My society earns interest on deposits with a co-operative bank. Is it deductible under 80P(2)(d)?
On the Karnataka view, no. Interest on idle or surplus funds keeps its character as income from other sources whether the depositee is a scheduled bank or a co-operative bank, and clause (d) speaks only of 'any other co-operative society' — the words 'co-operative banks' are absent from it.
Decided by the High Court (Karnataka High Court - Dr. Vineet Kothari and Dr. H.B. Prabhakara Sastry, JJ. (IT Appeal Nos. 100051-100054 and 100064 to 100068 of 2016)) on 2017-06-16, reported as [2017] 83 taxmann.com 140 (Karnataka) / (2017) 395 ITR 611 (Karnataka) / (2017) 297 CTR 158 (Karnataka). It bears on section 80P, section 80P(2)(d), section 80P(2)(a)(i), section 80P(4), section 56, section 194A(3)(v) of the Income Tax Act 1961, in Co-operative Societies and Deductions & Disallowances matters.
A revenue decision, binding in Karnataka and applied by the Bangalore benches, so any (2)(d) claim there has to deal with it. The Court also read the phrase 'in relation to' in s.80P(4) widely enough to take in interest a society earns from a co-operative bank. It is in the library because it is what the department will cite.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a co-operative society at Sirsi engaged mainly in marketing agricultural produce grown by its members; it also accepts deposits from and provides credit to members and runs kirana stores, rice mills, livestock, a van section, medical shops, an areca-nut trading section, lodging and goods carriage (para 10). Having lost before the Supreme Court for assessment years 1991-92 to 1999-2000 in Totgar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283, where interest on surplus funds placed with scheduled banks was held taxable under s.56 and not deductible under s.80P(2)(a)(i), it shifted its deposits to the Kanara District Central Co-operative Bank Ltd. and for assessment years 2007-08 to 2011-12 claimed 100 per cent deduction of the interest under s.80P(2)(d) instead, on the footing that a co-operative bank is itself a co-operative society. The Assessing Officer rejected the claim; the Commissioner (Appeals) and the Tribunal allowed it. Ten appeals were before the Court - five by the revenue on the deduction, and five by the assessee on the rejection of its cross-objections about the validity of reassessment under ss.147/148 (paras 1, 8(V) and 11).
The revenue's appeals were allowed and the assessee's appeals dismissed, with no order as to costs (para 27). The questions were answered in favour of the revenue: interest earned by the society during assessment years 2007-08 to 2011-12 on investments made with the co-operative bank is not eligible for deduction under s.80P(2)(d) (para 26). The character of interest on idle or surplus funds does not change according to whether the depositee is a scheduled bank or a co-operative bank; it remains income not arising from the society's business operations, and the Supreme Court's decision in the society's own case governs (para 23). The separate question on the validity of reassessment under ss.147/148, raised in the assessee's appeals, was held to have become academic once the deduction was denied, and was not decided (para 25).
The Court held that the assessee's argument missed two points: the character of interest on investments or deposits does not change according to the identity of the depositee, and what the Supreme Court had decided against this very society was that interest on surplus and idle funds not immediately required for business is not business income under s.28 but income from other sources under s.56, whereas s.80P(2) requires the income to be business or operational income (para 12). On the text, clause (d) speaks of investments with any other co-operative society and the words 'Co-operative Banks' are missing from it; a co-operative bank may have the corporate skeleton of a co-operative society but its business is banking, regulated by the Banking Regulation Act 1949, and only primary agricultural credit societies remain within s.80P (para 13). Sub-section (4) was enacted to exclude s.80P altogether in relation to any co-operative bank, and the words 'in relation to' are wide enough to take in interest earned by a society from a co-operative bank; the depositee here was admittedly not a primary agricultural credit society (para 14). The exclusion of co-operative banks from the definition of co-operative society in s.194A(3)(v) by the Finance Act 2015 confirmed the legislative intent (para 15), and the failure to amend clause (d) at the same time was not fatal to the revenue's case (para 16). Exemption and deduction provisions are to be strictly construed, and what the Supreme Court held not deductible could not become deductible merely because the depositee bank changed (para 17). Importantly, the Court dealt with a coordinate Bench of the same Court which had on 5 January 2017 dismissed the revenue's appeal against this same society for assessment year 2012-13 in ITA No. 100069 of 2016: it declined to follow that order for want of any detailed discussion of the Supreme Court decision, while expressly agreeing with the coordinate Bench that a co-operative bank is a specie of the genus co-operative society (paras 18 and 19). It drew support from the Gujarat High Court in State Bank of India v. CIT [2016] 389 ITR 578 and the Punjab and Haryana High Court in CIT v. Punjab State Co-operative Agricultural Development Bank Ltd. [2016] 389 ITR 607, and distinguished Udaipur Sahakari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 315 ITR 21 (SC) as a s.80P(2)(e) case (paras 20 to 23).
The words 'Co-operative Banks' are missing in clause (d) of subsection (2) of Section 80P of the Act.
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Handle my notice → Ask a CA on WhatsAppOn the Karnataka view, no. Interest on idle or surplus funds keeps its character as income from other sources whether the depositee is a scheduled bank or a co-operative bank, and clause (d) speaks only of 'any other co-operative society' — the words 'co-operative banks' are absent from it. This was decided by the High Court (Karnataka High Court - Dr. Vineet Kothari and Dr. H.B. Prabhakara Sastry, JJ. (IT Appeal Nos. 100051-100054 and 100064 to 100068 of 2016)) and bears on section 80P, section 80P(2)(d), section 80P(2)(a)(i), section 80P(4), section 56, section 194A(3)(v) of the Income Tax Act 1961. It is reported as [2017] 83 taxmann.com 140 (Karnataka) / (2017) 395 ITR 611 (Karnataka) / (2017) 297 CTR 158 (Karnataka). A revenue decision, binding in Karnataka and applied by the Bangalore benches, so any (2)(d) claim there has to deal with it. The Court also read the phrase 'in relation to' in s.80P(4) widely enough to take in interest a society earns from a co-operative bank. It is in the library because it is what the department will cite. If it applies to you, the first step is this: Check which High Court binds your assessment before framing a (2)(d) claim on co-operative bank interest.
The assessee is a co-operative society at Sirsi engaged mainly in marketing agricultural produce grown by its members; it also accepts deposits from and provides credit to members and runs kirana stores, rice mills, livestock, a van section, medical shops, an areca-nut trading section, lodging and goods carriage (para 10). Having lost before the Supreme Court for assessment years 1991-92 to 1999-2000 in Totgar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283, where interest on surplus funds placed with scheduled banks was held taxable under s.56 and not deductible under s.80P(2)(a)(i), it shifted its deposits to the Kanara District Central Co-operative Bank Ltd. and for assessment years 2007-08 to 2011-12 claimed 100 per cent deduction of the interest under s.80P(2)(d) instead, on the footing that a co-operative bank is itself a co-operative society. The Assessing Officer rejected the claim; the Commissioner (Appeals) and the Tribunal allowed it. Ten appeals were before the Court - five by the revenue on the deduction, and five by the assessee on the rejection of its cross-objections about the validity of reassessment under ss.147/148 (paras 1, 8(V) and 11). The matter was decided on 2017-06-16 by the High Court (Karnataka High Court - Dr. Vineet Kothari and Dr. H.B. Prabhakara Sastry, JJ. (IT Appeal Nos. 100051-100054 and 100064 to 100068 of 2016)). On those facts the High Court held as follows. The revenue's appeals were allowed and the assessee's appeals dismissed, with no order as to costs (para 27). The questions were answered in favour of the revenue: interest earned by the society during assessment years 2007-08 to 2011-12 on investments made with the co-operative bank is not eligible for deduction under s.80P(2)(d) (para 26). The character of interest on idle or surplus funds does not change according to whether the depositee is a scheduled bank or a co-operative bank; it remains income not arising from the society's business operations, and the Supreme Court's decision in the society's own case governs (para 23). The separate question on the validity of reassessment under ss.147/148, raised in the assessee's appeals, was held to have become academic once the deduction was denied, and was not decided (para 25).
The Court held that the assessee's argument missed two points: the character of interest on investments or deposits does not change according to the identity of the depositee, and what the Supreme Court had decided against this very society was that interest on surplus and idle funds not immediately required for business is not business income under s.28 but income from other sources under s.56, whereas s.80P(2) requires the income to be business or operational income (para 12). On the text, clause (d) speaks of investments with any other co-operative society and the words 'Co-operative Banks' are missing from it; a co-operative bank may have the corporate skeleton of a co-operative society but its business is banking, regulated by the Banking Regulation Act 1949, and only primary agricultural credit societies remain within s.80P (para 13). Sub-section (4) was enacted to exclude s.80P altogether in relation to any co-operative bank, and the words 'in relation to' are wide enough to take in interest earned by a society from a co-operative bank; the depositee here was admittedly not a primary agricultural credit society (para 14). The exclusion of co-operative banks from the definition of co-operative society in s.194A(3)(v) by the Finance Act 2015 confirmed the legislative intent (para 15), and the failure to amend clause (d) at the same time was not fatal to the revenue's case (para 16). Exemption and deduction provisions are to be strictly construed, and what the Supreme Court held not deductible could not become deductible merely because the depositee bank changed (para 17). Importantly, the Court dealt with a coordinate Bench of the same Court which had on 5 January 2017 dismissed the revenue's appeal against this same society for assessment year 2012-13 in ITA No. 100069 of 2016: it declined to follow that order for want of any detailed discussion of the Supreme Court decision, while expressly agreeing with the coordinate Bench that a co-operative bank is a specie of the genus co-operative society (paras 18 and 19). It drew support from the Gujarat High Court in State Bank of India v. CIT [2016] 389 ITR 578 and the Punjab and Haryana High Court in CIT v. Punjab State Co-operative Agricultural Development Bank Ltd. [2016] 389 ITR 607, and distinguished Udaipur Sahakari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 315 ITR 21 (SC) as a s.80P(2)(e) case (paras 20 to 23). In the words reproduced by the source cited on this page: "The words 'Co-operative Banks' are missing in clause (d) of subsection (2) of Section 80P of the Act." The decision followed or applied Totgar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 / 188 Taxman 282 (SC); State Bank of India v. CIT (2016) 389 ITR 578 / 72 taxmann.com 64 (Guj)(HC); CIT v. Punjab State Co-operative Agricultural Development Bank Ltd. (2016) 389 ITR 607 / 76 taxmann.com 307 (P&H)(HC).
It was decided by the High Court on 2017-06-16 and is reported as [2017] 83 taxmann.com 140 (Karnataka) / (2017) 395 ITR 611 (Karnataka) / (2017) 297 CTR 158 (Karnataka). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 80P, section 80P(2)(d), section 80P(2)(a)(i), section 80P(4), section 56, section 194A(3)(v), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The revenue's appeals were allowed and the assessee's appeals dismissed, with no order as to costs (para 27). The questions were answered in favour of the revenue: interest earned by the society during assessment years 2007-08 to 2011-12 on investments made with the co-operative bank is not eligible for deduction under s.80P(2)(d) (para 26). The character of interest on idle or surplus funds does not change according to whether the depositee is a scheduled bank or a co-operative bank; it remains income not arising from the society's business operations, and the Supreme Court's decision in the society's own case governs (para 23). The separate question on the validity of reassessment under ss.147/148, raised in the assessee's appeals, was held to have become academic once the deduction was denied, and was not decided (para 25). It arises in Co-operative Societies and Deductions & Disallowances matters, on section 80P, section 80P(2)(d), section 80P(2)(a)(i), section 80P(4), section 56, section 194A(3)(v) of the Income Tax Act 1961, and was decided by Karnataka High Court - Dr. Vineet Kothari and Dr. H.B. Prabhakara Sastry, JJ. (IT Appeal Nos. 100051-100054 and 100064 to 100068 of 2016). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the funds were not idle or surplus but arose in the course of the credit business, take the point on the character of the funds rather than on clause (d) alone. Put the conflict of High Court authority on record at the first appellate stage rather than leaving it to be raised later.
Still good law. Applied by the Gujarat High Court in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. v. ACIT [2022] 140 taxmann.com 602 (Gujarat), decided 4 January 2022, which at paras 13 and 14 relied on this decision for the propositions that interest earned from investments in a bank which is not a co-operative society is not deductible under s.80P(2)(d) and that the Finance Act 2015 amendment to s.194A(3)(v) shows co-operative banks are not a specie of the genus co-operative society; on that footing the reopening of the assessment there was upheld. The full report of this judgment carries no citator entry recording an SLP, a stay or a reversal, but the Supreme Court file was traced independently on 7 September 2026 and special leave petitions against this judgment do exist: SLP(C) Nos. 26314-26321 of 2017, SLP(C) No. 26817 of 2017 and SLP(C) Nos. 553-569 of 2018. They were part heard before M.R. Shah and A.S. Bopanna JJ on 27 October 2021 and listed for 10 November 2021 'as part heard'; that part-heard status has since lapsed and the file has passed through later Benches, with orders of 3 July 2023 (A.S. Bopanna and M.M. Sundresh JJ, 'List the matters after four weeks on a non-miscellaneous day'), 20 November 2024, 27 November 2024, and 15 January 2025 before J.B. Pardiwala and R. Mahadevan JJ, 'Post these matters for final disposal on 19-2-2025'. No disposal could be traced after that date, and no Supreme Court judgment on s.80P(2)(d) was found on a most-recent search restricted to the Supreme Court. Treat the petitions as pending and possibly close to disposal, and check the current status before advising; do not assume the question has been decided either way. Two qualifications. Within Karnataka a coordinate Bench had decided the same question the other way for this same society for assessment year 2012-13 on 5 January 2017 in ITA No. 100069 of 2016, reported at [2017] 78 taxmann.com 169 (Karnataka); this Bench declined to follow it (paras 18-19) rather than overruling it, so the intra-Karnataka position rests on which decision a later Bench prefers. And the conflict with the Gujarat line in Pr. CIT v. Ashwinkumar Arban Cooperative Society Ltd. [2024] 168 taxmann.com 314 (Gujarat) and Pr. CIT v. Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. [2025] 176 taxmann.com 71 (Gujarat) is live. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Live conflict, on two levels. Within Karnataka, a coordinate Bench of the same Court had decided the identical question in this same society's favour for assessment year 2012-13 on 5 January 2017 in ITA No. 100069 of 2016, reported at [2017] 78 taxmann.com 169 (Karnataka). That is the decision the entry previously recorded as uncorroborated; it exists. This Bench refused to follow it, saying it contained no detailed discussion of the Supreme Court's decision in the society's own case (paras 18-19), but it did not overrule it, and it expressly agreed with the coordinate Bench that a co-operative bank is a specie of the genus co-operative society. So the point of departure is not whether a co-operative bank is a co-operative society - this Court accepted that it is - but whether the Supreme Court's ruling on the character of interest on idle funds governs a claim reframed under clause (d). Across States, the Gujarat High Court in Pr. CIT v. Ashwinkumar Arban Cooperative Society Ltd. [2024] 168 taxmann.com 314 and Pr. CIT v. Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. [2025] 176 taxmann.com 71, both in this library, hold the opposite; yet the earlier Gujarat decision in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. [2022] 140 taxmann.com 602 applied this judgment against the assessee. No Supreme Court decision resolving the split was found. Note also that the reassessment question raised in the assessee's own five appeals was left undecided as academic (para 25). The judgment does not state the amounts of interest in dispute for each assessment year. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The revenue's appeals were allowed and the assessee's appeals dismissed, with no order as to costs (para 27). The questions were answered in favour of the revenue: interest earned by the society during assessment years 2007-08 to 2011-12 on investments made with the co-operative bank is not eligible for deduction under s.80P(2)(d) (para 26). The character of interest on idle or surplus funds does not change according to whether the depositee is a scheduled bank or a co-operative bank; it remains income not arising from the society's business operations, and the Supreme Court's decision in the society's own case governs (para 23). The separate question on the validity of reassessment under ss.147/148, raised in the assessee's appeals, was held to have become academic once the deduction was denied, and was not decided (para 25).
TaxSphere, “PCIT v Totagars Co-operative Sale Society”, https://taxnotice.vittsphere.com/caselaw/case/pcit-v-totagars-80p-2d-karnataka/ (validity last checked 2026-08-19)
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We are a co-operative bank. The TDS officer says we should have deducted tax under s.194A on fixed deposit interest paid to co-operative housing societies that are not our members, and has treated us as an assessee in default. Is he right?
Our co-operative society pays interest to members, to other co-operative societies and to outsiders. Which of these payments carry a TDS obligation under s.194A?
The Tribunal refused my society's s.80P(2)(a)(i) claim on bank fixed deposit interest saying it had already been given s.80P(2)(d). Can the two clauses be treated as interchangeable, and if the interest really is income from other sources, what happens to my cost of funds?
The Assessing Officer taxed our interest on deposits under s.56 by simply citing Totgars, without answering our case that the deposits are a statutory reserve we are obliged to maintain and that the interest we paid on borrowings should be netted against it. Is that order sustainable?
