Interest Earned By Co-operative Credit Society On Bank Deposits Eligible For Tax Deduction: Telangana HC

The Telangana High Court has held that interest earned by the Hyderabad-based co-operative credit society on bank deposits made from its business funds is eligible for deduction under the provision applicable to co-operative societies providing credit facilities to their members.

"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 cooperative 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",it observed.

The judgment, delivered on March 26, 2026, by a Division Bench of Justice P. Sam Koshy and Justice Narsing Rao Nandikonda, came in an appeal filed by The Ismailia Co-operative Credit Society Ltd.

The dispute traces back to the 2004–05 assessment year. The society had reported income that included interest earned from funds placed in bank deposits and claimed a deduction, arguing that the income was part of its regular business of lending to members.

According to the record, these deposits were not independent investments. The funds were placed in banks when they were not immediately required, primarily for safekeeping, while also earning interest in the process.

Tax authorities took a different view. The Assessing Officer treated the interest as income from other sources, reasoning that placing funds in deposits was not part of the taxpayer's business activity. That view was upheld at the appellate stages, including by the Income Tax Appellate Tribunal.

Before the High Court, the taxpayer argued that the law uses the phrase “attributable to,” which has a wider scope than “derived from.” On that basis, it said income connected to its business, even if earned incidentally, should qualify for deduction. It also stressed that temporarily placing funds in deposits does not change the nature of the income.

The Revenue maintained that the interest came from deposits with a non-cooperative bank and not from transactions with members. Relying on the decision in Totgars Co-operative Sale Society Limited, it was argued that such income should be taxed separately as income from other sources.

The High Court, however, found that the society's position was consistent with the scheme of the law. It noted that the funds deposited in banks were generated from the taxpayer's own operations. Earning interest on those funds, the court said, was incidental to its business activity rather than unrelated to it. The temporary nature of the deposits did not alter the character of the income.

The bench also distinguished the Supreme Court's ruling in Totgars Co-operative Sale Society Limited, pointing out that the facts in that case involved activities extending beyond members, which was not the situation here.

Consequently, the court held that the findings of the Assessing Officer, Commissioner (Appeals), and the tribunal do not hold good. It ruled in favour of the taxpayer, set aside the earlier orders, and directed the authorities to reconsider the claim for deduction after giving the society a fair hearing within three months.

For Appellant: Advocate A.V. Siva Karthikeya representing Advocate A.V.S. Krishna Koundinya,

For Respondent: K. Sudhakar Reddy, Senior Standing Counsel for Income Tax Department