SAGARA CREDIT COOPERATIVE SOCIETY LIMITED,BENGALURU vs. ITO WARD 2(2)(1), BENGALURU

The solitary issue raised is whether the assessee is entitled to deduction under section 80P of the Act on interest income Page 1 of 5 earned from deposits with cooperative banks. The assessee filed its return of income on 5 July 2018, claiming deduction of ₹ 68,81,090 under section 80P. The case was selected for scrutiny to verify the deduction claimed. The assessee is registered under the Karnataka Cooperative Societies Act and is engaged in accepting deposits from, and providing credit facilities to, its members. During assessment, the Assessing Officer noticed that the assessee had invested surplus funds in fixed deposits with cooperative banks and earned interest income of ₹ 2,64,041. The assessee explained that the investments were made in compliance with statutory requirements relating to reserves and surplus funds under the Karnataka Cooperative Societies Act, and that the income formed part of its business income from providing credit facilities to members.

The Assessing Officer rejected the claim, relying on judicial precedents, and held that the interest income of ₹ 2,64,041 was not eligible for deduction under section 80P. The income was accordingly assessed separately. On appeal, the learned CIT(A) confirmed the disallowance, holding that the interest earned on fixed deposits with cooperative banks was not deductible under section 80P.

We have heard Shri Madhukar Hegde, Chartered Accountant, appearing for the assessee, and Shri Ganesh R. Ghale, Standing Counsel, appearing for the Revenue.

We find that the assessee’s principal activity is to accept deposits from its members and provide credit facilities for them. During that business, the assessee placed members’ funds in fixed deposits with cooperative banks. Under section 80P(2)(a)(i), a cooperative society is entitled to deduction in Page 2 of 5 respect of profits and gains attributable to the business of banking or providing credit facilities to its members. On the facts of the present case, the interest income arises from funds connected with the assessee’s lending and borrowing activity with its members.

The assessee is a cooperative society engaged in accepting deposits from, and providing credit facilities to, its members. The dispute is whether interest earned from cooperative banks should be treated as business income eligible for deduction under section 80P, or as income from other sources. The learned Authorized Representative submitted that the issue is covered in favour of the assessee by the decisions of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income Tax Officer, Ward-1, Tumkur [2015] 55 taxmann.com 447 (Karnataka), and Pr. Commissioner of Income Tax v. Totagars Co-operative Sale Society.

The learned Departmental Representative submitted that the issue is covered in favour of the Revenue by the decisions in Totagars Co-operative Sale Society, including [2017] 395 ITR 611 and [2017] 83 taxmann.com 140 (Karnataka).

Section 80P allows deduction of income specified in sub-section (2)where such income forms part of a cooperative society’s gross total income. For a cooperative society engaged inbanking or providing credit facilities to its members, the whole of the profits and gains attributable to that activity is deductible. The question is whether interest received from cooperative banks qualifies for deduction under section 80P(2)(a)(i). The assessee contends that such receipts are business income attributable to its activity of providing credit facilities to members. We find that the issue is covered in favour of the assessee by decisions of the Hon’ble Karnataka High Court.

We also note that the Assessing Officer relied on another decision of the Hon’ble Karnataka High Court, which held that interest earned from cooperative banks is taxable as income from other sources and not as business income, and that deduction under section 80P(2)(d)is not allowable on such interest income.

Coordinate benches have held that, where conflicting decisions of the Hon’ble Karnataka High Court exist, the decision whose facts are closer to the case before the Tribunal should be followed. Here, the facts are closer to the decisions relied upon by the assessee. Accordingly, the interest income is eligible for deduction under section 80P(2)(a)(i), and the assessee’s claim is allowed.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 22nd June, 2026 Sd/- (PRASHANT MAHARISHI) VICE PRESIDENT Bangalore, Dated, the 22nd June, 2026. *VM* Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. CIT(A)