ITAT Bangalore: Mandatory SLR Deposits Qualify for Section 80P Deduction — A Clear Demarcation from Voluntary Surplus Investments

Background and Overview

The Income Tax Appellate Tribunal, Bangalore, in the case of Shanteshwar Vividoddeshagala Sahakara Sangha Vs ITO, delivered a significant ruling addressing a recurring controversy faced by co-operative credit societies — whether interest income earned from deposits maintained under statutory obligations qualifies for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

The Tribunal drew a firm and principled distinction between two fundamentally different categories of deposits: those maintained pursuant to a legal mandate under the Karnataka Co-operative Societies Act, 1959, and those representing surplus or idle funds voluntarily invested to generate returns. This distinction, the Tribunal held, is critical in determining eligibility for deduction under Section 80P.

The matter arose out of two separate appeals — ITA No. 2386/Bang/2025 for Assessment Year 2018-19 and ITA No. 2387/Bang/2025 for Assessment Year 2020-21 — both directed against orders of the Commissioner of Income Tax (Appeals)/NFAC dated 18.8.2025. Since the core legal issue was common to both appeals, the Tribunal clubbed them together and disposed of both through a common order pronounced on 12th May, 2026.

Profile of the Assessee and Nature of Business

The assessee, Shanteshwar Vividoddeshagala Sahakara Sangha, is a co-operative society registered under the Karnataka State Co-operative Societies Act, with its registered office located at Horti, District Vijayapur, Karnataka. The primary objects of the society include extending credit facilities to its members and mobilising deposits from members.

For Assessment Year 2018-19, the assessee filed its return of income under Section 139(1) of the Income Tax Act, 1961, declaring a total income of Rs. 9,080/-. The case was subsequently selected for limited scrutiny under the e-Assessment Scheme, 2019, specifically in respect of:

  • Investments, advances, and loans
  • Deductions claimed under Chapter VI-A of the Act

Assessment Proceedings and the Dispute

What the Assessing Officer Found

During scrutiny, the Assessing Officer noted that the assessee had claimed a deduction of Rs. 1,23,82,067/- under Section 80P of the Act, which included interest received from members as well as interest and dividend earned on deposits placed with financial institutions and banks.

A further examination of the Profit & Loss Account revealed that:

  • Rs. 24,90,017/- was credited on account of dividend and interest earned from investments with co-operative banks
  • Rs. 10,000/- was reflected as a gift received from VDCC Bank, Vijayapur

The Assessing Officer took the position that these receipts bore no connection to the core business activity of providing credit to members. Relying on decisions of ITAT Bengaluru, the Hon'ble Delhi High Court, and the jurisdictional Karnataka High Court, the AO held that:

  • The dividend, interest, and gift income aggregating Rs. 25,00,017/- did not qualify for deduction under Section 80P(2)(a)(i) of the Act
  • Such income constituted "Income from other sources" taxable under Section 56

Accordingly, the assessment was completed under Section 143(3) by withdrawing the deduction to that extent and enhancing the total income to Rs. 25,09,097/-.

CIT(A)/NFAC's Stance

The assessee appealed to the CIT(A)/NFAC, which dismissed the appeal. The appellate authority held that irrespective of whether the claim was made under Section 80P(2)(a)(i) or Section 80P(2)(d), the assessee was not entitled to any deduction on income received as interest, dividend, or gift from investments made with co-operative banks. The income was upheld as rightly chargeable under Section 56.

Arguments Before the ITAT

Assessee's Position

The Authorised Representative for the assessee argued vigorously that:

  1. The entire interest income of Rs. 25,00,017/- was attributable to the business of the society and therefore qualified for deduction under Section 80P(2)(a)(i)
  2. Without prejudice to the primary claim, at the very minimum, interest earned on deposits maintained to comply with the Statutory Liquidity Ratio (SLR) requirements and fluid resource obligations under the Karnataka Co-operative Societies Act, 1959 must be treated as business income eligible for deduction
  3. As per the notification/circular No. 104:XMC:92-93 dated 29.9.1992 issued by the Registrar of Co-operative Societies, Government of Karnataka, every credit co-operative society is required to maintain SLR funds of not less than 25% of total Demand and Time Liabilities (DTL)
  4. Under Section 57 of the Karnataka Co-operative Societies Act, 1959, every society must transfer not less than 25% of net profits to a reserve fund annually, and such reserve fund cannot be deployed as working capital but must be deposited into a co-operative bank

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