My society invested surplus funds in short-term bank deposits. Is that interest covered by 80P?
No. Interest on surplus funds not required for immediate business use is not attributable to providing credit to members or to marketing their produce. It is income from other sources under s.56 and outside s.80P(2)(a)(i).
Decided by the Supreme Court (S.H. Kapadia and Aftab Alam, JJ) on 2010-02-08, reported as (2010) 322 ITR 283 (SC); 188 Taxman 282; 229 CTR 209; Civil Appeal Nos. 1622 to 1629 of 2010. It bears on section 80P, section 80P(2)(a)(i), section 56, section 57, section 148 of the Income Tax Act 1961, in Co-operative Societies and Deductions & Disallowances matters.
A revenue decision, and the one every officer quotes the moment a society shows interest income. Its reach is narrower than the quotation suggests: the money there was sale proceeds retained for members and stood as a liability in the society's books, and later benches have confined it to that fact pattern.
Binding on every court and authority in India.
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The assessee was a co-operative society whose business was to provide credit facilities to its members and to market their agricultural produce. It often retained the sale proceeds payable to members; that retained amount stood as a liability in its balance sheet. Funds not immediately required for business were invested in short-term bank deposits and government securities, and the interest was claimed as business income eligible for deduction under s.80P(2)(a)(i). The assessments for 1991-92 to 1999-2000 (excluding 1995-96) were reopened by notices under s.148. The Assessing Officer taxed the interest under s.56 as income from other sources; the Tribunal and the Karnataka High Court agreed. The society appealed on that question and also challenged the reopening, contending that the notice served on 31 May 2001 preceded the Additional Commissioner's sanction of 8 June 2001.
The appeals were dismissed. Interest arising on surplus not required for business purposes, invested in short-term deposits and securities, is not profits and gains of business and is not attributable to providing credit facilities to members or to marketing their agricultural produce; it is income from other sources chargeable under s.56 and outside s.80P(2)(a)(i) (paras 10 and 11). The Court noted that the interest in question was not interest received from members on credit provided to them, and expressly confined the judgment to the facts of the case (paras 10 and 11). On the reassessment limb, the Court declined to disturb the Tribunal's finding of fact that sanction under s.151 existed before 31 May 2001, distinguishing the grant of sanction from its communication (para 13). One question raised below was left unanswered and remitted to the High Court: whether, the interest being taxed under s.56, the society is entitled to deduct the cost of funds and proportionate administrative and other expenses under s.57 (para 14).
Section 80P(2)(a) allows 'the whole of the amount of profits and gains of business attributable to' the specified activities. The Court gave weight to those words: the income for which deduction is sought must be operational income, not other income accruing to the society (para 11). The retained sale proceeds were a liability in the society's books, and the interest on their investment strictly accrued to the members' account, so it could not be described as profits and gains of the society's business or as attributable to either specified activity (para 10). The Court rejected the alternative argument that the source or head of income is irrelevant under s.80P: it declined to read s.80P(2)(a)(i) by analogy with Explanation (baa) to s.80HHC, s.80HHD(3) and s.80HHE(5), holding that each provision must be read in the context of its own subject matter, and it set aside the authorities cited because they concerned co-operative banks, which this society was not (para 11). On the reopening, it treated the sanction question as one of fact concluded by the Tribunal, adding that no form is prescribed for a sanction and that grant and communication are distinct (para 13).
The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society.
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Handle my notice → Ask a CA on WhatsAppNo. Interest on surplus funds not required for immediate business use is not attributable to providing credit to members or to marketing their produce. It is income from other sources under s.56 and outside s.80P(2)(a)(i). This was decided by the Supreme Court (S.H. Kapadia and Aftab Alam, JJ) and bears on section 80P, section 80P(2)(a)(i), section 56, section 57, section 148 of the Income Tax Act 1961. It is reported as (2010) 322 ITR 283 (SC); 188 Taxman 282; 229 CTR 209; Civil Appeal Nos. 1622 to 1629 of 2010. A revenue decision, and the one every officer quotes the moment a society shows interest income. Its reach is narrower than the quotation suggests: the money there was sale proceeds retained for members and stood as a liability in the society's books, and later benches have confined it to that fact pattern. If it applies to you, the first step is this: Establish where the deposited money came from and whether it was a liability owed to members — that fact drove the result.
The assessee was a co-operative society whose business was to provide credit facilities to its members and to market their agricultural produce. It often retained the sale proceeds payable to members; that retained amount stood as a liability in its balance sheet. Funds not immediately required for business were invested in short-term bank deposits and government securities, and the interest was claimed as business income eligible for deduction under s.80P(2)(a)(i). The assessments for 1991-92 to 1999-2000 (excluding 1995-96) were reopened by notices under s.148. The Assessing Officer taxed the interest under s.56 as income from other sources; the Tribunal and the Karnataka High Court agreed. The society appealed on that question and also challenged the reopening, contending that the notice served on 31 May 2001 preceded the Additional Commissioner's sanction of 8 June 2001. The matter was decided on 2010-02-08 by the Supreme Court (S.H. Kapadia and Aftab Alam, JJ). On those facts the Supreme Court held as follows. The appeals were dismissed. Interest arising on surplus not required for business purposes, invested in short-term deposits and securities, is not profits and gains of business and is not attributable to providing credit facilities to members or to marketing their agricultural produce; it is income from other sources chargeable under s.56 and outside s.80P(2)(a)(i) (paras 10 and 11). The Court noted that the interest in question was not interest received from members on credit provided to them, and expressly confined the judgment to the facts of the case (paras 10 and 11). On the reassessment limb, the Court declined to disturb the Tribunal's finding of fact that sanction under s.151 existed before 31 May 2001, distinguishing the grant of sanction from its communication (para 13). One question raised below was left unanswered and remitted to the High Court: whether, the interest being taxed under s.56, the society is entitled to deduct the cost of funds and proportionate administrative and other expenses under s.57 (para 14).
Section 80P(2)(a) allows 'the whole of the amount of profits and gains of business attributable to' the specified activities. The Court gave weight to those words: the income for which deduction is sought must be operational income, not other income accruing to the society (para 11). The retained sale proceeds were a liability in the society's books, and the interest on their investment strictly accrued to the members' account, so it could not be described as profits and gains of the society's business or as attributable to either specified activity (para 10). The Court rejected the alternative argument that the source or head of income is irrelevant under s.80P: it declined to read s.80P(2)(a)(i) by analogy with Explanation (baa) to s.80HHC, s.80HHD(3) and s.80HHE(5), holding that each provision must be read in the context of its own subject matter, and it set aside the authorities cited because they concerned co-operative banks, which this society was not (para 11). On the reopening, it treated the sanction question as one of fact concluded by the Tribunal, adding that no form is prescribed for a sanction and that grant and communication are distinct (para 13). In the words reproduced by the source cited on this page: "The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society." The decision followed or applied Affirms Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 272 (Kar.)(HC).
It was decided by the Supreme Court on 2010-02-08 and is reported as (2010) 322 ITR 283 (SC); 188 Taxman 282; 229 CTR 209; Civil Appeal Nos. 1622 to 1629 of 2010. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 80P, section 80P(2)(a)(i), section 56, section 57, section 148, 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 appeals were dismissed. Interest arising on surplus not required for business purposes, invested in short-term deposits and securities, is not profits and gains of business and is not attributable to providing credit facilities to members or to marketing their agricultural produce; it is income from other sources chargeable under s.56 and outside s.80P(2)(a)(i) (paras 10 and 11). The Court noted that the interest in question was not interest received from members on credit provided to them, and expressly confined the judgment to the facts of the case (paras 10 and 11). On the reassessment limb, the Court declined to disturb the Tribunal's finding of fact that sanction under s.151 existed before 31 May 2001, distinguishing the grant of sanction from its communication (para 13). One question raised below was left unanswered and remitted to the High Court: whether, the interest being taxed under s.56, the society is entitled to deduct the cost of funds and proportionate administrative and other expenses under s.57 (para 14). It arises in Co-operative Societies and Deductions & Disallowances matters, on section 80P, section 80P(2)(a)(i), section 56, section 57, section 148 of the Income Tax Act 1961, and was decided by S.H. Kapadia and Aftab Alam, JJ. 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. Where the deposits arose in the course of the credit business rather than as parked member money, argue the wider 'attributable to' language instead of conceding the point. If the funds are genuinely surplus, expect assessment under s.56 and fight on characterisation of the funds rather than on the wording of the section.
Still good law. Applied against the same society by the Karnataka High Court in Pr. CIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140/395 ITR 611 (Kar.), decided 16 June 2017, which records that the society moved its deposits to a co-operative bank after losing in the Supreme Court and holds the interest still ineligible, on the ground among others that it did not arise from the society's business operations. Confined to its facts, as the Court itself said: the retained sale proceeds were a liability in the society's books, and the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO [2015] 55 taxmann.com 447 (Kar.) distinguished it where the deposits were not liabilities. That finding was checked against a published source, which is linked on this page, on 2026-08-25. 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.
Two things this entry previously got wrong or left open are now settled. The decision is dated 8 February 2010, not 11 February. And it is not a complete disposal: the Court expressly left unanswered, and remitted to the High Court, the question whether the society may deduct the cost of funds and proportionate administrative and other expenses under s.57 against the interest taxed under s.56 (para 14). The judgment deals with s.80P(2)(a)(i) and refers in passing to s.80P(2)(a)(iii); it decides nothing under s.80P(2)(d), so do not carry it across to a (2)(d) dispute on the assumption that it did. The Court also said in terms that it was confining the judgment to the facts before it, and distinguished the authorities cited because they concerned co-operative banks. 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 appeals were dismissed. Interest arising on surplus not required for business purposes, invested in short-term deposits and securities, is not profits and gains of business and is not attributable to providing credit facilities to members or to marketing their agricultural produce; it is income from other sources chargeable under s.56 and outside s.80P(2)(a)(i) (paras 10 and 11). The Court noted that the interest in question was not interest received from members on credit provided to them, and expressly confined the judgment to the facts of the case (paras 10 and 11). On the reassessment limb, the Court declined to disturb the Tribunal's finding of fact that sanction under s.151 existed before 31 May 2001, distinguishing the grant of sanction from its communication (para 13). One question raised below was left unanswered and remitted to the High Court: whether, the interest being taxed under s.56, the society is entitled to deduct the cost of funds and proportionate administrative and other expenses under s.57 (para 14).
TaxSphere, “Totgars Co-operative Sale Society Ltd v ITO”, https://taxnotice.vittsphere.com/caselaw/case/totgars-co-operative-sale-society-v-ito-80p/ (validity last checked 2026-08-25)
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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?
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?
We lost on s.80P before the Tribunal. Can we raise the s.57 cost of funds point for the first time in the High Court, and does interest we charge our own employees qualify under s.80P(2)(a)(i)?
My society has nominal and associate members. Does that alone destroy the 80P deduction?
