When 80P Meets Bank Interest: Nagpur ITAT Reaffirms the View on allowability of deduction of credit cooperative societies
A decade-old argument finds fresh acceptance in three cooperative society cases
For cooperative credit societies, interest earned on bank deposits has been a recurring tax controversy. The Assessing Officer often sees an FDR and immediately thinks- “Income from Other Sources!” The assessee, on the other hand, says- “Wait, this FDR is part of my banking business!”
The debate is not new. In fact, it has travelled through several benches of the Income Tax Appellate Tribunal and various High Courts.
A recent decision of the Nagpur Bench of the ITAT has once again tilted the scales in favour of cooperative societies.
And there is an interesting personal connection for me with this issue: I had argued substantially the same issue before the Nagpur ITAT almost a decade ago. The argument accepted then has now found fresh acceptance in the latest batch of appeals.
The latest Nagpur ITAT decision
The Nagpur ‘SMC’ Bench, comprising Dr. Manish Borad, Accountant Member, recently decided appeals involving:
• Keshao Nagari Co-operative Path Sanstha Ltd., Wani – ITA No. 373/NAG/2026 for AY 2017-18;
• The Pragatisheel Sahkari Pat Sanstha Maryadit, Nagpur – ITA No. 478/NAG/2026 for AY 2020-21; and
• I represented the appellants wherein the common issue before the Tribunal was simple but significant – Whether interest earned by a cooperative society on deposits/investments with nationalised banks and cooperative banks is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act?
The Assessing Officers had denied the deduction and the first appellate authorities had upheld the denial.
The Tribunal, however, disagreed.
What did the Nagpur ITAT hold?
The Tribunal noted that the Pune Bench had consistently taken the view that interest earned on deposits with nationalised banks and other cooperative banks can qualify for deduction under section 80P(2)(a)(i).
It specifically relied upon the Pune ITAT decision in ITO v. Shri Bhairavnath Multistate Cooperative Credit Society Ltd., ITA No. 2484/PUN/2017, order dated 27 June 2024.
That decision had dealt with interest earned on investments of surplus funds with cooperative banks, cooperative societies and nationalised banks.
The Tribunal also referred to the decision in Nashik Road Nagari Sahkari Patsanstha Ltd. v. ITO, ITA No. 1700/PUN/2017, where the Pune Bench had examined the familiar argument that interest earned from a bank is income from a third party and therefore cannot qualify for section 80P(2)(a)(i).
The Pune Bench nevertheless held in favour of the cooperative society.
The crucial reasoning was that a cooperative credit society does not necessarily cease to be engaged in its eligible business merely because temporarily available funds are placed in bank deposits.
The “Totgars” argument—again!
The major hurdle in these cases is, of course, the Supreme Court decision in Totgars Co-operative Sale Society Ltd. v. ITO.
The Revenue frequently relies upon Totgars to contend that interest earned from surplus funds deposited with banks is taxable under the head “Income from Other Sources” and is therefore outside the ambit of section 80P(2)(a)(i).
But Totgars cannot automatically become a universal password for denying every 80P claim involving bank interest.
The factual distinction becomes extremely important.
In the cases of cooperative credit societies engaged in providing credit facilities to their members, funds are intrinsically connected with their business activity. The society receives deposits, provides credit facilities to members and has to maintain liquidity.
Therefore, the question is not merely:
“Where was the money invested?”
The more important question is:
“Why was the money invested and what is the connection of that investment with the business activity of the society?”
This distinction has been at the heart of the litigation.
A decade-old argument gets a fresh lease of life
This is where the latest order becomes particularly interesting for me.
Back in 2016, I had argued the issue before the Nagpur Bench in ITO, Ward-5, Amravati v. Utkranti Nagri Sahakari Pat Sanstha, ITA No. 30/Nag/2015, order dated 2 June 2016.
The issue again concerned the eligibility of interest income for deduction under section 80P(2)(a)(i).
The argument was that a cooperative credit society cannot be compared mechanically with the assessee in Totgars. A credit society’s funds are operational/business funds and maintaining liquid funds or investing temporarily unutilised funds does not necessarily mean that the society has stepped outside its eligible business.
The Tribunal accepted this distinction.
It held that where the society was engaged in providing credit facilities to its members and maintained liquid funds to meet eventualities, the interest on such deposits qualified for deduction under section 80P(2)(a)(i).
Interestingly, the very same ITA No. 30/Nag/2015 was specifically relied upon in the subsequent Ismailia Urban Co-operative Society matter.
The argument was also highlighted in my earlier article on the subject, where I had explained why the ratio of Totgars could not be applied indiscriminately to every cooperative credit society earning interest on bank deposits.
The journey did not stop in 2016
What is even more significant is that the issue has continued to develop.
The Nagpur ITAT has subsequently considered similar questions in cases such as Navodaya Nagri Pat Sanstha and Ashtavinayak Nagari Sahakari Pat Sanstha.
The recent Ismailia Urban Co-operative Society decision of the Nagpur ITAT in ITA No. 122/Nag/2023, dated 18 June 2024, is another important link in this chain. In that case also, I represented the assessee, and the Tribunal held the interest income eligible for deduction under section 80P, relying, inter alia, upon the jurisdictional High Court decision in CIT v. Solapur Nagri Audyogik Sahakari Bank Ltd.
Thus, the latest decision should not be seen in isolation.
It is another chapter in an evolving line of judicial decisions concerning the taxability of interest earned by cooperative credit societies.
What makes the latest decision important?
The latest order is significant because the Nagpur Bench has categorically observed:
“I hold that the assessee is entitled to claim deduction u/s 80P(2)(a)(i) on the interest income earned on investments made out of surplus funds made with Cooperative banks, Cooperative Societies and Nationalised banks.”
The Tribunal accordingly allowed all three appeals.
This is an important takeaway for cooperative societies facing similar disallowances.
However, one must be careful not to read the judgment as saying that every interest receipt of every cooperative society is automatically deductible under section 80P.
The facts and nature of the society’s activities remain important.
The distinction between business funds, operational liquidity, statutorily required investments and genuinely independent surplus funds can be crucial.
The larger lesson
Tax litigation often moves in circles.
An issue appears settled. A new argument emerges. A Supreme Court judgment is relied upon. The facts are distinguished. Different Benches examine the issue. And eventually, a consistent line of reasoning begins to emerge.
The section 80P controversy surrounding bank interest is one such example.
What began as an argument before the Nagpur ITAT in 2016 has continued to travel through subsequent cases and has now received another favourable reaffirmation from the same Bench in August 2026.
Sometimes, in tax litigation, the best argument is not the newest argument-it is the argument that survives the test of time.
And this one has been doing exactly that.
Legal takeaway
For a cooperative credit society, the mere fact that funds are temporarily invested in a bank deposit should not, by itself, conclude the matter against deduction under section 80P(2)(a)(i). The nature of the society, source and character of funds, purpose of investment and nexus with the eligible business activity must be examined.
The latest Nagpur ITAT ruling provides fresh support to this proposition.
Three appeals. One common issue. One consistent answer.
Section 80P gets another favourable word from Nagpur.
The copy of the order is as under:
ITAT Order - Keshao Nagari Co. Operative Path Sanstha LTD (WANI) - 10-08-2026
