80P Deduction on Bank Interest: ITAT Clarifies Co-op Society Eligibility
In a recent ruling, the Income Tax Appellate Tribunal (ITAT) has once again upheld the eligibility of co-operative societies to claim 80P deduction on bank interest, reinforcing an important relief available under the Income-tax Act, 1961. This ruling brings clarity on a common point of litigation—whether interest earned from deposits with banks (not co-operative banks) is eligible under Section 80P(2)(a)(i) or 80P(2)(d).
Let’s break down the implications for co-operative societies.
What is Section 80P Deduction?
Section 80P of the Income Tax Act provides tax deduction to co-operative societies on income earned from certain specified activities.
Key Clauses:
- Section 80P(2)(a)(i): Deduction for income earned from banking or credit facility activities with members.
- Section 80P(2)(d): Deduction for income from investments in other co-operative societies.
ITAT Ruling: Bank Interest Eligible for 80P Deduction
Case Reference:
XYZ Co-operative Society Ltd. vs. ITO, [ITAT Bengaluru, 2025]
Facts:
- The assessee, a registered co-op society, earned interest income on deposits with nationalised banks.
- AO denied 80P deduction citing that such income did not arise from core business with members or co-operative banks.
- ITAT ruled in favour of the assessee, allowing the 80P deduction on bank interest, relying on Supreme Court precedents and consistent ITAT jurisprudence.
Legal Basis:
- Totgar’s Co-op Sale Society Ltd. v. ITO (2010) – Differentiates operational surplus from investment surplus.
- Mavilayi Service Co-op Bank Ltd. (SC, 2021) – Favours liberal interpretation of Section 80P.
- CBDT Circular No. 14/2006 – Clarifies liberal deduction intent under 80P for co-ops.
When is 80P Deduction on Interest Allowed?
| Interest Earned From | 80P Deduction Allowed? | Section Applicable |
|---|---|---|
| Co-operative Bank | ✅ Yes | 80P(2)(d) |
| Scheduled/Nationalised Bank | ✅ Yes (as per ITAT) | 80P(2)(a)(i) or 80P(2)(d) |
| Fixed Deposit with Commercial Bank | ✅ Yes (if linked to society surplus) | Subject to facts |
| Loans to Non-Members | ❌ Not Allowed | — |
Expert Tip: Maintain Clear Segregation of Funds
To avoid denial of 80P deduction:
- Maintain separate accounts for operational vs. investment income
- Route member-specific activities clearly through core banking
- Avoid intermingling surplus funds with speculative investments
Practical Steps for Co-op Societies
- File with full disclosures on interest income in ITR.
- Cite ITAT/Supreme Court rulings if deduction is disallowed.
- Respond to scrutiny with proper resolutions and fund flow statements.
- Ensure PAN and classification is updated correctly in IT portal.
FAQs
Q1. Is bank interest from SBI or ICICI eligible for 80P deduction?
Yes, recent ITAT rulings have allowed it, provided the funds are part of the society’s operational surplus.
Q2. What if the AO denies the deduction?
You can file an appeal with the CIT(A) or ITAT, citing the 2025 ruling and Supreme Court precedents.
Q3. Is income from mutual funds or shares eligible for 80P?
No, only income from co-operative banks or societies qualifies under Section 80P(2)(d).
Summary
ITAT has ruled that co-operative societies can claim Section 80P deduction on bank interest earned from deposits with scheduled banks. This strengthens the legal position for tax relief, provided funds are part of operational surplus and not speculative in nature.