Bangalore ITAT Allows Section 80P(2)(a)(i) Deduction on Interest Income from Bank Deposits for Credit Co-operative Society; Distinguishes Totgars Precedent

Case Overview

Case Name: Nagapura Credit Co Operative Society Vs ITO (ITAT Bangalore)
Appeal Number: ITA 370/BANG/2026
Date of Order: 30/07/2026
Assessment Year: 2023-24
Forum: ITAT Bangalore

Background and Factual Matrix

Nagapura Credit Co-operative Society, a registered credit co-operative society whose principal business activity consists of extending credit facilities exclusively to its members, challenged the appellate order dated 19 August 2025 passed by the National Faceless Appeal Centre, Delhi (CIT(A)). The CIT(A) had affirmed the assessment order dated 7 March 2025, framed under Section 143(3) read with Section 144B of the Income-tax Act, 1961, wherein the assessee's total income was assessed at Rs. 1,56,03,018.

The central dispute before the Bangalore ITAT revolved around whether interest income of Rs. 1,56,03,018 earned by the assessee from deposits maintained with co-operative banks, commercial banks, and other financial institutions is eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961, or whether such income is chargeable under the head "Income from Other Sources" and thus disentitled from any deduction under Section 80P.

Grounds Raised by the Assessee

The assessee pressed the following substantive grounds before the Tribunal:

1. That the orders passed under Section 250 and Section 143(3) of the Income-tax Act, 1961 are contrary to law, facts, equity, and principles of natural justice, and are consequently liable to be set aside.

2. That the CIT(A) committed an error in rejecting the deduction claimed under Section 80P(2)(a)(i), notwithstanding that the assessee is a duly registered credit co-operative society exclusively engaged in providing credit facilities to its members and satisfies all statutory conditions for availing such deduction.

3. That interest income of Rs. 51,68,727 relates to statutory and reserve fund deposits which the assessee is mandatorily required to maintain under the Karnataka Co-operative Societies Act, 1959, and the Rules thereunder. The following precedents were relied upon in support:

   • Siddhartha Pattina Sahakari Sangha Niyamita v. ITO (ITA No. 2113/Bang/2024, order dated 29.05.2025) — held that interest earned on statutory/reserve fund deposits maintained as per the Karnataka Co-operative Societies Act is attributable to the business of providing credit facilities to members and qualifies for deduction under Section 80P(2)(a)(i), distinguishing Totgars Co-operative Sale Society Ltd.
   • Yedamangala Vyavasaya Seva Sahakari PACS Ltd. v. ITO — held that statutory reserve funds compulsorily maintained under the Karnataka Co-operative Societies Act do not represent surplus funds, and interest earned thereon retains the character of business income eligible for deduction under Section 80P(2)(a)(i).

4. That the remaining interest income of Rs. 1,04,34,291 arises from deposits made out of operational business funds sourced from member deposits, temporarily placed with co-operative banks pending their deployment in lending operations. The following decisions were cited:

   • Shree Sharada Credit Co-operative Society Ltd. v. ITO (ITA Nos. 1315 & 1316/Bang/2025, order dated 05.12.2025) — interest earned on operational fund deposits temporarily parked with co-operative banks constitutes business income eligible for deduction under Section 80P(2)(a)(i).
   • M/s. Sree Maruthi Cooperative Housing Society, Bengaluru v. ITO, Ward-7(2)(3), Bengaluru — interest earned on deposits made pursuant to statutory and mandatory requirements under the Co-operative Societies Act does not shed its character as business income and qualifies for deduction under Section 80P(2)(a)(i).

5. That the CIT(A) erred in applying the ratio of Totgars Co-operative Sale Society Ltd. v. ITO (322 ITR 283) in a mechanical and indiscriminate manner without appreciating that the said decision pertains to a marketing co-operative society and is factually distinguishable from a credit co-operative society engaged exclusively in providing credit facilities to members.

6. That the lower authorities failed to follow binding and persuasive judicial precedents of the ITAT Bangalore Bench, which consistently hold that interest earned by credit co-operative societies on statutory/reserve funds and operational business funds has a direct nexus with the business of providing credit facilities, qualifying for deduction under Section 80P(2)(a)(i).