YESHWANTHAPURA CREDIT CO OPERATIVE SOCIETY,BENGALURU vs. DCIT, CENTRAL CIRCLE-1(4), BENGALURU

Yashwanthapura Credit Cooperative Society Limited [the Assessee/Appellant/Trust] filed these three appeals for Assessment Years 2017–18, 2018–19, and 2020–21 against the consolidated appellate order dated 12 November 2025 passed by the Principal Commissioner of Income Tax (Appeals)-11, Bengaluru [learned CIT(A)]. By that order, the learned CIT(A) disposed of the assessee’s appeals for all three years, which challenged the assessment orders passed by the Income Tax Officer, Ward 6(2)(4), Bengaluru [learned Assessing Officer], under section 143(3) of the Income Tax Act, 1961 on 30 December 2019; under section 143(3) read with sections 143(3A) and 143(3B) on 9 February 2021; and under section 143(3) read with section 144B on 19 September 2022, respectively. The learned CIT(A) dismissed the appeals. The assessee is therefore in appeal before us. 2. We first set out the facts for Assessment Year 2017–18. The learned Assessing Officer noted that the assessee filed its return of income on 26 December 2017 declaring total income at nil and claimed deduction of ₹1,50,52,929 under section 80P of the Income Tax Act. The case was selected for limited scrutiny and notice under section 143(2) was issued on 26 September 2018. Since one of the issues related to deduction under Chapter VI-A of the Act, the learned Assessing Officer asked the assessee to justify its claim under section 80P and to explain why the deduction should not be disallowed in view of the decisions in Citizen Co-operative Society Ltd. v. Assistant Commissioner of Income Tax, dated 8 August 2017, Totgars Co-operative Sale Society Ltd. v. Income Tax Officer, Karnataka, reported in 322 ITR 283, and Principal Commissioner of Income Tax v. Totagars Co-operative Sale Society, reported in 395 ITR 611. 3. The assessee furnished the required details, stating that the income was earned from its members and that it is engaged in the business of providing credit facilities to its members as a cooperative society registered under the Karnataka Cooperative Societies Act, 1959. It further stated that it had claimed deduction under section 80P(2)(a)(i) of the Act on the ground that income of a cooperative society from such activities is exempt. The assessee supported its claim by relying on the decision of the Hon’ble Karnataka High Court in ITA No. 237/2012 dated 27 June 2014 for Assessment Year 2007–08. 4. The learned Assessing Officer held that, in view of the jurisdictional High Court’s decision reported in 395 ITR 611, the assessee’s claim for deduction was not allowable. He noted that the assessee had invested surplus funds in deposits and securities with cooperative banks and societies and had earned interest income of ₹2,27,54,891 and dividend income of ₹70,41,911. According to the learned Assessing Officer, the assessee’s business was to accept deposits from its members, generate surplus funds, and reinvest those funds in banks to earn interest. He further observed that funds available with the assessee were required to be used only for providing credit facilities to members; when such funds were not immediately needed for business purposes, they became temporary surplus funds. Since the assessee invested those surplus funds with banks and cooperative banks and earned interest, the learned Assessing Officer treated the activity as being outside the assessee’s business and assessed the income as income from other sources. He observed that such income could qualify for deduction under section 80P(2)(d) of the Act only if the prescribed conditions were satisfied. Relying on the Karnataka High Court’s decision, the learned Assessing Officer disallowed the assessee’s deduction under section 80P amounting to ₹1,50,52,929. Accordingly, the assessment order dated 30 December 2019 was passed after making the said disallowance. 5. For Assessment Year 2018–19, the assessee filed its return of income on 10 July 2018 at Rs Nil. The return was selected for scrutiny and examined during assessment proceedings. The learned Assessing Officer considered the assessee’s claim for deduction of ₹1,41,46,606 under section 80P of the Act and, for reasons similar to those recorded for Assessment Year 2017–18, denied the deduction. 6. For Assessment Year 2020–21, the assessee filed its return of income on 25 September 2020 declaring income at nil and claimed deduction of ₹77,35,353 under section 80P of the Income Tax Act. The learned Assessing Officer disallowed the deduction for reasons similar to those recorded in the earlier assessment years. Accordingly, the assessment order dated 19 September 2022 was passed by assessing ₹77,35,353, being the interest income on which deduction under section 80P was disallowed. 7. The assessee preferred appeals before the learned CIT(A), who disposed of the appeals for all three assessment years by a common order dated 12 November 2025. In paragraph 5.1 of the appellate order, at page 13 of 17, the learned CIT(A) noted that the assessee had claimed deduction under section 80P(2)(a)(i) of the Income Tax Act and that the Assessing Officer had recorded a factual finding that the assessee earned interest income from funds invested in other cooperative banks, which was not eligible for exemption under section 80P(2)(d) of the Act. The learned CIT(A) further observed that the issue had generated considerable litigation and extensive case law. He then referred to the decision of the Hon’ble Karnataka High Court reported in 395 ITR 611 and discussed its gist, namely that such interest income was not business income but income chargeable to tax under the head “income from other sources”; therefore, deduction under section 80P(2)(d) was not allowable. Accordingly, relying on the binding decision of the Hon’ble Karnataka High Court reported in 395 ITR 611, the learned CIT(A) held that the assessee was not eligible to claim deduction under section 80P(2)(a)(i) on interest income earned by investing surplus funds in cooperative banks and commercial banks. He therefore dismissed the grounds of appeal raised by the assessee for all three assessment years. 8. The assessee is in appeal before us for all three assessment years. The learned authorised representative, Shri Bharath Laxminarayan, filed a synopsis of submissions and a paper book for all three assessment years. He relied on the submissions made before the learned CIT(A), the computation of total income, the assessee’s financial statements and audit reports, the break-up of interest paid and received from various parties, and several board resolutions placed on record. According to him, the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. v. Income-tax Officer, reported in 55 taxmann.com 447, which has been followed by the Hon’ble Karnataka High Court in several subsequent decisions. The principal submission of the learned authorised representative was that the assessee’s claim falls under section 80P(2)(a)(i) of the Income Tax Act and not under section 80P(2)(d). He submitted that the assessee had not made any claim under section 80P(2)(d). He further contended that the assessee is required to safeguard deposits received from its members and remunerate them by paying interest. It must also be able to meet members’ demands for withdrawal of deposits and funds as and when they arise. Therefore, the assessee must maintain a sound system to protect members’ deposits and compensate them for such deposits. For this purpose, it follows an investment policy under which it pays interest and earns interest, both of which form part of its core activity. He submitted that the assessee is accountable to its members and is required to invest funds to earn interest rather than allow monies to remain idle. Thus, funds not immediately lent to borrowers are placed as deposits with other banks as part of the society’s asset-liability management. He further submitted that deposits with other banks are made in accordance with section 58 of the Karnataka Cooperative Societies Act and remain readily available to meet depositors’ demands when they arise. He therefore argued that interest earned on such deposit’s forms part of the assessee’s business of providing credit facilities and is covered by section 80P(2)(a)(i) of the Act. In other words, funds temporarily parked in interest-bearing bank deposits are members’ funds meant for lending to members; parking them temporarily to earn interest does not convert the income into income chargeable under the head “income from other sources”. He accordingly submitted that the relief under section 80P(2)(a)(i) squarely applies to the assessee’s case.

The learned authorised representative further distinguished the decision of the Hon’ble Karnataka High Court reported in 395 ITR 611, on which the learned Assessing Officer had relied. He submitted that the assessee’s claim is not for deduction under section 80P(2)(d) of the Income Tax Act in respect of income chargeable under the head “income from other sources”. Rather, the assessee claims deduction under section 80P(2)(a)(i), contending that the interest income earned by it is chargeable as business income arising from its activity of providing credit facilities to its members. He also relied on several judicial precedents. Referring to the assessee’s case for Assessment Year 2018–19, he noted that the learned Assessing Officer had also relied on the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd., reported in 397 ITR 1. He submitted that the issue was later considered by the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd., reported in 431 ITR 1, where it was held that section 80P is a benevolent provision intended to promote cooperative societies and must be construed accordingly. He further submitted that the Act does not prohibit the assessee from dealing with nominal members; in any event, the assessee had no dealings with non-members. 10. It was strongly submitted that the assessee’s claim under section 80P(2)(a)(i) of the Income Tax Act is in accordance with law and is covered by the decision of the Hon’ble Karnataka High Court, as well as by several decisions of the coordinate benches at Bengaluru allowing similar claims. Therefore, on the principle of consistency also, the assessee’s claim should be allowed. 11. The learned Departmental Representative strongly supported the orders of the lower authorities. He submitted that the interest income earned by the assessee is chargeable to tax under the head “income from other sources” and that such income is not eligible for deduction under section 80P(2)(d) of the Act, in view of the binding decision of the Hon’ble Karnataka High Court reported in 395 ITR 611. He further submitted that the decision of the Hon’ble Karnataka High Court is binding on this Tribunal and cannot be distinguished on the basis of superficial arguments. 12. We have carefully considered the rival submissions and perused the orders of the lower authorities. The facts for all three assessment years show that the assessee is a primary credit cooperative society registered under the Karnataka Cooperative Societies Act, 1959, with the sole objective of providing credit facilities to its members. The assessee accepts deposits from its members and grants loans to them as required. It also undertakes specific welfare activities for its members. The funds deposited in various bank accounts are funds received from members. Interest earned on such deposits forms part of the assessee’s business funds and is therefore chargeable to tax as business income. Further, section 80P(2)(a)(i) of the Income Tax Act provides that the whole of the income attributable to the business of providing credit facilities to members is eligible for deduction under that provision. 13. We note that the Hon’ble Supreme Court, in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC)/ [2021] 279 Taxman 75 (SC)/ [2021] 431 ITR 1 (SC), dated 12 January 2021, held as under: “20. We now come to the judgment of this Court in Citizen Cooperative Society Ltd. (supra). This judgment was concerned with an assessee who was established initially as a mutually aided cooperative credit society, having been registered under section 5 of the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995. As operations of the assessee began to spread over States outside the State of Andhra Pradesh, the assessee got registered under the Multi-State Cooperative Societies Act, 2002 as well. The question that the Court posed to itself was as to whether the appellant was barred from claiming deduction in view of Section 80P (4) of the Income-tax Act - see paragraph 5. After setting out the findings of fact in that case, and the income tax authorities concurrent holding that the society is carrying on banking business and for all practical purposes acts like a co-operative bank, this Court then held as follows: "18. We may mention at the outset that there cannot be any dispute to the proposition that section 80-P of the Act is a benevolent provision which is enacted by Parliament in order to encourage and promote growth of cooperative sector in the economic life of the country. It was done pursuant to the declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (see Bajaj Tempo Ltd. v. CIT [1992] 3 SCC 78]). It is also trite that such a provision has to be construed as to effectuate the object of the legislature and not to defeat it (see CIT v. Mahindra and Mahindra Ltd. [1983] 4 SCC 392. Therefore, it hardly needs to be emphasised that all those cooperative societies which fall within the purview of section 80-P of the Act are entitled to deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to any one or more of such activities which are mentioned in sub-section (2). 19. Since we are concerned here with sub-clause (i) of clause (a) of sub-section (2), it recognises two kinds of cooperative societies, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members. 20. In Kerala State Coop. Mktg. Federation Ltd. v. CIT [1998] 5 SCC 48, this Court, while dealing with classes of societies covered by section 80-P of the Act, held as follows: "6. The classes of societies covered by section 80-P of the Act are as follows: (a) engaged in business of banking and providing credit facilities to its members; ** ** ** 7. We may notice that the provision is introduced with a view to encouraging and promoting growth of cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption." 21. In CIT v. Punjab State Coop. Bank Ltd. [2008 SCC OnLine P&H 2042], while dealing with an identical issue, the High Court of Punjab and Haryana held as follows: "8. The provisions of section 80-P were introduced with a view to encouraging and promoting the growth of the cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The different heads of exemption enumerated in the section are separate and distinct heads of exemption and are to be treated as such. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax, then it has to be seen whether such income fell within any of the several heads of exemption. If it fell within any one head of exemption…It means that a cooperative society engaged in carrying on the business of banking and a cooperative society providing credit facilities to its members will be entitled for exemption under this sub-clause. The carrying on the business of banking by a cooperative society or providing credit facilities to its members are two different types of activities which are covered under this sub-clause. ** ** ** 13. So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provisions of section 80-P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the legislature wanted to restrict the exemption to a primary cooperative society, it was so made clear as is evident from clause (f) with reference to a milk cooperative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative society." The aforesaid judgment of the High Court correctly analyses the provisions of section 80-P of the Act and it is in tune with the judgment of this Court in Kerala State Coop. Mktg. Federation Ltd. [(1998) 5 SCC 48] 22. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a cooperative bank. However, if it is a primary agricultural credit society or a primary cooperative agricultural and rural development bank, the deduction would still be provided. Thus, cooperative banks are now specifically excluded from the ambit of section 80-P of the Act. 23. Undoubtedly, if one has to go by the aforesaid definition of "cooperative bank", the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative to have a licence from Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a cooperative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of section 80-P. 24. So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under section 80-P of the Act is not sub- section (4) thereof. What has been noticed by the assessing officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violation of the provisions of MACSA under which it is formed. It is pointed out by the assessing officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of "nominal members". These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as cooperative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the assessing officer that the activity of the appellant is in violation of the Cooperative Societies Act. Moreover, it is a cooperative credit society which is not entitled to deduction under section 80-P(2)(a)(i) of the Act. 25. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the assessing officer, our purpose would be served by taking note of the following portion of the discussion: "As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality: (i) that no person can earn from him;

An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment:

However, considering that the learned Senior Advocate appearing for the Revenue argued that the concurrent findings of fact in that case were that most of the business of the assessee was conducted illegally with nominal members, who could not be members of such society under the Andhra Pradesh Act, and considering also that, as the assessee engaged in granting loans to the general public, it could not be treated as a co- operative society meant only for its members and providing credit facilities to its members, the appeal by the assessee would fail. It is important to note that no argument was made by the counsel for the assessee in Citizen Cooperative Society Ltd. (supra) that the assessing officer and other authorities under the IT Act could not go behind the registration of the co-operative society in order to discover as to whether it was conducting business in accordance with its bye-laws.”

The Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co- operative Ltd. v. Income-tax Officer, Ward-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka), dated 28 October 2014, held that a cooperative society engaged in providing credit facilities to its members earns profits and gains from that business. If capital not immediately required for lending to members is deposited in a bank to earn interest, such interest income remains attributable to the business of providing credit facilities to members. The society is not carrying on any separate business merely by earning such interest. Accordingly, the interest income forms part of the profits and gains attributable to the activity of banking or providing credit facilities to members and is deductible from gross total income under section 80P. The High Court further noted that the amount invested in banks was not an amount due to members, nor was it shown as a liability in the accounts. It represented profits and gains not immediately required for lending because there were no borrowers at that time. Therefore, depositing such funds in a bank to earn interest did not alter the character of the income, which remained attributable to the business of banking and eligible for deduction under section 80P(1) of the Act. In paragraph 3 of that decision, the Hon’ble High Court also considered the decision of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. v. Income-tax Officer [2010] 322 ITR 283/188 Taxman 282 (SC). 15. Further, the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubli v. Totagars Co-operative Sale Society [2017] 78 taxmann.com 169 (Karnataka)/[2017] 392 ITR 74 (Karnataka), dated 5 January 2017, held that cooperative banks are first to be regarded as cooperative societies and that, in any event, deduction is allowable under section 80P(2)(d) of the Act. 16. The Revenue authorities relied on the decision of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubballi v. Totagars Co- operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka), dated 16 June 2017, where, in paragraph 11, the Hon’ble High Court recorded that the issue before it was: “The bone of contention is that the deduction under Section 80P(2) of the Act is now claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act.” However the claim before us is under the provisions of section 80 P(2)( a)(i) of the Income Tax Act and not under section 80 P(2) (d) of the Income Tax Act and therefore the decision relied upon by the learn it revenue authorities are distinguishable on facts and as well as on the provisions of the law. 17. In view of the above discussion and respectfully following the decision of the Hon’ble Karnataka High Court on deduction under section 80P(2)(a)(i) of the Act, we hold that the assessee is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act. The learned Assessing Officer is therefore directed to grant the assessee the deduction under that provision. 18. In the result, all three appeals filed by the assessee are allowed. Order pronounced in the open court on 30th July, 2026.