Arya Vyshya Co Operative Society Limited Vs ITO (ITAT Bangalore)
Credit Transactions with Nominal Members and Interest on Bank Deposits Eligible for Section 80P Deduction: Bangalore ITAT
The assessee, a credit co-operative society registered under the Karnataka Co-operative Societies Act, claimed deduction under section 80P(2)(a)(i). The AO disallowed 50% of the deduction on an estimated basis, alleging that part of the business was conducted with nominal members. A further deduction of ₹11.06 lakh relating to interest earned from deposits with commercial banks was also denied.
The Bangalore ITAT held that section 18 of the Karnataka Co-operative Societies Act expressly permits the admission of nominal members. The statutory ceiling of 15% applies only to associate members and not to nominal members. Since the term “member” is not defined under the Income-tax Act, its meaning must be determined with reference to the State Co-operative Societies Act. Nominal members cannot be treated as outsiders merely because they lack voting, management or profit-sharing rights.
The Tribunal distinguished Citizen Co-operative Society Ltd., where the society had violated the governing State law and dealt with persons who were not genuine members. In the present case, there was no finding that the assessee dealt with the general public or that the Registrar had found any violation of the State Act or its bye-laws. Accordingly, the estimated disallowance of 50% of the deduction was deleted.
Regarding interest earned from bank deposits, the Tribunal followed the jurisdictional Karnataka High Court decision in Tumkur Merchants Souharda Credit Co-operative Ltd. It held that where a society engaged exclusively in providing credit facilities temporarily parks statutory or surplus business funds in banks, the resulting interest remains attributable to its credit business and qualifies for deduction under section 80P(2)(a)(i).
The Tribunal clarified that Karnataka High Court decisions denying deduction under section 80P(2)(d) for interest from co-operative banks do not govern a claim under section 80P(2)(a)(i). Both disallowances were therefore deleted and the assessee’s appeal was allowed.
Cases Discussed
- M/s Naravi Vyavasaya Seva Sahakari Bank Limited vs The Income Tax Officer, Ward 1, Puttur (ITAT Bangalore), ITA No. 2552/Bang/2025
- West Bengal State Co-Operative Agriculture & Rural Development Bank Ltd. vs. DCIT (Calcutta High Court), [2025] 177 taxmann.com 469 (Calcutta)[06-08- 2025]
- BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO (Karnataka High Court), ITA No. 118 of 2025 dated 21st January 2026
- M/s. Judicial Employees House Building Co-operative Society Limited v. Income Tax Officer (Karnataka High Court), [ITA No.93/2024, dated 16.09.2025]
- PCIT vs. Sahyadri Co operative Credit Society Ltd. (Kerala High Court), [2024] 166 taxmann.com 445 (Kerala)
- Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO (Karnataka High Court), ITA No. 100004 of 2018
- Guttigedarara Credit Co-operative Society Ltd. vs. ITO, Ward 2(2), Mysore (Karnataka High Court), [2015] 60 taxmann.com 215
- Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V (Karnataka High Court), [2015] 55 taxmann.com 447
- State Bank of India (SBI) vs. CIT (Gujarat High Court), [2016] 72 taxmann.com 64
- Andhra Pradesh State Cooperative Bank Ltd. (Andhra Pradesh High Court), 12 taxmann.com 66
- Totgars Co-operative Sale Society Ltd. Vs. ITO (Supreme Court), Civil Appeal Nos. 1622 to 1629 of 2010, dated 8th February 2010, reported in 322 ITR 283/ 188 Taxman 282
- Mavilayi Service Co-operative Bank Ltd. (Supreme Court), 431 ITR 1
- Dilip Kumar and Company (Supreme Court), (supra)
- CIT v. Thana Electricity Supply Ltd. (Bombay High Court), [1994] 206 ITR 727
- East India Commercial Co. Ltd. v. Collector of Customs (Supreme Court), [1962] 3 SCR 338 / AIR 1962 SC 1893
- CIT versus Karnataka State cooperative apex bank (Supreme Court), 251 ITR 194
- P. Cooperative Cane Unions’ Federation Ltd. v. CIT (Supreme Court), [1997] 11 SCC 287
- Vattiama Champaka Pillai v. Sivathanu Pillai (Supreme Court), AIR 1979 SC 1937
- Cambay Electric Supply Industrial Co. Ltd. v. CIT (Supreme Court), [1978] 113 ITR 84 (SC)
- Citizen Co-operative Society Ltd. (Supreme Court), Civil Appeal No. 10245 of 2017
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is filed by the Assessee against the order of Ld. ITO WARD 2, HASSAN vide DIN: ITBA/APL/S/250/2025-26/1084922079(1) dated 19-Jan-2026 for the Assessment Year 2015-16.
2. At the outset, we note that the appeal is delayed by three days. The assessee has filed a petition for condonation of delay supported by an affidavit of its President.
It is stated that the order u/s 250 of the Act was passed on 19.01.2026 and the appeal was required to be filed on or before 01.04.2026. However, the appeal in the prescribed electronic form was filed on 03.04.2026.
3. The learned AR for the assessee has explained that it had already forwarded the appeal through email on 27.03.2026, within the prescribed period, but could not complete the filing through the designated portal due to the transition to the new e- filing system and the procedural and technical adjustments involved. Hence, the ld. AR prayed to condone the delay and decide the issue on merit.
4. The Ld. DR opposed the condonation petition and submitted that the assessee had failed to file the appeal within the prescribed time.
5. We have considered the explanation furnished by the assessee. The delay is marginal and appears to have occurred due to a bona fide procedural misunderstanding rather than any negligence or deliberate inaction on the part of the assessee. The fact that the assessee had attempted to file the appeal through email within the prescribed period also demonstrates its intention to pursue the appellate remedy diligently. The petition further states that the delay was purely technical and procedural in nature and that the assessee acted promptly upon becoming aware of the prescribed e-filing requirement. Considering the totality of the facts and circumstances, we are satisfied that the assessee was prevented by sufficient cause from filing the appeal within the prescribed period. Accordingly, in the interest of substantial justice, the delay of three days in filing the appeal is condoned and the appeal is admitted for adjudication on merits.
6. The first effective issue raised by the assessee is that the learned CIT(A) erred in disallowing 50% of the deduction claimed under section 80P(2)(a)(i) of the Act on account of business transaction with nominal members.
7. The brief facts of the case on hand are that the assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 and is engaged in providing credit facilities to its members. For the captioned AY, the assessee filed its ROI declaring total income of Rs. 2,90,690/- after claiming deduction under section 80P(2)(a)(i) of the Act for Rs. 25,75,892/- only.
8. During the assessment, the AO noticed that the assessee was providing credit facilities not only to regular members but also to associate/nominal members. Relying upon the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd in Civil Appeal No. 10245 of 2017, the AO called upon the assessee to furnish details of income earned from regular members, nominal/non-members, along with details of deposits, investments and interest income.
81. The assessee furnished a list of regular members and an affidavit dated 21.11.2017 stating that deposits were accepted and advances were given to regular members having voting rights as well as nominal members. It was also stated that about 15% of the permanent members constituted nominal members. However, according to the AO, the assessee did not furnish the list of nominal members or a clear bifurcation of the income earned from regular members and nominal members. In the absence of such bifurcation, the AO estimated the income attributable to regular and nominal members in the ratio of 50:50 only. Accordingly, the AO, relying on the ruling of the Hon’ble Supreme Court in the case of Citizen Cooperative (Supra), disallowed 50% of the deduction claimed under section 80P(2)(a)(i) of the Act which amounted to Rs. 12,87,946/- and added to the total income of the assessee.
9. The aggrieved assessee preferred an appeal before the learned CIT(A). The assessee submitted that, as per the provisions of section 18 of the Karnataka Cooperative Society Act, it is allowed to admit nominal members and accept deposits, as well as provide credit facilities to such nominal members. It was also submitted that the ruling of the Hon’ble Supreme Court in the case of Citizen Cooperative (supra) is not applicable to it for the reason that the assessee i.e. Citizen Cooperative was registered under a different Act which prohibits the admission of nominal members. Further, the said society was also dealing with the general public whereas the appellant assessee does not deal with the general public. Accordingly, it was prayed to the learned CIT(A) to delete the disallowances made by the AO by applying the ratio of Citizen Cooperative(supra). However, the learned CIT(A) rejected the assessee’s argument and confirmed the disallowance made by observing as under:
5.1.3 Upon careful consideration, it is observed that the Assessing Officer has rightly examined the facts and applied the correct legal principles while framing the assessment u/s 143(3) of the Act. The AO noted that the appellant society was engaged in providing credit facilities not only to regular members but also to nominal members, without obtaining the requisite approval from the Registrar of Co-operative Societies. This contravention of the Co-operative Societies Act, coupled with the absence of segregation of income between regular and nominal members, clearly undermines the principle of mutuality. Relying on the ratio laid down by the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. v. ACIT, the AO concluded that income attributable to transactions with nominal members cannot qualify for deduction u/s 80P(2)(a)(i) of the Act. Furthermore, the AO correctly disallowed deduction on interest earned from statutory deposits, treating it as income from other sources u/s 56 of the Act, in line with the decision of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. v. ITO. In view of these findings, the appeal on these grounds is hereby Dismissed.
10. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
11. The learned AR before us filed a copy of the written arguments and a compilation of case laws. As such, the learned AR reiterated that transactions carried out with nominal members are allowed as per the provisions of the Karnataka Cooperative Societies Act and as per the bylaws of the assessee society. The learned AR referred to various case laws wherein it was held that the nominal member, as allowed under the respective Act under which the cooperative society is registered, shall be considered as a member for the purpose of section 80P(2)(a)(i) of the Act.
12. On the contrary, the learned DR before us vehemently supported the order of the authorities below.
13. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that an identical issue came before the coordinate bench of this Tribunal in the case of the M/s Naravi Vyavasaya Seva Sahakari Bank Limited vs The Income Tax Officer, Ward 1, Puttur in ITA No. 2552/Bang/2025 pertaining to A.Y. 2017-18. The bench, vide order dated 19-05-2026, decided the issue in favour of the assessee. The finding of the bench is extracted as under:
11. We have heard the rival contentions of both the parties and perused the materials available on record. The short controversy before us is whether the assessee society is eligible for deduction u/s 80P(2)(a)(i) of the Act on income arising from credit facilities provided to its nominal members (class ‘C’ members). The AO denied the claim mainly on the ground that the nominal members do not have voting rights, are not entitled to participate in the management of the society and are not entitled to share in the profits. The AO further held that the assessee had violated the provisions of the Karnataka Co-operative Societies Act, 1959 and that the case was covered by the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. reported in 397 ITR 1. The Ld. CIT(A), while not accepting the main plea of the assessee, directed the AO to restrict the disallowance only to the income attributable to class ‘C’ members. The relevant facts, including the membership pattern, the AO’s reasoning, the assessee’s submissions and the finding of the Ld. CIT(A), are borne out from the record placed before us.
11.1 At the outset, we note that the assessee is a primary agricultural co-operative society registered under the Karnataka Co-operative Societies Act, 1959. The assessee has regular members, nominal members and associate members. During the relevant year, the total membership stood at 5,761, out of which regular members were 1,687, nominal members were 4,070 and associate members were only 4. The allegation of the AO is that the number of nominal members exceeded 15% of regular members and therefore there was violation of the Karnataka Co-operative Societies Act. However, in our considered view, this finding proceeds on an incorrect reading of section 18 of the Karnataka Co-operative Societies Act, 1959 as amended in the year 2014. For ready reference the relevant provision of section 18 of the Karnataka Co-operative Societies Act, 1959 reads as under:
18. Nominal or associate members.-
(1) Notwithstanding anything contained in section 16, a co-operative society may admit,—
(a) any individual as a nominal or associate member;
(b) any banking company as a nominal member.
(c) any firm, company, co-operative society, or any body or corporation constituted by or under any law for the time being in force, as a nominal or associate member;
(d) Self help group as nominal members
[Provided that the number of associate members under clause (a) in any Cooperative Society shall not exceed fifteen percent of the total membership of the society. However, in case of Co-operative Societies already having more than fifteen percent of their total membership as associate members, the excess associate members shall be either made as member, if eligible under the section 16 or shall be removed from the associate membership within six months from the date of commencement of the Karnataka Co-operative Societies (Amendment) Act, 2014.] Explanation.—In this sub-section ―banking company‖ shall have the same meaning as is assigned to it in the Deposit Insurance Corporation Act, 1961 (Central Act 47 of 1961)
(2) A nominal member shall not be entitled to any share in any form whatsoever in the assets or profits of the society and a nominal member who is an individual shall not also be entitled to become an [office bearer] of the society.
(3) An associate member may hold shares but shall not be entitled to become an [office bearer] of the society.
(4) Save as provided in this section, a nominal or associate member shall have such privileges and rights of a member and be subject to such liabilities of a member, as may be specified in the bye-laws of the society
11.2 From the perusal of the above, it is transpired that the proviso to section 18, after amendment, places restriction on the number of associate members and provides that the number of associate members shall not exceed 15% of the total regular members. The said restriction is not on nominal members. In the present case, the associate members are only 4 as against 1,687 regular members. Therefore, even on facts, the number of associate members is far below the prescribed statutory ceiling. Once this position is accepted, the very foundation of the AO’s allegation that there is violation of the State Co-operative law does not survive. The Ld. CIT(A) has also noticed that class ‘D’/associate members are only 4 and constitute only a minuscule portion of the total membership. However, the Ld. CIT(A) proceeded to uphold disallowance in respect of class ‘C’/nominal members by applying the decision of Citizen Co- operative Society Ltd., which, in our view, is not justified in the facts of the present case.
11.3 Section 80P(2)(a)(i) of the Act grants deduction to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. The condition under the provision is that the business of banking or providing credit facilities should be with members. The term “member” is not defined under the Income-tax Act. Therefore, the meaning of the word “member” has to be gathered from the Co-operative Societies Act under which the assessee society is registered. This legal position is no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. reported in 431 ITR 1. The Hon’ble Supreme Court has held that, for the purpose of section 80P(2)(a)(i) of the Act, the expression “members” has to be understood with reference to the provisions of the concerned State Co-operative Societies Act. Therefore, once the State Act recognizes nominal members or associate members as members, the Income-tax authorities cannot import a narrower meaning into section 80P of the Act merely because such members do not enjoy all rights available to regular members.
11.4 In this regard, we find that section 18 of the Karnataka Cooperative Societies Act, 1959 recognizes admission of nominal and associate members. The statute itself permits the society to admit such members. It is also not the case of the Revenue that the Registrar of Cooperative Societies has cancelled the registration of the assessee or has held that the admission of nominal members by the assessee is illegal. The bye-laws of the assessee society, as noticed in the orders of the lower authorities, also recognize different classes of members. Once nominal members are admitted as per the bye-laws and the State Act, they cannot be treated as strangers or as general public for the limited purpose of denying deduction u/s 80P(2)(a)(i) of the Act.
11.5 The AO has placed much emphasis on the fact that nominal members do not have voting rights, do not participate in management and do not have right to receive dividend or share in profits. In our view, these factors by themselves cannot convert a statutory member into a non-member. The State legislature itself has created different classes of members with different rights and restrictions. A regular member may have full voting rights and management rights. A nominal member may have limited rights. An associate member may also have restricted rights. But the absence of complete rights does not mean that such persons are not members, when the State Act and the bye-laws recognize them as members. The Income-tax authorities cannot sit in judgment over the wisdom of the State legislature or rewrite the definition of membership for the purpose of section 80P of the Act.
11.6 We also find merit in the submission of the assessee that the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd., in our humble understanding, has been wrongly applied by the lower authorities. In Citizen Co-operative Society Ltd., the Hon’ble Supreme Court found that the society was functioning in violation of the concerned co-operative law. The society had carved out a class of nominal members in a manner not contemplated by law and was also dealing with persons who were not genuine members. In that factual background, the deduction u/s 80P of the Act was denied. However, in Mavilayi Service Co- operative Bank Ltd.(supra), the Hon’ble Supreme Court considered Citizen Co-operative Society Ltd. and explained that Citizen Co-operative Society Ltd. was rendered on its own peculiar facts where the society had violated the governing co-operative law and had dealings with non- members. Therefore, Citizen Co-operative Society Ltd. cannot be applied mechanically to every case where there are nominal members. The relevant observation of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd.(supra) is extracted as under:
46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287 referred to section 80P of the IT Act and then held:
“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under:
“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;””
Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).
47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows:
“59. Restrictions on loans.— (1) A society shall not make a loan to any person or a society other than a member:
Provided that the above restriction shall not be applicable to the Kerala State Co- operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society.
(2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit.
(3) Granting of loans to members or to non-members under sub-section (2) and recovery thereof shall be in the manner as may be specified by the Registrar.”
Thus, the giving of loans by a primary agricultural credit society to non-members is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra).
11.7 In the present case, there is no finding that the assessee has advanced loans to the general public without admitting them as members. There is also no finding by any statutory authority under the Karnataka Co-operative Societies Act that the assessee has violated its bye- laws or the provisions of the State Act. The entire objection of the AO is based on the status and rights of nominal members. As noted above, such rights are restricted by the State Act itself. Therefore, once the persons are admitted as nominal members in accordance with the State Act and the bye-laws, the income earned from providing credit facilities to such members cannot be excluded from the ambit of section 80P(2)(a)(i) of the Act.
11.8 We further observe that the AO has proceeded on the assumption that the 15% restriction applies to nominal members. This assumption is factually and legally incorrect. The amendment made in the year 2014 places the ceiling on associate members and not on nominal members. Even otherwise, the amendment does not lay down any automatic procedure for removal of existing nominal or associate members who were already admitted under the earlier regime. In the present case, the associate members are only 4. Thus, even if the amended provision is applied, there is no violation in the case of the assessee. Therefore, the Revenue cannot deny deduction u/s 80P of the Act on the basis of an alleged breach which is not established under the State law.
11.9 The Ld. CIT(A) has also referred to the decision of the Hon’ble Supreme Court in Dilip Kumar and Company (supra) for the proposition that exemption provisions must be strictly construed. There can be no dispute regarding the said principle. However, strict interpretation does not mean that a statutory expression used in the Income-tax Act should be given a meaning contrary to the governing State Act, particularly when the Income-tax Act itself does not define the term “member”. In the present case, the assessee has to satisfy the condition that credit facilities are provided to members. Once the concerned State Act recognizes nominal members as members, and there is no dealing with non-members, the assessee satisfies the requirement of section 80P(2)(a)(i) of the Act. The rule of strict interpretation cannot be used to create a new disability which is not found either in the Income-tax Act or in the Karnataka Co-operative Societies Act.
11.10 We also do not approve the reasoning that mutuality is lost merely because nominal members do not have voting rights or profitsharing rights. In the context of deduction u/s 80P(2)(a)(i) of the Act, the primary test is whether the assessee is a co-operative society engaged in the business of banking or providing credit facilities to its members. The doctrine of mutuality may be relevant in a given case where the society deals with outsiders or carries on activities contrary to its objects and governing statute. But where the persons with whom the assessee deal are admitted as members under the State Act and the bye-laws, the deduction cannot be denied merely by applying a general test of mutuality detached from the statutory scheme of section 80P of the Act. The Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. has clarified this position and has held that the Revenue authorities must examine the facts in the light of the State Act and not merely deny deduction on the ground that nominal members have limited rights.
11.11 In view of the above discussion, we hold that the nominal members/class ‘C’ members of the assessee society cannot be treated as non-members for the purpose of section 80P(2)(a)(i) of the Act merely because they do not have voting rights, management rights or profit sharing rights. They are recognized under the Karnataka Co-operative Societies Act, 1959 and are admitted as per the bye-laws of the assessee society. Further, the restriction of 15% under the amended section 18 applies to associate members and not to nominal members. Since the associate members in the present case are only 4, there is no violation of the said provision. Consequently, the reliance placed by the AO and the Ld. CIT(A) on Citizen Co- operative Society Ltd. is misplaced and the assessee’s case is governed by the principle laid down by the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd.
11.12 Accordingly, we set aside the order of the Ld. CIT(A) on this issue and direct the AO to allow the deduction claimed by the assessee u/s 80P(2)(a)(i) of the Act in respect of income arising from providing credit facilities to its members, including nominal members/class ‘C’ members. The grounds raised by the assessee on this issue are allowed.
13.1 Respectfully following the above decision of the coordinate bench of the tribunal and considering the assessee has been dealing with regular members and nominal members only and no bar has been placed on the number of nominal members under the Karnataka Cooperative Societies Act, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made. Hence, the ground of appeal raised by the assessee is hereby allowed.
14. The next issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowances of deduction claimed under section 80P(2)(a)(i) of the Act for Rs. 11,06,344/- on account of interest income earned from banks.
15. During the assessment, the AO noticed that the assessee had earned interest from investments/deposits with HDFC Bank, Vijaya Bank, and other banks and had claimed deduction in respect thereof. The AO held that interest earned from deposits and investments with banks other than a co-operative society was not eligible for deduction u/s 80P(2)(a)(i) or 80P(2)(d) of the Act. The AO also rejected the assessee’s argument that the issue of allowability of deduction on interest income from deposit of idle fund with bank is covered in favour of the assessee by the decision of the Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax Officer, Ward-V, Tumkur reported in [2015] 55 taxmann.com 447. Hence, the AO also disallowed deduction of Rs. 11,06,344 in respect of interest income from bank deposits/investments.
16. The aggrieved assessee preferred an appeal before the learned CIT(A). Before the Ld. CIT(A), the assessee submitted that the interest was earned from statutory deposits and investments made in the course of its credit business and was therefore eligible for deduction. The assessee contended that the decision of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd was in respect of a marketing society; therefore, the ratio laid down in that case is distinguishable from a credit co-operative society. Reliance was also placed on the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. and other decisions. 16.1 However, the Ld. CIT(A) rejected the assessee’s contentions and upheld the disallowance u/s 80P(2)(a)(i) of the Act. He held that such interest represented income from surplus funds and was taxable as “Income from Other Sources” and was not attributable to the business of providing credit facilities to members.
17. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
18. The learned AR before us submitted that the interest income was earned from statutory and short-term deposits made in the ordinary course of the assessee’s credit business. He contended that such income was attributable to the business of providing credit facilities to members and was eligible for deduction u/s 80P(2)(a)(i) of the Act. He relied upon the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd (supra) and the Tribunal’s decision in Naravi Vyavasaya Seva Sahakari Bank Ltd in ITA Nos. 2552-2553/Bang/2025.
19. The learned DR relied upon the orders of the lower authorities and submitted that interest earned from deposits with banks was taxable as income from other sources u/s 56 of the Act and was not eligible for deduction u/s 80P of the Act.
20. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that this Tribunal in the identical issue having similar facts and circumstances has decided the issue in favour of the assessee in the case M/s Naravi Vyavasaya Seva Sahakari Bank Ltd. vs. ITO in ITA Nos. 2552-2553/Bang/2025 vide order dated 19-05-2026. The relevant part of the order reads as under:
19. We heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the assessee has received interest and dividend income from deposits and investment made with SCDCC Bank for an amount aggregated to Rs. 20,76,951/- only. The assessee before the AO has contended that the major portion of the deposit or investment with the SCDCC bank was in accordance with the compulsory requirements under the provisions of KCS Act. Further the other short-term deposit was made during ordinary course of the business to avoid keeping surplus fund idle when not immediately required for lending. However, the AO disallowed the claim of deduction under section 80P of the Act on impugned interest and dividend income.
19.1 The views of the AO are that such interest income from banks or cooperative banks cannot be said to be attributed to the carrying on banking business or providing credit facility as it is not arising from the members. Therefore, such income shall not be eligible for deduction under section 80P(2)(a)(i) of the Act. The views of the Revenue authorities are largely based on the ruling of Hon’ble Supreme Court in the case of Totgars, Co-Operative Sales Society Ltd Vs. ITO in Civil Appeal Nos. 1622 to 1629 of 2010, dated 8th February 2010, reported in 322 ITR 283/ 188 Taxman 282.
19.2 Going through the above stated judgment of Hon’ble Supreme Court, we note the assessee i.e. Totgars, Co-Operative Sales Society Ltd at the relevant time (A.Y. 1991-92 to 1999-2000) was engaged in two activities viz marketing of agricultural produce of its members and providing credit facilities to them. The assessment for the A.Ys. 1991-92 to 1994-95 and 1996-97 to 1999-2000 stood reopened under section 147 of the Act. During the relevant assessment years, the assessee i.e. Totgars, Co-Operative Sales Society Ltd has earned interest income from short term deposit with the bank and in the government securities. Before the AO, it was argued by the assessee that it had invested the funds on short-term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman. Therefore, such interest income was liable to be taxed under section 28 of the Act and not under section 56 of the Act, and, consequently, the assessee was entitled to deduction under section 80P(2)(a)(i) of the Act. This argument of the assessee was rejected by the AO by holding that the assessee-society had invested the surplus funds as and by way of, investment by an ordinary investor, hence, interest on such investment has got to be taxed under the head “Income from other sources”. The finding of the AO was confirmed by the Tribunal as well by the Hon’ble Karnataka High Court. The dispute reached to the Hon’ble Supreme Court through the civil appeal filed by the assessee. The Bench of Hon’ble Supreme Court observed that the assessee markets the produce of its member and sale proceeds of the same which liable to remitted to the member were sometimes retained by the assessee. The surplus fund created by such retention, not immediately required for business purposes, was invested in specified securities. The Hon’ble Supreme Court in the given facts and circumstances decided the issue favouring the Revenue by observing as under:
10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short- term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is – whether interest on such deposits/securities, which strictly speaking accrues to the members’ account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of “Income from other sources”, hence, such interest income would be taxable under section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with “Deductions in respect of certain incomes”. The headnote to section 80P indicates that the said section deals with deductions in respect of income of co-operative Societies. Section 80P(1), inter alia, states that where the gross total income of a co-operative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in section 80P(2) of the Act, would be eligible for deduction. The word “income” has been defined under section 2(24)( i) of the Act to include profits and gains.
This sub-section is an inclusive provision. The Parliament has included specifically “business profits” into the definition of the word “income”. Therefore, we are required to give a precise meaning to the words “profits and gains of business” mentioned in section 80P(2) of the Act. In the present case, as stated above, assessee-Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression “profits and gains of business”. Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under section 80P(2)(a) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as “investment”. Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this “retained amount” which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-Society, was a liability and it was shown in the balance-sheet on the liability-side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)( i) of the Act or in section 80P(2)(a)( iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under section 56 of the Act.
11. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by section 56 of the Act, even then, the assessee- Society is entitled to the benefit of section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)( i) of the Act cannot be placed at par with Explanation (baa) to section 80HHC, section 80HHD(3) and section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of section 80HHC is, therefore, different from the scope of section 80P of the Act, which deals with deduction in respect of income of co- operative Societies. Even Explanation (baa) to section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to section 80HHC, therefore, cannot be compared with the words used in section 80P of the Act which grants deduction in respect of “the whole of the amount of profits and gains of business”. A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of section 80P of the Act. We find no merit because all the judgments cited were cases relating to Co operative Banks and assessee-Society is not carrying on Banking business. We are confining this judgment to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of section 80P of the Act would not be correct because we need to give weightage to the words “the whole of the amount of profits and gains of business” attributable to one of the activities specified in section 80P(2)(a) of the Act. An important point needs to be mentioned. The words “the whole of the amount of profits and gains of business” emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee-Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of “Other Income” which has been rightly taxed by the Department under section 56 of the Act.
19.3 The above finding of the finding of the Hon’ble Supreme Court has been followed by the revenue authorities for disallowing the deduction claimed under section 80P(2)(a)(i) of the Act on account of interest income earned from deposit or investment of surplus fund by the cooperative societies carrying the business of banking or providing credit facilities to the members.
19.4 On the contrary, the argument of the assessee engaged in providing credit facility to the members is that the surplus fund for which members are not immediately seeking credits are deposited with bank as a prudent business decision and hence, the same shall be attributed to the business only. Therefore, the same is eligible for the deduction. We note that the above argument of the assessee finds support from the ruling of Hon’ble Jurisdictional High court of the Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income- tax officer Word-V dated 28th October 2014, reported in [2015] 55 taxmann.com 447 (Karnataka). The Hon’ble Bench of Karnataka High Court distinguished the ratio of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (supra).
19.5 The assessee i.e. Tumkur Merchants Souharda Credit Cooperative Ltd (hereafter- TMSCC) was engaged only in the business of providing credit facilities to members unlike the assessee i.e. Totgars Co-operative Sale Society Ltd which was also engaged in marketing of agricultural produce of the members as well as providing credit facilities. For the A.Y. 2009-10, the assessee TMSCC earned interest income on short term deposit with the M/s Allahabad Bank and M/s Axis Bank and the same was included in the profit claimed for the deduction under section 80P(2)(a)(i) of the Act. The learned CIT(A) disallowed the deduction to the extent of aforesaid interest income and coordinate bench of the Tribunal confirmed the disallowances by following the ratio of the Hon’ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. (supra). However, the Hon’ble High Court found that the assessee being cooperative society is only engaged in the business of providing credit facility to the members and other than that it does not engage in any other business. It was observed that the word used in the provision of section 80P of the Act is the profit and gains attributable to the business of providing credit facilities. The Hon’ble High Court referring to the ruling of the Hon’ble Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) held that the word “attributable” is wider term than the word “derived from”. It was held that:
“A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.”
19.6 The Hon’ble High Court in the above stated case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) also found that ratio laid down by the Hon’ble Supreme in Totgars Co-operative Sale Society (supra) was in different context. It was found that said assessee retained the sale proceed payable to the members and deposited such retained money. The fund deposited was the liability of the said cooperative society and interest earned on such deposit was held to be not attributable to the business of the cooperative society. Hence, the Hon’ble High Court held that ratio laid down by the Hon’ble Supreme Court in Totgars Co- operative Sale Society(supra) shall not be applicable where cooperative society is carrying banking business or providing credit facility to members and earns interest on deposit of surplus/idle fund out of profit & gains or capital.
19.7 It is also noted that the identical view was taken by the Hon’ble Jurisdictional High Court of the Karnataka in the subsequent decision in case of Guttigedarara Credit Co-operative Society Ltd. vs. ITO, Ward 2(2), Mysore dated 9th June 2015 reported in [2015] 60 taxmann.com 215.
19.8 Furthermore, the Hon’ble Karnataka High Court followed the principle laid down Tumkur Merchants Souharda Credit Cooperative Ltd(supra) in the subsequent judgment dated 19th February 2018 in the case of Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO in ITA No. 100004 of 2018.
19.9 We also find that the identical view was taken by the Hon’ble High Court of Andhra Pradesh in the case of Commissioner of Income-tax-III, Hyderabad vs. Andhra Pradesh State Cooperative Bank Ltd. dated 7th June 2011 reported in 12 taxmann.com 66. This decision of Hon’ble Andhra High Court was passed after considering the ratio of the Hon’ble Supreme Court in Totgars Co-operative Sale Society(supra) and before the ratio of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd(supra). The relevant extract stands as under:
11. Does section 80P(2)( a) of the Act make a distinction between income received by a cooperative bank from statutory deposits and the income from non-statutory deposit of surplus funds? The answer must be in the negative. The income earned by the cooperative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainly attributable to the business of banking. Indeed as a prudent business practice, no banking company or no entity engaged in the business of banking would keep its amount idle. By parking the funds, immediately not required for the business in other banks, interest can be earned to the benefit of the cooperative society. Every cooperative society is expected to make profits for the benefit of its members. As long as the deposit of the surplus funds in the other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable statutes, the income is certainly attributable to the business of banking. There is no concept of voluntary or non-statutory reserves as urged by the Revenue.
19.10 We further note that the ratio laid down by the Hon’ble Jurisdictional High Court of the Karnataka in Tumkur Merchants Souharda Credit Cooperative Ltd(supra) was subsequently followed by the Hon’ble Kerala High Court in the case of the PCIT vs. Sahyadri Co operative Credit Society Ltd. reported in [2024] 166 taxmann.com 445 (Kerala) and further by the Hon’ble Calcutta High Court in West Bengal State Co-Operative Agriculture & Rural Development Bank Ltd. vs. DCIT reported [2025] 177 taxmann.com 469 (Calcutta)[06-08- 2025]. The relevant finding of the Hon’ble Kerala High Court in above stated case is extracted as under:
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 part of its profits and gains attributable to its business of providing credit facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue 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.
19.11 Likewise, the relevant finding of the Hon’ble Calcutta High Court in the above stated case is extracted as under:
11. In terms of the above decision, the expression ‘attributable to’ being a wider in import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. The facts in the said case were more or less identical to the facts before us. As the interest income so derived or the capital, if not immediately required to be lent to the members, the society/assessee cannot keep the said amount idle and if they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. Bearing in mind the meaning of the words ‘attributable to’ the court proceeded to consider as to the applicability of the judgment of the Hon’ble Supreme Court in Totgars, Co operative Sale Society Ltd. (supra). It was pointed out that the Hon’ble Supreme Court was dealing with the case where the assessee therein, apart from providing credit facility to the members, was also in the business of marketing of agricultural produce grown by its members and the sale consideration received from marketing agricultural produce of its members was retained in many cases and retained amount which was payable to its members from whom produce was bought, was invested in a short term deposit/security.
12. The facts of the case of the assessee before us is entirely different as the amount which was deposited in the bank was not an amount due to the members and it was not the liability of the society to the members and, therefore, the interest earned from such deposits in the bank should be held to be eligible for deduction under section 80P(2)(a)(i) of the Act. Yet again in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO [2015] 55 taxmann.com 447/ 230 Taxman 309 (Kar) identical issue was considered and it was held that where Cooperative Society was engaged in the business of providing credit facilities to its members, they deposited excess amount for short term in banks, interest earned was entitled to be deducted under section 80P of the Act.
19.12 At this point, we also find it pertinent to refer the decision of Hon’ble Gujarat High Court in the case of State Bank of India (SBI) vs. CIT reported [2016] 72 taxmann.com 64 wherein ratio of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) was distinguished by holding the ratio of the Hon’ble Supreme Court in Totgars Co-operative Sale Society(supra) was properly interpreted. The relevant finding of the Hon’ble Gujarat High Court in this respect reads as under:
13. In the opinion of this court, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned under section 80P(2)(a) of the Act. In the case of Totgars Co-operative Sale Society (supra), as rightly submitted by the learned counsel for the respondent, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. This is further clear when one peruses the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. This court is, therefore, of the view that the above decision is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression “profits and gains of business” and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as “investment” are ineligible for deduction under section 80P(2)(a)(i) of the Act. For the above reasons, this court respectfully does not agree with the view taken by the Karnataka in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) High that Court the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law.
19.13 From the preceding discussion of the ratio laid down by the Hon’ble Supreme Court, High Court of Karnataka, Andhra Pradesh, Kerala, Culutta and Gujarat, we note the dispute of whether the interest income earned from deposit or investment of surplus/idle fund out of profit & gains or capital by the cooperative societies engaged in providing credit facilities to the members is squarely covered in favour of the assessee by the ruling of Jurisdictional High Court in the cases of Tumkur Merchants Souharda Credit Cooperative Ltd(supra), Guttigedarara Credit Co-operative Society Ltd. and Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO as well as by the decision of Hon’ble Kerala High court and Calcutta high court as mentioned in preceding paras.
19.14 It well settled position of the law that the Income-tax Appellate Tribunal, though the final fact-finding authority under the Income-tax Act, functions within the judicial hierarchy established under the Constitution. Under Articles 226 and 227 of the Constitution of India, the Hon’ble High Court exercises supervisory jurisdiction over all courts and tribunals within its territorial jurisdiction. Consequently, the Tribunal is bound to follow the law laid down by the jurisdictional High Court while deciding matters arising within that State.
19.15 The principle that subordinate authorities must follow the judgments of superior courts has been firmly established by the Hon’ble Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs [1962] 3 SCR 338 / AIR 1962 SC 1893, wherein it was held that the law declared by the Hon’ble High Court is binding on all authorities and tribunals within its territorial jurisdiction. The relevant finding is extracted below:
Section 167 (8) of the Sea Customs Act can be invoked only if an order issued under s. 3 of the Act was infringed during the course of the import or export. The division Bench of the High Court held that a contravention of a condition imposed by a licence issued under the Act is not an offence under s. 5 of the Act. This raises the question whether an administrative tribunal can ignore the law declared by the highest court in the State and initiate proceedings in direct violation of the law so declared. Under Art 215, every High Court shall be a court of record and shall have all the powers of such a court including the power to punish for contempt of itself. Under Art. 226, it has a plenary power to issue orders or writs for the en- forcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under Art. 227 it has jurisdiction over all courts and tribunals throughout the territories in relation to which it exercise jurisdiction. It would be anomalous to suggest that a tribunal over which the High Court has superint- endence can ignore the law declared by that court and start proceedings in direct violation of it. If a tribunal can do so, all the sub-ordinate courts can equally do so, for there is no specific, provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior tribunal that all the tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working: otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer. We, therefor, hold that the law declared by the highest court in the State is binding on authorities or tribunals under its supreintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceedings contrary to the law laid down by the High Court would be in. valid and the proceedings themselves would be without jurisdiction.
19.16 Further, the binding nature of Hon’ble Jurisdictional High Court decisions on the Tribunal has been reiterated in CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 by the Hon’ble Bombay High Court, wherein it was held that the Tribunal is bound by the decision of the Hon’ble High Court within whose jurisdiction it functions. The Hon’ble Court also clarified that decisions of other High Courts have only persuasive value. The relevant finding is extracted below:
For deciding whose decision is binding on whom, it is necessary to know the hierarchy of the courts. In India, the Supreme Court is the highest court of the country. That being so, so far as the decisions of the Supreme Court are concerned, it has been stated in article 141 of the Constitution itself that: “The law declared by the Supreme Court shall be binding on all courts within the territory of India.” In that view of the matter, all courts in India are bound to follow the decisions of the Supreme Court. Though there is no provision like article 141 which specifically lays down the binding nature of the decision of the High Courts, it is a well-accepted legal position that a single judge of a High Court is ordinarily bound to accept as correct judgments of courts of co-ordinate jurisdiction and of the Division Benches and of the Full Benches of his court and of the Supreme Court. Equally well-settled is the position that when a Division Bench of the High Court gives a decision on a question of law, it should generally be followed by a co-ordinate Bench of the same High Court. If the co-ordinate Bench in the subsequent case wants the earlier decision to be reconsidered, it should refer the question at issue to a larger Bench. It is equally well-settled that the decision of one High Court is not a binding precedent on another High Court. The Supreme Court in Vattiama Champaka Pillai v. Sivathanu Pillai, AIR 1979 SC 1937, dealing with the controversy whether a decision of the erstwhile Travancore High Court can be made a binding precedent on the Madras High Court on the basis of the principle of stare decisis, clearly held that such a decision can at best have persuasive effect and not the force of binding precedent on the Madras High Court. Referring to the States Reorganisation Act, it was observed that there was nothing in the said Act or any other law which exalts the ratio of those decisions to the status of a binding law nor could the ratio decidendi of those decisions be perpetuated by invoking the doctrine of stare decisis. The doctrine of stare decisis cannot be stretched that far as to make the decision of one High Court a binding precedent for the other. This doctrine is applicable only to different Benches of the same High Court. It is also well-settled that though there is no specific provision making the law declared by the High Court binding on subordinate courts, it is implicit in the power of supervision conferred on a superior Tribunal that the Tribunals subject to its supervision would confirm to the law laid down by it. It is in that. ITA No.2552 & 2553/Bang/2025 Page 40 of 44 view of the matter that the Supreme Court in East India Commercial Co, Ltd. v. Collector of Customs, AIR 1962 SC 1893 (at page 1905) declared: “We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it….
19.17 In the absence of a decision of the jurisdictional High Court, the Tribunal may rely upon judgments of other Hon’ble High Courts as persuasive precedents. The Hon’ble Bombay High Court in CIT v. Thana Electricity Supply Ltd. (supra) explained that when conflicting decisions of Hon’ble Non-Jurisdictional High Courts exist, the Tribunal may adopt the view it considers more reasonable.
19.18 Thus, under the constitutional scheme and the doctrine of judicial discipline, a decision of the Hon’ble jurisdictional High Court is binding on the Tribunal, while decisions of other Hon’ble High Courts carry persuasive value and may be followed in the absence of a contrary jurisdictional precedent.
19.19 Hence in our considered view, while deciding the issue of deductibility of interest income from deposit of surplus/idle fund by the cooperative societies engaged in providing credit facilities, we are bound to follow the principles laid down in the case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra), unless material brought on record that the said principle/finding has been overruled by the Hon’ble Supreme Court or the larger bench of the Hon’ble Karnataka High Court or disturbed by the Hon’ble Karnataka High Court in subsequent case.
19.20 Be that as may be and without prejudice to the above, we find that there is statutory requirement & legal obligation imposed on the cooperative society into the business of carrying banking business or providing credit facility to maintain certain deposits, thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the Registrar of Co-operative Societies. Given this statutory compulsion, we find that the interest income arising from these deposits cannot be said that the same is not attributable to carrying banking business or providing credit facility to the members. Therefore, in our considered opinion, such interest income earned from such statutory deposits should be considered as operational income derived in the course of the assessee’s business and consequently qualifies for deduction under section 80P(2)(a)(i) of the Act. In holding so, we also draw support and guidance from the Judgment of Hon’ble Supreme court in case CIT versus Karnataka State cooperative apex bank reported in 251 ITR 194 where in it was held as under:
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. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
19.21 Applying the principle culled out from the elaborate discussion of various judicial pronouncements in the preceding paragraphs of this order, we hold that the assessee is eligible for deduction under section 80P(2)(a)(i) of the Act on the above-compulsory deposit, fixed deposit as well as saving bank interest and dividend income.
19.22 At this juncture it is equally important to note that in several earlier decisions, this Tribunal had taken a view that interest income earned by a co-operative society from deposits placed with banks would not qualify for deduction under section 80P(2)(a)(i) of the Act and the same was liable to be taxed under the head “Income from other sources”.
Accordingly, the claim of deduction under section 80P(2)(a)(i) in respect of such interest income was rejected in those cases.
19.23 However, the legal position now stands clarified by the judgment of the Hon’ble jurisdictional High Court of Karnataka in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra), and other case laws as discussed in preceding paragraphs wherein it has been held that where a co-operative society engaged in the business of providing credit facilities to its members temporarily parks its surplus funds with banks, the interest earned therefrom is attributable to the business of the society and is therefore eligible for deduction under section 80P(2)(a)(i) of the Act.
19.24 Since the decision of the Hon’ble Jurisdictional High Court is binding on this Tribunal, judicial discipline requires that the same be followed. Therefore, to the extent our earlier decisions have taken a contrary view, we respectfully depart from the earlier stand and follow the ratio laid down by the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Accordingly, the issue is now decided in favour of the assessee by granting deduction under section 80P(2)(a)(i) in respect of the interest income in question.
19.25 Before parting it is also equally important to highlight that the learned DR before us quoted the recent judgment of Hon’ble Jurisdictional High Court of Karnataka in the case of BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO in ITA No. 118 of 2025 dated 21st January 2026. The relevant finding of the Hon’ble High Court in the said case is extracted as under:
6. Section 80P(1) of the I.T. Act enables a co-operative society to claim deduction of the income referred to in sub-section (2). Sub-section (2) provides for deduction in respect of the profits and gains of business attributable to the business of banking or providing credit facilities to its members. Section 80P(2)(d) provides deduction of interest income derived by the Co-operative Societies from its investments with any other Co-operative societies. The assessee as made investments in SCDCC Bank which is a Co-operative Bank. Interest income derived from Co-operative Bank is not included as deduction under Section 80P of the I.T. Act. This Court, in M/s. Judicial Employees House Building Co-operative Society Limited v. Income Tax Officer [ITA No.93/2024, dated 16.09.2025], has held that the interest income received from co operative banks is not eligible for deduction under Section 80P of the I.T. Act. We find that the facts and the legal position considered in the aforesaid d ecision apply to the present case in all force.
19.26 From the perusal of the said finding we note that the decision of the Hon’ble High Court in the case of BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO (supra) was in relation to deduction under section 80P(2)(d) of the Act which deals with deduction of interest and dividend income on investments with other cooperatives society/ bank. As the SCDCC bank is a cooperative bank and not cooperative society, it was held that interest income from such cooperative bank is not eligible for deduction u/s 80P(2)(d) of the Act. However, in the present case, we are dealing with deduction under section 80P(2)(a)(i) of the Act which state the whole of the amount of profits and gains of business attributable to business of banking or providing credit facilities to its members shall be deducted. Therefore, the ratio of the Hon’ble Karnataka High court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. is applicable in the given fact whereas ratio in case of BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO (supra) is distinguished.
19.27 In view of the above detailed discussion, we hereby set aside the findings of the learned CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal raised by the assessee is hereby allowed.
20.1 Respectfully following the above-mentioned finding of the coordinate bench of this Tribunal, in identical facts and circumstances, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal raised by the assessee with respect to the claim of deduction u/s 80P(2)(a)(i) of the Act on interest income is hereby allowed.
21. In the result, the appeal of the assessee is hereby allowed.
Order pronounced in the open court on 12th August, 2026
