Statutory SLR Deposits Save 80P Deduction – ITAT Bangalore Draws Clear Line Between Mandatory Funds & Idle Surplus!

Shanteshwar VividoddeshagalaSahakara Sangha Vs ITO (ITAT Bangalore)

Statutory SLR Deposits Save 80P Deduction – ITAT Bangalore Draws Clear Line Between Mandatory Funds & Idle Surplus!

The Bangalore ITAT held that a co-operative credit society is entitled to deduction u/s 80P(2)(a)(i) on interest earned from deposits maintained under the statutory requirements of the Karnataka Co-operative Societies Act, 1959. The Tribunal observed that where deposits are compulsorily maintained as SLR/fluid resources, the interest earned therefrom is “attributable to” the business of providing credit facilities to members and hence qualifies for deduction.

The Tribunal distinguished between mandatory statutory deposits and idle/surplus funds voluntarily parked to earn interest. It held that interest earned on surplus funds invested beyond statutory requirements cannot automatically qualify for deduction u/s 80P(2)(a)(i) and may instead fall under the head “Income from other sources”. However, even in such cases, the assessee would be entitled to deduction of proportionate expenditure u/s 57.

Importantly, the ITAT clarified that interest/dividend earned from investments with another co-operative society may still qualify for deduction u/s 80P(2)(d). The matter was remanded to the AO to determine the quantum of statutory deposits required under law and segregate eligible and non-eligible interest accordingly.

The Tribunal relied upon landmark Supreme Court rulings including Karnataka State Co-operative Apex Bank (251 ITR 194), Mehsana District Central Co-operative Bank (251 ITR 522) and Cambay Electric Supply (113 ITR 84) to emphasize the wider scope of the expression “attributable to” used in section 80P.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These appeals at the instance of the assessee are directed against the separate orders of ld. CIT(A)/NFAC both dated 18.8.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1079697778(1) for the assessment year 2018-19 & vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1079698467(1) for the assessment year 2020-21 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). Since the issue involved in both these appeals is common in nature, these are clubbed together, heard together and disposed of by this common order for the sake of convenience and brevity.

2. For the purpose of adjudication, we take ITA No.2386/Bang/2025 for the AY 2018-19 as the lead year. In this appeal, the assessee has raised the following grounds of appeal:

3. The brief facts of the case are that the assessee is a cooperative society registered under the Karnataka State Co-operative Societies Act having registered office at Horti, Dist: Vijayapur, Karnataka. The main objective of society is to provide credit facilities to its members and collect deposit from the members. The assessee society filed its return of income u/s 139(1) of the Act for the AY 2018-19 on 13.8.2018 by declaring total income of Rs.9080/-. Thereafter, the case was selected for limited scrutiny assessment under the e-assessment scheme, 2019 on the following issues:-

i. Investments/Advances/Loans.

ii. Deduction from total income under Chapter VI-A.

Accordingly, the notices u/s 143(2) as well as 142(1) of the Act was issued along with the questionnaire. In response, the assessee society duly submitted its reply which had been taken on record by the AO.

3.1 During the course of assessment proceedings, the AO observed that the assessee society had claimed deduction of Rs.1,23,82,067/- u/s 80P of the Act which was earned as interest from its members and dividend & interest from deposits made in financial institutions/banks. Further, on going through the profit & loss account of the society, it was seen that an amount of Rs.24,90,017/- was credited towards dividend and interest on investment in Co-operative banks. Also Rs.10,000/- was shown as gift from VDCC Bank, Vijayapur. The AO was of the opinion that since the above income is clearly not attributable to the activity of the assessee society of providing credit facilities to its members or its operational income, this income does not qualify for deduction u/s 80P of the Act. The AO by relying decisions of ITAT Bengaluru as well as Hon’ble Delhi High Court and Hon’ble Jurisdictional High Court of Karnataka held that the dividend and interest income earned by the assessee society amounting to Rs.24,90,017/- along with the gift earned from VDCC Bank, Vijayapur of Rs.10,000/- are not eligible for deduction u/s 80P of the Act and accordingly held that such dividend and interest income falls in the category of “Other income” and is required to be taxed u/s 56 of the Act. Thus, the AO completed the assessment proceedings by withdrawing the claim of deduction u/s 80P of the Act to the extent of Rs.25,00,017/- and added the same to the total income of the assessee under the head “Income from other sources” and concluded the assessment proceedings u/s 143(3) of the Act on a total modified income of Rs.25,09,097/-.

4. Aggrieved by the aforesaid order of the AO passed u/s 143(3) of the Act on 13.2.2021, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

5. The ld. CIT(A)/NFAC dismissed the appeal of the assessee by holding that the assessee is not eligible to claim deduction on the income earned from interest, dividends and gifts on the investments made with the cooperative banks u/s 80P of the Act irrespective of the fact that whether such claim was made u/s 80P(2)(a)(i) of the Act or u/s 80P(2)(d) of the Act and accordingly held that the said income had rightly been taxed as income from other sources u/s 56 of the Act.

6. Again aggrieved by the order of ld. CIT(A)/NFAC dated 18.8.2025, the assessee has filed the present appeals before this Tribunal. The assessee has also filed a paper book comprising 14 pages containing therein the relevant provisions of Karnataka Co-operative Societies Act,1959, English version of circular issued by the Registrar of Co-operative Societies, Government of Karnataka along with the financials for the AY 2018-19 & AY 2020-21.

7. Before us, the ld. A.R. of the assessee vehemently submitted that the assessee is entitled for the benefit of deduction amounting to Rs.25,00,017/- u/s 80P(2)(a)(i) of the Act as the entire interest is attributable to the business of the assessee. Without prejudice, the assessee claimed that they are entitled for the benefit of deduction to such portion of interest from the cooperative banks/other banks in respect of mandatory maintenance of statutory deposits/fluid resources as legally bound under the Karnataka Co-operative Society Act.

8. The ld. D.R. on the other hand, supported the order of the authorities below and vehemently submitted that as the assessee had not earned the interest, dividend & gift from the members of the society and hence as rightly held by the authorities below the same are neither liable for deduction u/s 80P(2)(a)(i) of the Act nor u/s 80P(2)(d) of the Act.

9. We have heard the rival submissions and perused the materials available on record. It is an undisputed fact that assessee is a cooperative society registered under the Karnataka State Co-operative Societies Act and is carrying on the business of providing financial/credit facility to its members only and collecting deposits only from the members. The crux of the issue in the present two appeals of the assessee are whether the interest earned from the co-operative banks which were claimed to deposited due to the statutory compulsion under the Karnataka Co-operative Societies Act, 1959 is eligible to the claim deduction u/s 80P(2)(a)(i) of the Act or not? The contention of the assessee is that assessee being a credit cooperative society has to comply with the provisions of Karnataka Cooperative Societies Act, 1959 and rules made thereunder as well as circular and notification issued by the Government of Karnataka. Further, as per the notification/circular 104:XMC:92-93 dated 29.9.1992 issued by the Registrar of Cooperative Societies, Government of Karnataka, the credit cooperative society has to keep statutory liquid ratio (SLR) fund not less than 25% of the total demand and time liabilities (DTL). Further, as per section 57 of the Karnataka Cooperative Societies Act, 1959, every year a cooperative society shall out of its net profit in any year transfer an amount not being less than 25% of the profits to the reserve fund and such reserve fund cannot be used as working capital of the society and shall be deposited into the cooperative bank and hence it is claimed by the assessee that there is a business nexus to the earning of interest income and hence eligible for deduction u/s 80P(2)(a)(i) of the Act. We also take a note of the fact that for the financial year 2017-18 relating to the AY 2018-19, the assessee had DTL of Rs.53,47,58,818/- and had to maintain SLR of Rs.13,36,89,705/-. However, the assessee had maintained SLR of Rs.2,91,53,163/- and earned the interest of Rs.14,02,008/- which in our opinion should be treated as attributable to the business of the assessee and eligible for deduction u/s 80P(2)(a)(i) of the Act.

9.1 However, we are also of the considered opinion that if the idle fund/surplus money which are neither required to be deposited for maintaining the fluid resources nor statutorily required to be deposited under the Karnataka State Cooperative Societies Act are invested/deposited into co-operative bank/schedule bank with an intention to earn interest income only as these funds are not immediately required for the purposes of the business, then it cannot be said that such interest income earned are attributable to the business of the assessee. Therefore, such interest income earned on the surplus fund can neither be treated as an operational income of the assessee nor it can be said to be attributable to the business of the assessee. Had the intention of the legislature was to treat all the interest income earned by the society are attributable to the business of the assessee only then the provisions of section 80P(2)(d) of the Act would be completely redundant. According to section 14 of the Act, all the income shall, for the purposes of charge of income tax and computation of income, be classified under the 5 heads of income as specified therein. Therefore, we do not agree with the contention of the assessee that the entire interest and gift of Rs.25,00,017/- are allowable as deduction u/s 80P(2)(a)(i) of the Act.

9.2 Further, on considering the argument raised by the AR of the assessee that the assessee is entitled for the deduction u/s 80P(2)(a)(i) of the Act to such portion of the interest from cooperative banks in respect of mandatorily maintenance of fluid resources as statutorily required under the Karnataka Cooperative Societies Act and rules thereunder and only the balance of interest over and above the mandatory SLR was liable to be charged u/s 56 of the Act, we take a note of the fact that the certain deposits in question as contended by the AR of the assessee was not voluntarily made by the assessee society for the investment purposes but were instead statutorily mandated by the Karnataka Cooperative Societies Act, 1959. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operation without prior approval from the Registrar of Cooperative Society. We also take note of the fact that if the statutory funds are not invested in the prescribed mode, the business of the assessee may also get hampered/effected due to the violation of these statutory provisions. Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the Cooperative banks are entitled for deductions u/s 80P(2)(a)(i) of the Act. In holding so, we also draw our support and guidance from the judgement of Hon’ble Supreme Court reported in 113 ITR 84 in the case of Cambay Electrical Supply Industrial Co. Ltd. Vs. CIT which has considered the term “attributable” and held as follows:

“As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business” of the specific industry (here generation and distribution of society) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from” been used, it could have with some force been contented that a balance charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression “derived from”, as for instance, in Section 80J. In our view, since the expression of wider import, namely “attributable to” has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity”

9.3 Further, we also draw support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank reported in 251 ITR 194 wherein 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 purpose of carrying on the banking business, the income derived there from 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 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.”

9.4 Further, the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. v. Income-tax Officer Reported in (SC) :(2001) 251 ITR 522 had again reiterated by relying on its own judgment delivered in the case of Karnataka State Co-operative Apex Bank’s case (supra) as under-

“Insofar as the interest income upon statutory reserves is concerned, the question must be answered in favour of the assessee, in the light of the judgment delivered by us in Karnataka State Co-operative Apex Bank’s case (supra).”

In view of the above principles laid down by Hon’ble Supreme Court if the income is attributable to the profits & gains of business of the society, then the assessee society is entitled for deduction u/s 80P(2)(a)(i) of the Act.

9.5 Further, In the case of ClT Vs Nawanshahar Central Cooperative Bank Ltd. [2007] 160TAXMAN 48(SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head “Profits and Gains of Business and Profession”. Even though the abovementioned decision was in the context of co-operative societies /Banks claiming deduction under section 80P (2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 as per the CBDT Circular No. 18/2015 dated 02/11/2015.

9.6 The Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer Ward-V, Tumkur reported in [2015] 230 Taxman 309 had also held as under-

“7. The word ‘attributable’ used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v.CIT [1978] 113 ITR 84 (SC) as under:

‘As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature, has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression “derived from”, as, for instance, in section-80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.’

8. Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider 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. 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.”

9.7 However, we are also conscious to the fact that the details of quantum of amount necessary to be deposited to comply with the Karnataka Co-operative Society Act, 1959 is not provided by the assessee to the AO. Therefore, we, in the interest of justice and fair play are inclined to set aside this issue to the file of AO with a direction to compute the required quantum of amounts needs to be deposited as per the statutory requirement and allow the claim of the deduction u/s 80P(2)(a)(i) of the Act of the corresponding interest income irrespective of the fact that the investment were made by the co-operative society in co-operative Banks or scheduled banks.

9.8 Furthermore, without prejudice to the above findings, we are also inclined to consider the argument/contention of the Revenue. In the event that the AO found that any amount of investment over and above the mandatory statutory limits, the AO may consider the claim of deduction u/s 80P(2)(d) of the I.T. Act and accordingly, we direct the A.O. to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act.

9.9 The ld. DR profoundly relied upon the decision of Hon’ble High Court of Karnataka in the case of Totgars Cooperative Sale Society [2017] 83 taxmann.com 140/395 ITR 611 (Karnataka) which held that the intention of legislature is clear that Co-operative banks are not specie of genus cooperative society, which would entitle to exemption or deduction under the Special Provisions of chapter VIA in the form of section 80P of the Act.

9.10 We are of the considered opinion that the Hon’ble Supreme Court in the case of Kerala State co-operative agricultural and rural development bank Ltd. KSCARDB v. the Assessing Officer, Trivandrum and Ors. Reported in (2023) 458 ITR 384 analyzed, whether the assessee therein could be treated as a “co-operative Bank” within the meaning of sec. 80P(4) of the Act. The Hon’ble Supreme Court considered the above issue in case of an assessee who is a state level Agricultural and Rural Development Bank, governed as a cooperative society, under the relevant state cooperative societies Act, and was engaged in providing credit facilities to its members who were cooperative societies only. On facts, the assessee therein claimed deduction under Section 80P (2)(a)(i) of the Act. The Ld. AO disallowed the deduction under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Ld.AO therein held that the appellant/assessee is a “co-operative bank” and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. This was upheld by the Ld.CIT(A) and the Tribunal. The decision of the Tribunal was confirmed by Hon’ble Kerala High Court.

9.10.1 The Apex Court analyzed the legal framework, relevant provisions under the co-operative societies Act, NABARD Act, provisions of sec. 80P under the Income Tax Act, 1961, RBI Act, the Banking Regulation Act and the various judicial precedents on similar issues. The observations of Hon’ble Supreme Court in Paras 14.3 and 15.8 are relevant that read as under: –

“14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court:

i) Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” is significant as it indicates the general “drift” of the provision.

ii) Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”.

iii) Thirdly, the gross total income must include income that is referred to in sub-section (2).

iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being “engaged in”, inter alia, carrying on the business of banking or providing credit facilities to its members.

v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P.

vi) Sixthly, the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.

vii) Seventhly, under Section 80P(1)(c), the co-operative societies must be registered either under Co-operative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c).

viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other co-*operative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole.

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15.8. Since the words ‘bank’ and ‘banking company’ are not defined in the NABARD Act, 1981, the definition in sub-clause (i) of clause (a) of Section 56 of the BR Act, 1949 has to be relied upon. It states that a cooperative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co-operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of Section 5 of the BR Act, 1949 is seen, it means any company which transacts the business of banking in India and as already noted banking business is defined in clause (b) of Section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank and in such a case, Section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co-operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci). Whereas a co-operative bank is in the nature of a banking company which transacts the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949. But if a cooperative society does not transact the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a cooperative bank. Then the definitions under the NABARD Act, 1981 would not apply. If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act.”

9.10.2 In any event Hon’ble Supreme Court in the decision has elaborately analyzed the requirement of a cooperative bank that could fall within the exception of section 80P(4) of the Act. Based on such principle analyzed by Hon’ble Supreme Court and respectfully following the view taken by the Hon’ble Karnataka High Court in the case of PCIT & Anr. Vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and the Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, we are also of the considered opinion that interest earned on any amount of investment over and above the required statutory limits from such commercial/cooperative banks that fall within the definition of “banking company’ as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head ‘income from other sources’ as held by the jurisdictional High Court of Karnataka in the case of Pr. CIT v. Totagars Co-operative Sale Society reported in (2017) 395 ITR 611.

9.11 Insofar as AR of the assessee’s claim that if interest income is to be assessed as income from other sources, necessarily, the cost of fund and related administrative expenses in respect of earning such interest income should be allowedas deduction u/s 57 of the I.T. Act, 1961, we find an identical issue was considered by the Hon’ble jurisdictional High Court in the case of Totagars Co-operative Sales Society Ltd. v. ITO reported in [2015] 58 Taxmann.com 35 (Karnataka) (judgment dated 25.03.2015). The relevant findings of the Hon’ble High Court, read as follows: –

“11. Having heard the learned counsel for the parties and perusing the records and in the light of the finding recorded by The Hon’ble Supreme Court that the interest income earned by the appellant falls within the category of “other income” what falls for consideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deduction in respect of proportionate costs incurred as permissible under Section 57.

12. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to Supra, the income earned on the interest is declared as “other income” falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from “other sources”, the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the next income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee.

13. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits.”

9.12 The assessee has not raised the plea before the Income tax Authorities that it has to be given deduction u/s 57 of the Act, in respect of expenditure for earning the interest income. However, in spite of such plea not being raised beforethe lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only the net income has to be taxed (i.e., gross receipt minus allowable expenditure), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of the Hon’ble jurisdictional High Court in the case of Totagars Sale Co-operative Society Limited v. ITO (supra). Accordingly, the issue of deduction u/s 57 of the I.T. Act is restored to the file of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources. If so, the same shall be allowed as deduction u/s 57 of the Act. The assessee is directed to co-operate with the revenue and furnish all the necessary details/records/evidence.

9.13 In view of the above discussions/observations, we are inclined to remit the issue back to the file of AO for determining/computing the Business Income, Income from other sources, eligible deduction u/s 80P of the Act with the following Observations–

i) The Interest received exclusively from the credit facilities provided to its members will be treated as operating Profit of the Co-operative society & eligible for deduction u/s 80P(2)(a)(i) of the Act.

ii) Further, the Interest income earned out of the Statutory deposits/maintain fluid resources are attributable to the business activity of the co-operative society & hence also eligible for deduction u/s 80P(2)(a)(i) of the Act irrespective of the fact that the interest is earned from the co-operative bank and/or scheduled bank.

iii) For an amount of interest earned on investment over and above the required statutory limits from such scheduled/cooperative banks that fall within the definition of “banking company’ as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head ‘income from other sources’ & the deduction under section 80P(2)(d) is not available on such Interest on investment. However the cost of fund and related administrative expenses in respect of earning such interest income should also be allowed as deduction u/s 57 of the Act.

iv) In respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income is eligible for deduction u/s 80P(2)(d) of the Act.

v) In respect of interest earned on investment out of the surplus fund/idle funds over and above as required statutorily can not be said to be attributable to the business of the assessee & therefore deduction u/s 80P(2)(a)(i) can not be allowed on such interest income.

Needless to say, a reasonable opportunity of being heard must be granted to the assessee. The assessee is also directed to submit all the relevant details as well as the breakups as per our observation above.

10. In the result, appeal filed by the assessee is partly allowed for statistical purposes.

11. The assessee has raised the following grounds of appeal in ITA No.2387/Bang/2025 for the AY 2020-21:

12. Since the issues in this appeal are exactly similar to that in ITA No.2386/Bang/2025 except change in figures, the findings and result shall mutatis mutandis apply to the present appeal and hence this appeal is also partly allowed for statistical purposes.

13. In the result, both these appeals are partly allowed for statistical purposes.

Order pronounced in the open court on 12^th May, 2026