Interest received from Cooperative banks allowable deduction u/s 80P to a Cooperative Society

Deduction u/s 80P(2)(d) towards interest received from cooperative banks is allowable to a cooperative society.

In a recent judgment, Hon’ble Sikkim High Court has held that interest received from Cooperative banks is an allowable deduction u/s 80(P)(2)(d) to Cooperative Society.

ABCAUS Case Law Citation:
5025 (2026) (01) abcaus.in HC

In the instant case, the appellant assessee had challenged the order passed by the ITAT Kolkata in denying the benefit of exemption u/s 80P of the Income Tax Act, 1961 (the Act) towards interest received from Cooperative banks.

The appellant was the apex co-operative society in Sikkim, registered under the Sikkim Cooperative Societies Act, 1978, with the Government of Sikkim holding 93% of its shares. The appellant was the central body of the State of Sikkim’s co-operative infrastructure, primarily focusing on wholesale supply of consumer goods, bulk marketing and procurement of agricultural, horticulture produce and also providing storage and cold chain infrastructure. The appellant also acted as an agent for members’ societies in respect of product handling, quality assurance and facilitating credit while also undertaking procurement activities on behalf of the Government and public sector undertakings.

During the relevant assessment year, appellant, earned interest income from investments made in two co-operative banks, both registered as co-operative societies under the Sikkim Co-operative Societies Act, 1978. These investments were made from the surplus funds and statutory reserves of the federation as required under the relevant provision of the Sikkim Co-operative Societies Act, 1978, which mandated prudent management and investment of funds only in approved securities or co-operative banks approved by the Registrar.

The appellant claimed deduction under section 80P(2)(d) of the Income Tax Act, on the interest income earned from such investments. The Assessing Officer disallowed the deduction on interest earned from deposits made with co-operative banks.

The CIT(A) allowed the deduction upon finding that the interest income qualified for exemption as it was derived from the investment made in co-operative banks registered under the State Cooperative Societies Act, 1978. However, the Tribunal upheld the disallowance.

The case of the appellant was that the Tribunal misinterpreted section 80P(4), which only bars cooperative banks from claiming deductions on their own income and wrongly applied it to deny section 80P(2)(d) deductions to the Appellant, being a non-bank cooperative society, in respect of interest received from cooperative banks.

The Hon’ble High Court observed that Tribunal had relied substantially on a judgment of the Karnataka High Court and the judgment of the Hon’ble Supreme Court.

The Hon’ble High Court further observed that a plain reading of the section 80P(4) reveals that the statute makes a clear distinction between a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural or rural development bank) and any other co-operative entity registered as a co-operative society, which the appellant happened to be.

The Hon’ble High Court further noted that the explanation provided under section 80P(4), makes it further clear that a “co-operative bank” will have the same meaning, as assigned to it under Part V of the Banking Regulation Act, 1949. It is nobody’s case that appellant was a cooperative bank, functioning within the meaning assigned to it under Part V of the Banking Regulation Act, 1949. Rather, it was clearly evident that it was a non-banking co-operative society and received interest only from some co-operative banks, that too, based on investments made from the surplus funds and statutory reserves of the federation, as required under the relevant provisions of Sikkim Co-operative Societies Act, 1978. 

The Hon’ble High Court further noted the provisions of section 80P(2)(d) and observed that the appellant earned interest from investments made in two co-operative banks, both were registered as co-operative societies under the Sikkim Co-operative Societies Act, 1978. Also, investments were made from the surplus funds and statutory reserves as required under the relevant provisions of Sikkim Cooperative Societies Act, 1978 which mandated prudent management and investment of funds only in approved securities of co-operative banks approved by the Registrar.

The Hon’ble High Court opined that a plain reading of the provisions of law clearly revealed that the Tribunal misinterpreted the provision of section 80P(4) of the Income Tax Act, 1961, which specifically excludes co-operative banks (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) and erroneously applied it in respect of appellant, thereby disentitling it from claiming benefit under section 80P of the Act. As such, the substantial question of law was answered in favour of the assessee.

With respect to reliance placed by the ITAT on decisions, the Hon’ble High Court held that they were not applicable in the facts of that case which were are factually and materially different. With respect to judgment of the Karnataka High Court which was relied upon by the Tribunal, the Hon’ble High Court noted that the Gujarat High Court had considered the said judgment and has clearly held the same to be distinguishable and not applicable in a similar fact situation as our present case.

Accordingly, the Hon’ble High Court held that the assessee was entitled to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961.

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