeal reads: “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 80P(2)(a)(i) of the Income -tax Act, 1961 ?”
While deciding the above question of Law raised by Revenue, the Hon’ble Supreme Court observed as under:
Quote, “…… There is no doubt, and it is not disputed, that the assessee-co- operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income- tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee’s business……” Unquote.
The Hon’ble Supreme Court in the above case answered the question in favour of Assessee and against Revenue.
Thus, the proposition of law emanating from the above decision is that Interest earned from Funds deposited with State bank of India by Co-Operative Bank is business income and eligible for deduction u/s 80P(2)(a) of the Act.
9. The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-ITR 371 analyzed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagar Cooperative Sale Society, and held as under:
Quote,“8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub -section (2) of section 80P or not.
9. While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co – operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar’s Co- operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283.
……………………
34. The case before the Supreme Court in Totgar’s Co- operative Sale Society Ltd.’s case (supra) was in respect of a co- operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision o f the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision o f the Karnataka High Court in Totgar’s Co- operative Sale Society Ltd.’s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgar s was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. Th is is why Totgar’s struck a different note.
35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co- operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
36. The original source of t he investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub- clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression “attributable to” and not any one of the two expressions, namely, “derived from” or “directly attributable to”.
37. Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.” Unquote.
Thus, Hon’ble High Court of Andhra Pradesh and Telangana held that Interest Income earned by investing Income derived from Business and Profession of providing credit facility by a Co-Operative Credit Society was eligible for deduction u/s 80P(2)(a) of the Act.
10. In the case of Sahyadri Co-operative Credit Society Limited, the Sahyadri Co- operative Credit Society had deposited excess funds in the Banks or Institutions permitted by the Co – operative Societies Act. In that context, the Hon’ble Kerala High Court in the case of Pr.CIT Vs. Sahyadri Co-operative Credit Society Ltd., [2024] 301 Taxman 36 (Kerala) vide order dated 04.09.2024 has held as under:
Quote “7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T. Act for a Co- operative Society that is assessed to tax under the head of ‘Profits and Gains of Business or Profession’ is of the whole of the amount of profits and gains of business attributable to any one or more of its activities. Thus, all amounts as can be attributable to the conduct of the specified businesses by a Co-operative Society will be eligible for the deduction envisaged under the statutory provision. The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns interest on such deposits, such interest would cease to form credit facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Re venue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount [the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co- operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members. Under those circumstances, if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.” Unquote
11. Similar view has been taken by the Hon’ble High Court of Telangana in the case of Ismailia Co- operative Credit Society Ltd. Vs. ACIT, (2026) 186 taxmann.com 1136 (Telangana) held as under:
“28. This Bench is of the considered view that the findings given by the Assessing Officer, the Commissioner and the Appellate Tribunal do not hold good and t hat the appellant is prima facie entitled to the deduction under Section 80P(2)(a) of Income Tax Act. Accordingly, the substantial question of law is answered in favour of the appellant and against the respondent.”
12. What emerges from the above referred decisions of Hon’ble Supreme Court and Hon’ble High Courts is that interest earned by Co- operative Credit Society registered under state cooperative society Act, which is engaged in the business of providing credit facilities to its members, from funds de with Cooperative Bank or Bank is eligible for deduction u/s 80P(2)(a)(i) of the Act.
13. Similar view has been taken by ITAT Pune Bench in the case of ITO vs. Dhanshri Multi State Cooperative Society Ltd in ITA 463/PUN/2024, Arth Nagari Sahakari Patsanstha Limited vs ITO Arth Nagari Sahakari Patsanstha Limited.
14. The facts of the present case are identical to the facts of the cases referred above. Hence, respectfully following the judicial precedent, we hold that assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act on the Interest Income earned as mentioned above. Accordingly, the AO is directed to delete the addition. Thus, ground No. 2 raised by the assessee is allowed.
15. Since, we have allowed ground No. 2, the remaining grounds become academic in nature.
16. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on 08th October, 2026
