Telangana High Court
The Ismail,Ia Co-Operative Credit … vs Assistant Commissioner Income Tax on 26 March, 2026
Author: P. Sam Koshy
Bench: P. Sam Koshy
IN THE HIGH COURT FOR THE STATE OF TELANGANA
AT HYDERABAD
THE HONOURABLE SRI JUSTICE P. SAM KOSHY
AND
THE HONOURABLE SRI JUSTICE NARSING RAO NANDIKONDA
INCOME TAX TRIBUNAL APPEAL NO.132 OF 2010
Date: 26.03.2026
Between:
The Ismailia Co-operative Credit Society Ltd.
...Appellant
AND
Assistant Commissioner Income Tax,
Circle 5(1), Hyderabad.
...Respondent
JUDGMENT:
(As per the Hon’ble Sri Justice Narsing Rao Nandikonda)
Heard Mr. A.V. Siva Karthikeya, representing Mr. A.V.S.
Krishna Koundinya, learned counsel for the appellant and
Mr. K. Sudhakar Reddy, learned Senior Standing Counsel for
Income Tax Department appearing for the respondent.
2. This Memorandum of Appeal is filed under Section 260A of
the Income Tax Act, 1961 aggrieved by the order of the Income
Tax Appellate Tribunal, Hyderabad Bench ‘A’ in
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I.T.A.No.1187/Hyd/2007 (Assessment year 2004-05) dated
25.04.2008.
3. The brief facts of the case are that the appellant herein is a
cooperative society engaged in the business of providing credit
facilities to its members. The appellant filed returns for the
assessment year 2004-05 showing an income of Rs.33,35,549/-,
which included interest income of Rs.31,63,578/- and claimed
deduction under Section 80P of the Income Tax Act, 1961 (for
short ‘IT Act‘), contending that the interest income derived from
deposits was attributable to the business of providing credit to
the members of the assessee society.
4. Further, it was contended that as part of activities of the
society, the appellant deposited funds with the bank whenever
their funds were not required and these funds were kept in a
bank account for safe custody so that the said deposits would
yield some interest. The activity of keeping such funds in deposit
and deriving interest income was a regular activity of the society
and submitted that investment of funds in short-term deposits
and earning interest there from is an activity attributable to the
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business of the society and sought deduction under Section
80P(2)of the IT Act. However, the claim of the appellant was
disallowed by the Assessing Officer on the following grounds that
the assessee is not carrying on any banking activity and that the
deposits made by the assessee in the bank may facilitate the
business of the assessee. However, making such deposits is not
the business of the assessee.
5. The Assessing Officer, vide order dated 29.12.2006has held
that the interest income derived by a society indulged in banking
business or in the business of providing credit facilities to its
members is exempt in its entirety. Section 80P(2)(d) of the IT Act
will not have any application, and not having found a place in
the IT Act. It was further held that Section 80P(2)(d) of the IT Act
clearly provides that any interest income derived from
investment with co-operative societies alone is not taxable.
Thereby, the contention of the appellant was rejected.
6. Being aggrieved by the same, the appellant preferred an
appeal before the Commissioner of Income Tax (Appeals)-V,
Hyderabad, vide order dated 13.11.2007, has dismissed the
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appeal confirming the order of the CIT (A). The relevant order of
the learned Commissioner is extracted below:
“Relying on the ratio of the above decision of the Hon’ble
jurisdictional High Court in the case of Anakapalli Co-operative
Marketing Society Ltd. (supra), in my considered opinion, the interest
income to the extent of Rs.31,63,578 earned by the appellant from the
investment made with Development Credit Bank cannot be considered
as income having been derived from the activity of providing credit
facility to its members and hence, the same is not entitled for
deduction u/s. 80P(2)(a)(i) of the ‘Act’. It may be further mentioned
here that such interest income derived by the appellant from the above
investment did not constitute one of the sources of income attributable
to activities of providing credit facilities to its members. In this view of
the matter, the Assessing Officer was justified in disallowing the claim
of the appellant for deduction u/s. 80P of the ‘Act’ and hence, the
assessment order passed by him, bringing to tax the above amount of
interest, is upheld.”
7. Aggrieved by the same, the present appeal is filed on the
grounds that the learned Tribunal failed to consider that interest
received from Development Credit Bank is attributable to the
assessee’s activity of providing credit facilities to its members,
thereby erred in denying deduction under Section 80P(2) of the
IT Act and it is further contended that the learned tribunal
ought to have appreciated that the expression “attributable to”
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“derived from,” suggests that the legislature intended to cover
receipts from sources other than the actual conduct of the
business of the assessee and it was further contended that the
learned Tribunal ought to have seen that Section 80P(2) of the IT
Act was enacted to promote the growth of Co-operative Societies
and such provisions have to be constructed liberally.
8. Having perused the entire material on record and the
following substantial question of law which would arise for the
consideration before this Court is:
“Whether on the facts and circumstances of the case, the
interest income earned by the assessee on bank deposits is eligible for
deduction under Section 80P(2)(a)(i) of the Income Tax Act 1961?”
9. The learned counsel for the appellant contended that the
Co-operative Society qualifies for and is entitled to claim
deduction under Section 80P(2)(a)(i) of the IT Act. Whereas, the
Assessing Officer treated the interest earned on deposits made
with nationalised banks as “Income from Other Sources” and
denied the deduction under Section 80P. He further contended
that the appellant is engaged only in providing credit facilities to
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its members which is undisputed and that the surplus funds
deposited in banks represent the appellant’s own funds
generated from its business operations and these funds are not
liabilities payable to members nor they are retained sale
proceeds or trust amounts. The investment of surplus funds in
bank deposits is a prudent business decision to safeguard and
multiply funds and the interest earned is ultimately for the
benefit of members and forms part of the circulating capital of
the society.
10. Further, the appellant argued and contended that the
judgment of the Hon’ble Supreme Court relied upon by the
Revenue in Totgars Cooperative Sale Society Limited 1, is not
applicable to the present set of facts and further relied upon the
judgment of the jurisdictional High Court in the case State
Bank Cooperative Society, which has extensively analysed
Section 80P and its scheme and clarifies that Section 80P
confers different categories of benefits such as activity based and
investment based deductions.
1
322 ITR 283
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11. The Court held that the temporary parking of surplus
business income in nationalised banks does not alter the
character of the income when the statute uses the expression
“attributable to”. The character of business income is not lost
merely because it is temporarily invested pending deployment.
The approach of revenue creates an artificial distinction without
statutory basis and defeats the beneficial object of Section 80P
and that denying the deduction merely because the investment
was made in a nationalised bank and not in another co-operative
society leads to an irrational classification. Hence, the interest
income earned on surplus funds deposited in banks is eligible
for deduction under Section 80P(2)(a)(i) and prayed to set aside
the impugned orders.
12. The learned counsel for the appellant also relied upon the
judgment in ITTA No.292 of 2010 and reference was also made
to a judgment from the then High Court of Telangana and
Andhra Pradesh 2.
2
2017 396 ITR 371
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13. The learned Senior Standing Counsel for Income Tax
Department appearing for the respondent has argued and
contended that the appellant is a Co-operative Credit Society
engaged in providing credit facilities to its members and is not a
co-operative bank. The deduction claimed under Section
80P(2)(a)(i) is only in respect of interest earned on deposits
placed with non-co-operative bank (Development Credit Bank).
In fact, Section 80P(1) allows deduction only in respect of income
referred to in Section 80P(2), subject to statutory condition and
under Section 80P(2)(a)(i), the deduction is confined to profits
and gains of business attributable to carrying on the business of
banking or providing credit facilities to its members.
14. He further contended that the interest income earned is
not from the members but from the deposits placed with a third-
party bank, which is not a co-operative society or cooperative
bank and such income does not qualify for deduction under
Section 80P(2)(a)(i). Under Section 14 of the IT Act, income must
be classified under specific heads; income not falling under
“Profits and Gains of Business” is taxable under the head
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“Income from Other Sources” and Section 56(1) clearly provides
that income not chargeable under any other specific head shall
be taxed as “Income from Other Sources.”
15. The Hon’ble Supreme Court in Totgars Co-operative Sale
Society Limited case held that interest earned on surplus
funds invested in deposits, not immediately required for
business purposes, is taxable under “Income from Other
Sources.” The principle laid down in Totgars Co-operative Sale
Society Limited applies squarely, as the interest income in the
present case arises from the investment of surplus funds and
not from core lending activity and allowing such a deduction
would defeat the statutory scheme and permit co-operative
societies to divert funds into unrelated investments while
claiming blanket exemption. The Court acknowledged the
findings of the Assessing Officer and the Appellate Authorities,
who rightly held that interest earned from a non-co-operative
bank is ineligible for deduction under Section 80P(2)(a)(i) or
Section 80P(2)(d) and finally prayed to dismiss the appeal.
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16. The learned Senior Standing Counsel for the respondent
has relied upon the Hon’ble Supreme Court judgment in The
Citizens Co-operative Society Limited vs. Assistant
Commissioner of Income Tax 3.
17. Having heard the rival contentions of both the parties and
also material placed on record, it is undisputed that the
appellant is a registered co-operative credit society engaged in
providing credit facilities to its members and the dispute is
whether the appellant’s society is entitled for the deduction of
the income accrued from deposits in a development co-operative
bank and whether the income arrived can be said to be out of
the business or income attributable to the nature of the
business and derived from the business.
18. Admittedly, the surplus funds deposited in banks
represent the appellant’s own funds generated from its business
operations. The case of the appellant is that the appellant being
a co-operative society is entitled to claim deduction under
Section 80P(2)(a)(i) of the IT Act.
3
(C.A.No.10245 of 2017)
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19.The Bench while dealing with the similar set of facts by this
same Bench in M/s. SBI Staff Mutually Aided Co-operative
Credit Society Ltd. v. Assistant Commissioner Income Tax 4,
referred to the case of Vavveru Co-operative Rural Bank
Limited v. Chief Commissioner of Income Tax 5 and also
referred to the case of Commissioner of Income Tax V. Andhra
Pradesh State Co-operative Bank Limited 6, has allowed the
appeal by directing the respondent to allow the
assessee/petitioner herein to claim deduction under Section
80P(2)(a)(i) of the Income Tax Act, 1961 for the assessment year
2004-2005 from the interest earned through State Bank of India
and National Savings Certificates. The Division Bench of the
then High Court of Andhra Pradesh held that under Section
80P(2)(d) thereof, it is only the income by way of interest or
dividends derived by a co-operative society from its investments
with any other co-operative society which is required to be
deducted while computing the total income of the assessee. On
perusal of the above said judgments, which has become finality
4
ITTA No.292 of 2010
5
(2017) 396 ITR 371 (T&AP)
6
(2011) 12 taxmann.com 66 (AP)
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and by applying the same principles, since the facts and
circumstances are similar, the said judgments are binding on
the Assessing Officer and need to be followed. The respondent
by taking a different view and passing a contradictory order in
ITA No.1187/Hyd/2007 dated 25.04.2008; prima facie appears
to be illegal.
20. The court also considered the judgment of the High Court
of Gujarat in State Bank of India vs. Commissioner of
Income Tax 7 . Further, the judgment of the Hon’ble Supreme
Court was relied upon by the learned Senior Standing Counsel
in The Citizens Co-operative Society Limited vs. Assistant
Commissioner of Income Tax 8 , wherein the relevant
paragraphs are extracted below:
We may mention at the outset that there cannot be any dispute
to 16 the proposition that Section 80P of the Act is a benevolent
provision which is enacted by the Parliament in order to encourage
and promote growth of co-operative sector in the economic life of the
country. It was done pursuant to declared policy of the Government.
Therefore, such a provision has to be read liberally, reasonably and
in favour of the assessee (See – Bajaj Tempo Limited, Bombay v.
Commissioner of Income Tax, Bombay City-III, Bombay. It is also7
(2016) 72 taxmann.com
8
C.A.No.10245 of 2017
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ITTA_132_2010trite that such a provision has to be construed as to effectuate the
object of the Legislature and not to defeat it (See – Commissioner of
Income Tax, Bombay & Ors. v. Mahindra and Mahindra Limited &
Ors.4). Therefore, it hardly needs to be emphasised that all those co-
operative societies which fall within the purview of Section 80P of the
Act are entitled to deduction in respect of any income referred to in
sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption
of whole of the amount of profits and gains of business attributable to
anyone or more of such activities which are mentioned in sub-section
(2).
Since we are concerned here with sub-section (i) of clause (a)
of sub-section (2), it recognises two kinds of co-operative societies,
namely: (i) those carrying on the business of banking and; (ii) those
providing credit facilities to its members.
In the case of Kerala State Cooperative Marketing Federation
Limited & Ors. v. Commissioner of Income Tax, this Court, while
dealing with classes of societies covered by Section 80P of the Act,
held as follows:
6. The classes of societies covered by Section 80-P of the Act
are as follows:
(a) Engaged in business of banking and providing credit
facilities to its members;
XX XX XX
7. We may notice that the provision is introduced with a view
to encouraging and promoting growth of cooperative sector in the
economic life of the country and in pursuance of the declared policy
of the Government. The correct way of reading the different heads of
exemption enumerated in the section would be to treat each as a
separate and distinct head of exemption. Whenever a question arises
as to whether any particular category of an income of a cooperative
society is exempt from tax what has to be seen is whether income fell
within any of the several heads of exemption. If it fell within any one
head of exemption, it would be free from tax notwithstanding that the
conditions of another head of exemption are not satisfied and such
income is not free from tax under that head of exemption…”
Undoubtedly, if one has to go by the aforesaid definition of
‘co-operative bank’, the appellant does not get covered thereby. It is
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also a matter of common knowledge that in order to do the business of
a co-operative bank, it is imperative to have a licence from the
Reserve Bank of India, which the appellant does not possess. Not only
this, as noticed above, the Reserve Bank of India has itself clarified
that the business of the appellant does not amount to that of a co-
operative bank. The appellant, therefore, would not come within the
mischief of sub-section (4) of Section 80P.
So far so good. However, it is significant to point out that the
main reason for disentitling the appellant from getting the deduction
provided under Section 80P of the Act is not sub-section (4) thereof.
What has been noticed by the Assessing Officer, after discussing in
detail the activities of the appellant, is that the activities of the
appellant are in violations of the provisions of the MACSA under
which it is formed. It is pointed out by the Assessing Officer that the
assessee is catering to two distinct categories of people. The first
category is that of resident members or ordinary members. There may
not be any difficulty as far as this category is concerned. However, the
assessee had carved out another category of ‘nominal members’.
These are those members who are making deposits with the assessee
for the purpose of obtaining loans, etc. and, in fact, they are not
members in real sense. Most of the business of the appellant was with
this second category of persons who have been giving deposits which
are kept in Fixed Deposits with a motive to earn maximum returns. A
portion of these deposits is utilised to advance gold loans, etc. to the
members of the first category. It is found, as a matter of fact, that the
depositors and borrowers are quiet distinct. In reality, such activity of
the appellant is that of finance business and cannot be termed as co-
operative society. It is also found that the appellant is engaged in the
activity of granting loans to general public as well. All this is done
without any approval from the Registrar of the Societies. With
indulgence in such kind of activity by the appellant, it is remarked by
the Assessing Officer that the activity of the appellant is in violation of
the Co-operative Societies Act. Moreover, it is a co-operative credit
society which is not entitled to deduction under Section 80P(2)(a)(i) of
the Act.
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21. The said judgment of the Hon’ble Supreme Court is
distinguishable on the ground that the facts therein involved an
appellant engaged in the activity of granting loans to the general
public. Although, this was done without the approval of the
Registrar of Societies, the activity of the appellant therein was
characterized as a finance business. Consequently, they could
not be termed a co-operative society because the principle of
mutuality was missing in that case.
22. In the present case, there was a finding that the appellant
could not be treated as a co-operative society providing credit
facilities exclusively to its members. As such, the Hon’ble
Supreme Court held that the society in that instance could not
claim the benefit of Section 80P of the Act and with due respect,
that judgment is not applicable to the present set of facts and
does not come to the rescue of the respondent.
23. Learned counsel for the respondent submitted that Section
80P was interpreted in Vavveru Co-operative Rural Bank
Limited v. Chief Commissioner of Income Tax (5th cited
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supra), which has dealt with in detail, the tabular form is
extracted below for the sake of better appreciation.
Category of co-op. societies covered by Nature and extent of
sub-clauses (a) to (f) benefit available
(a)
1) Co-operative society carrying on the business of The whole of the amount of
banking or providing credit facilities to its profits and gains of business
members; attributable to any one or more of
2) Co-op. society engaged in cottage industry; such activities.
3) Co-operative society engaged in marketing of
agricultural produce grown by its members.
4) Co-operative society engaged in purchase of
agricultural implements, seeds etc., for the
purpose of supplying to its members;
5) Co-operative society engaged in processing of
agricultural produce of its members without the
aid of power.
6) Co-operative society engaged in collective
disposal of the labour of its members.
7) Co-operative society engaged in fishing or allied
activities.
(b)
Primary co-operative society engaged in supplying milk, The whole of the amount of
oil seeds, fruits or vegetables grown by its members to- profits and gains on such business.
1) A federal co-operative society, engaged in the
same business;
2) The government or a local authority;
3) The government company or corporation
engaged in the same business;
(c)
1) A consumer co-operative society engaged in So much of the profits and gains
activities other than those specified in clause (a) attributable to such activities not
or clause (b) either independently of, or in exceeding Rs. 100,000 (one
addition to, all or any of the activities so hundred thousand rupees).
specified.
2) Co-operative society other than a consumer So much of the profits and gains
co-operative society engaged in activities other attributable to such activities not
than those specified in clauses (a) and (b). exceeding Rs. 50,000 (fifty
thousand rupees)
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(d) Interest or dividends derived by the co-operative
society from its investments with any other co-operative The whole of such income.
society;
(e) Any income derived by the co-operative society from The whole of such income.
the letting of godowns or warehouses for storage,
processing or facilitating the marketing of commodities;
The income by way of interest on
(f) A co-operative society other than securities and the income from
1) A housing society; house property chargeable under
2) An urban consumer society; section 22.
3) A society carrying on transport business;
4) A society engaged in the performance of any
manufacturing operations with the aid of power,
where the gross total income does not exceed
Rs. 20,000 (twenty thousand rupees).
24. The appellant contended that its society falls within
Section 80P(2)(a), which pertains to a co-operative society
carrying on the business of banking or providing credit facilities
to its members. The very nomenclature of the appellant’s society
is “The Ismailia Co-operative Credit Society Limited” and
regarding the nature of the activities, while the appellant is not
carrying on banking activities, but admittedly providing credit to
its members out of the income and interest yielded from bank
deposits kept for safe custody.
25. It is settled law that if a society makes any profit or gain
from business attributable to such activity, then such income
qualifies for deduction under Section 80P(2)(a)(i) and the
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judgment of the Andhra Pradesh High Court in Anakapalli Co-
operative Marketing Society Limitedv. CIT 9 has held that to
claim the deduction under Section 80P(2)(a)(i), providing credit
facilities must be one of the assessee’s activities and the income
must be towards profits or gains therefrom. It is also the case of
the appellant that the amounts received by the appellant’s
society are kept in the bank for the purpose of earnings interest
thereon.
26. The learned Senior Standing Counsel for the respondent
pointed out that the society would fall under Section 80P(2)(c)
and Section 80P(2)(d) based on the tabular form presented
earlier. However, upon perusal of that section, it applies to any
co-operative society other than consumer co-operative societies
engaged in activities other than those specified in clause (a) and
clause (b). Section 80P(2)(c) is not applicable to the present set of
facts as it relates to co-operative societies in general and does
not apply to a co-operative society providing credit. Since clause
(a)(i) specifically covers cooperative societies providing credit
9
2000 (245 ITR 616)
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facilities, the contention of the learned Senior Standing Counsel
cannot be accepted, for the reason that the said provision is only
applicable to cooperative societies that do not fall under
categories (a) and (b) and it is only in respect of the co-operative
societies other than categories (a) and (b).
27. It is clear that eligibility for deduction under Section
80P(2)(a) requires that the claim must relate to the profits and
gains of business attributable to one or more of the activities
specified therein. In the present case, the appellant is a co-
operative society providing credit facilities, which falls directly
under the specified activities. Consequently, the appellant is
entitled to claim the deduction under Section 80P(2)(a) of the IT
Act.
28. This Bench is of the considered view that the findings given
by the Assessing Officer, the Commissioner and the Appellate
Tribunal do not hold good and that the appellant is prima facie
entitled to the deduction under Section 80P(2)(a) of Income Tax
Act. Accordingly, the substantial question of law is answered in
favour of the appellant and against the respondent.
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29. With the aforementioned reasons, the appeal is allowed
setting aside the orders passed by the Income Tax Appellate
Tribunal (ITAT), the Commissioner of Income Tax (Appeals) and
the Assessing Officer, Hyderabad Bench ‘A’ in
I.T.A.No.1187/Hyd/2007 (assessment year 2004-05) dated
25.04.2008.The respondents are directed to reconsider the case
of the appellant for the deduction of their income earned by way
of interest accrued from deposits kept in the bank and pass
appropriate orders within a period of three (3) months from the
date of receipt of a copy of this order by giving a fair opportunity
of hearing to the appellant and communicate the same to the
appellant. There shall be no order as to costs.
As a sequel, miscellaneous applications, if any pending,
shall stand closed.
_______________________________
JUSTICE P. SAM KOSHY
________________________________________________
JUSTICE NARSING RAO NANDIKONDA
Date: 26.03.2026.
vjb
