ITAT Rules in Favor of Co-op Society: Bank Interest Income Eligible for 80P Deduction [Read Order]

The Pune Bench of Income Tax Appellate Tribunal (ITAT) held that interest income earned by primary co-operative societies from bank deposits qualifies for tax deduction under Section 80P(2)(a)(i), overturning the tax department's classification of such income as taxable "other sources" revenue. The ruling reinforces the beneficial interpretation of tax provisions meant to support rural financial institutions.

Sangli-based Shree Mahaveer Dhamani Vikas Society Limited, a primary agricultural credit co-operative society that had claimed ₹4.36 lakh interest earned from Sangli District Central Co-operative Bank as exempt under Section 80P. The ITO and CIT(A) had denied the deduction, citing the Karnataka High Court's Totagars Co-operative Society verdict which distinguished between core business income and ancillary interest earnings.

Judicial Member Vinay Bhamore and Accountant Member Dr. Dipak P. Ripote sided with the society, relying on the Andhra Pradesh High Court's Vavveru Co-operative Rural Bank judgment (2017) which held that interest income remains "attributable to" a co-op's main business when derived from surplus funds. The tribunal emphasized the critical difference between the facts in Totagars - where funds belonged to members - and the present case where deposits originated from the society's own operational surplus.

The ITAT noted that cooperatives must temporarily park funds between lending cycles, and penalizing them for prudent treasury management would defeat Section 80P's purpose. "When statute uses 'attributable to' rather than 'derived from', it indicates legislative intent to allow broader deductions for co-ops," the order stated, referencing the AP High Court's interpretation. The bench also cited its own 2024 decision in Yashwant Nagari Sahakari Patsanstha which reached similar conclusions.

This marks the latest in a series of pro-cooperative rulings from Pune ITAT, which has consistently held that interest income from scheduled and co-operative banks qualifies for 80P benefits when linked to primary credit activities. The decision provides much-needed clarity for rural credit societies that face disproportionate compliance burdens despite their developmental mandate.

For Shree Mahaveer Dhamani Vikas Society, the verdict validates their position that all income streams including temporary bank deposits naturally flow from their core business of member lending. The tribunal's refusal to artificially segregate interest income recognizes the operational realities of small co-ops that lack sophisticated treasury management options available to commercial banks.

The order serves as a reminder to tax authorities that cooperative societies deserve beneficial interpretation of deduction clauses, given their socio-economic role in rural credit delivery. By distinguishing Totagars on facts and following the AP High Court's broader reading of "attributable to", the ITAT has reinforced judicial protection for cooperative banking models.

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