Section 80P Deduction Upheld: Bangalore ITAT Holds Bank Interest Earned by Credit Co-operative Society Is Business Income; Nominal Members Cannot Destroy Mutuality

Case Overview

Case Name: Sri Gayathri Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)
Appeal Number: ITA No. 2614/Bang/2025
Date of Order: 17/08/2026
Assessment Year: 2017-18
Forum: Income Tax Appellate Tribunal, Bangalore

Background and Context

A significant ruling has emerged from the Bangalore bench of the Income Tax Appellate Tribunal concerning the eligibility of credit co-operative societies to claim deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The case involved Sri Gayathri Credit Co-operative Society Ltd., a credit co-operative society duly registered under the Karnataka Co-operative Societies Act, 1959, which was exclusively engaged in providing credit facilities to its members.

The central dispute revolved around two intertwined questions:

  1. Whether the presence of nominal members in a co-operative society destroys the principle of mutuality, thereby disentitling the society from claiming deduction under Section 80P.
  2. Whether interest income earned by depositing temporarily idle funds with a District Central Co-operative Bank qualifies as business income attributable to credit operations, making it eligible for deduction under Section 80P(2)(a)(i).

Facts of the Case

For Assessment Year 2017-18, the assessee filed its return of income on 17.08.2017, declaring total income of Rs. 1,81,770/- after claiming deduction of Rs. 29,42,348/- under Section 80P of the Income Tax Act, 1961. The return was initially processed under Section 143(1) on 02.03.2018, accepting the income as declared.

Subsequently, the case was selected for scrutiny under CASS, and notices were issued under Section 143(2) and Section 142(1) of the Act.

During assessment proceedings, the Assessing Officer (AO) noted the following from the financial statements:

  • The assessee had earned interest income of Rs. 26,42,517/- from deposits placed with District Central Co-operative Bank, Hassan.
  • The statement of income reflected business income of Rs. 31,24,117/-.
  • A nominal membership fee of Rs. 900/- had been received from nominal members.

The assessee's position was straightforward — the funds deposited with the bank were temporarily surplus amounts that were otherwise deployed in providing credit to members. The interest arising therefrom was, therefore, inextricably linked to the core credit business and constituted an integral part of business profits eligible for deduction under Section 80P(2)(a)(i).

Assessing Officer's Position

The AO rejected the assessee's claim on two distinct grounds:

Ground 1: Defeat of Mutuality Due to Nominal Members

The AO observed that the assessee's membership comprised two distinct categories — regular members and nominal members — with materially different rights and privileges. The AO reasoned that:

  • Nominal members contributed to the society's pool of funds.
  • However, the benefits flowed exclusively to regular/permanent members.
  • This asymmetry in contribution and benefit violated the foundational principle of mutuality.