Section 80P(2)(a)(i) Deduction on Co-operative Bank Deposits: Bangalore ITAT Rules in Favour of Credit Co-operative Society
Overview
The Bangalore Bench of the Income Tax Appellate Tribunal has delivered a significant ruling in Jagadguru Mouneshwar Pattin Sahakari Sangh Niyamit Kerur Vs ITO (ITAT Bangalore), ITA No. 2884/Bang/2026, holding that interest income earned by a credit co-operative society from deposits placed with co-operative banks qualifies for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961. The order was pronounced on 21 September 2026.
The ruling carries particular weight because it draws a precise legislative boundary between Section 80P(2)(a)(i) and Section 80P(2)(d) — two distinct provisions that have frequently been conflated in lower-authority proceedings — and applies the jurisdictional Karnataka High Court's binding precedent to settle the controversy in favour of the assessee.
Background: Nature of the Assessee and the Dispute
The assessee, a co-operative credit society registered under the Karnataka Co-operative Societies Act, 1959, carried on the business of accepting deposits from its members and extending credit facilities to them in accordance with its bye-laws. This constitutes the defining character of a credit co-operative society, and the assessee's activities were confined to this core function.
For Assessment Year 2016-17, the assessee had not originally filed a return of income. Based on departmental information indicating that the assessee had deposited cash amounting to approximately ₹3,45,80,000 in Shri Veerpulikeshi Co-op Bank Ltd during the relevant year, a show cause notice under Section 148A(b) of the Income-tax Act, 1961 was issued. After completion of proceedings under Section 148A, a notice under Section 148 followed. In response, the assessee filed its return on 17/03/2023 declaring nil total income.
During the course of reassessment, the Assessing Officer noted that the assessee had received interest income of ₹8,80,946 from deposits held with co-operative banks, including amounts maintained as a statutory reserve fund. The assessee's position before the Assessing Officer was that:
- Its sole business was operating as a credit co-operative society — receiving deposits from members and providing loans and advances to them.
- Surplus cash generated from this business was temporarily placed with co-operative banks.
- The interest earned from such placement was directly attributable to the society's credit business and therefore eligible for deduction under
Section 80P(2)(a)(i). - Even the statutory reserve fund deposits were maintained pursuant to the provisions of the Karnataka Co-operative Societies Act, 1959, and the interest thereon equally arose in the course of business.
Assessing Officer's Stand: Interest Classified as Income from Other Sources
The Assessing Officer, vide order dated 16/03/2024 passed under Section 147 read with Section 144B, rejected the assessee's contentions in their entirety. The entire interest income of ₹8,80,946 — covering both co-operative bank deposits and reserve fund deposits — was assessed under the head "Income from Other Sources", on the ground that such income could not be treated as attributable to the business of providing credit facilities to members.