The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has allowed the appeal of a credit co-operative society and held that interest earned on bank deposits out of funds attributable to its business of providing credit facilities to members is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

The bench of Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) rejected the department’s contention that the presence of nominal or associate members defeated the principle of mutuality. Relying upon the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd. v. CIT and consistent decisions of the Karnataka High Court, the ITAT held that nominal and associate members recognised under the Karnataka Co-operative Societies Act cannot automatically be treated as non-members or members of the general public for denying the Section 80P benefit.

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The assessee was a credit co-operative society registered under the Karnataka Co-operative Societies Act, 1959 and was engaged in providing credit facilities to its members. For AY 2017-18, it filed its return declaring total income of Rs. 1,81,770, after claiming a deduction of Rs. 29,42,348 under Section 80P.

The return was initially processed under Section 143(1) of the Income Tax Act. Subsequently, the case was selected for scrutiny under CASS, following which notices under Sections 143(2) and 142(1) were issued. During the assessment, the Assessing Officer examined the interest income earned by the society from deposits. The assessment record noted interest income of Rs. 26,42,517 from deposits, while the society had claimed the Section 80P deduction on the footing that the interest was attributable to its credit-facility business.

The society maintained that it was exclusively engaged in providing credit facilities to its members and that funds representing the earnings of this business were temporarily deposited with banks for short periods when they were not immediately required for lending. According to the society, the resulting interest therefore remained attributable to its core business activity.

The Assessing Officer, however, took a different view.

The Assessing Officer noted that the society had received a fee of Rs. 900 from nominal members and concluded that it was providing credit facilities to two categories of persons—regular members and nominal members.

According to the AO, the rights and privileges of the two categories were different and the existence of separate categories defeated the principle of mutuality. The AO relied upon the Supreme Court’s decision in Citizen Co-operative Society Ltd. v. ACIT. The assessment order also proceeded on the footing that the society had earned income from persons other than its regular members.

The AO further treated the interest earned from deposits as “income from other sources”, rather than business income eligible for deduction under Section 80P(2)(a)(i). The AO also rejected an alternative claim under Section 80P(2)(d), relying upon the Karnataka High Court’s decision in PCIT v. Totgars Co-operative Sales Society. Consequently, the entire Section 80P deduction was disallowed and the total assessed income was determined at Rs. 31,24,117.

The society challenged the assessment before the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre.

The CIT(A)/NFAC dismissed the appeal. It held that the society had kept money in deposits with its Member District Co-operative Bank, Hassan, and earned interest from those deposits. According to the appellate authority, Section 80P(2)(a)(i) provided deduction for profits and gains from providing credit facilities to members, but not for interest earned on deposits.

The dispute consequently reached the ITAT.

The assessee argued that the entire interest income was attributable to its business of providing credit facilities to members.

The society relied upon the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO, contending that surplus funds arising from its credit-facility business could not be kept idle and that interest earned by temporarily depositing those funds remained connected with its business activity.

It also argued that the Karnataka Co-operative Societies Act did not prohibit the admission of nominal or associate members and that the District Co-operative Bank with which the funds were deposited was itself a member of the society.

The Revenue defended the orders of the lower authorities and contended that interest received from co-operative banks should be assessed under the head “income from other sources”. It relied, among other things, on the Karnataka High Court’s decision in Belve Vyavasaya Seva Sahakari Sangha v. Commissioner of Income Tax, ITA No. 118 of 2025, dated January 21, 2026.

The Tribunal first considered whether the existence of nominal or associate members prevented the society from claiming deduction under Section 80P(2)(a)(i).

The ITAT found that the Supreme Court’s judgment in Mavilayi Service Co-operative Bank Ltd. v. CIT, Calicut supported the assessee’s position. It observed that the mere presence of nominal or associate members could not, by itself, constitute a ground for denying the Section 80P deduction.

The Tribunal specifically examined the definition of “member” under the Karnataka Co-operative Societies Act, 1959. It noted that Section 2(f) of the Karnataka Act includes nominal and associate members.

Since the Income Tax Act does not independently define “member” for purposes of Section 80P(2)(a)(i), the Tribunal held that the expression has to be understood in the context of the State legislation under which the co-operative society is formed. On that basis, transactions with nominal or associate members could not automatically be characterised as transactions with non-members or the general public.

The Tribunal therefore concluded that the Assessing Officer was not justified in denying the Section 80P deduction merely on the ground that the society had nominal members.

The more significant issue before the ITAT concerned the character of interest earned on deposits with co-operative and commercial banks.

The Tribunal relied heavily on its recent decision in Sri Kengal Credit Co-operative Society Limited v. ITO, ITA Nos. 238 & 331/Bang/2026, dated August 4, 2026.

In that decision, the Tribunal had considered whether interest earned by a co-operative society engaged exclusively in providing credit facilities to its members, from temporary deposits of surplus business funds, constituted business income eligible for Section 80P(2)(a)(i) deduction.

The Tribunal noted that where funds generated from the society’s credit-facility business were not immediately required for lending because there were no immediate borrowers, placing those funds in banks to earn interest did not amount to undertaking a separate business.

Instead, such interest was considered attributable to the society’s business of providing credit facilities to members.

The ITAT placed particular emphasis on the expression “attributable to” used in Section 80P(2)(a)(i).

Relying upon the Supreme Court’s judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT, the Tribunal observed that “attributable to” has a wider meaning than “derived from”. The wider expression is intended to cover receipts having a nexus with the relevant business even though they may not arise directly from the immediate conduct of that business.

The Tribunal also relied on the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Co-operative Ltd., which had held that where a co-operative society earns profits from providing credit facilities to members and temporarily deposits funds that are not immediately required for lending, the interest earned on such deposits can be regarded as attributable to its credit-facility business.

An important part of the Tribunal’s reasoning was its treatment of the Supreme Court’s decision in Totgars Co-operative Sale Society Ltd.

The ITAT noted that Totgars involved a materially different factual situation. In that case, the co-operative society was also engaged in marketing agricultural produce of its members. Amounts retained from the sale consideration payable to members were invested in short-term deposits. Those amounts represented liabilities payable to the members and were reflected on the liability side of the balance sheet.

By contrast, in the present case, the funds placed with banks were not amounts payable to members and were not liabilities of the society. They represented business profits that were temporarily not required for lending.

The Tribunal therefore found that the interest generated from those funds had a direct nexus with the society’s credit-facility business and was consequently attributable to that business.

The ITAT also considered the Karnataka High Court’s decision in Guttigedarara Credit Co-operative Society Ltd. v. Income-tax Officer and reiterated that interest earned from temporary investment of funds that are part of the society’s business profits can qualify for deduction where the income is attributable to the business of providing credit facilities to members.

The Tribunal further referred to the Karnataka High Court’s decision in Lalitamba Pattina Souharda Sahakari Niyamita v. ITO. The High Court had followed the reasoning in Tumkur Merchants and held that interest earned by a co-operative society from bank investments could be attributable to its business of banking or providing credit facilities to members.

The High Court had also emphasised that Section 80P(2)(d) and Section 80P(2)(a)(i) operate in distinct fields and that a claim under one provision cannot simply be rejected by conflating it with the requirements of the other.

The Bangalore ITAT held that interest earned by the society from investments with co-operative banks and commercial banks was attributable to its activity of providing credit facilities to its members.

Since the assessee had claimed the interest income under Section 80P(2)(a)(i), the Tribunal directed the Assessing Officer to allow the deduction as claimed.

The Tribunal consequently allowed the appeal filed by the assessee. The order was pronounced in open court on August 17, 2026.

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