[Opinion] Section 80P(2)(d) on Interest from Co-op Banks Under ITA 2025

CA Deepak Gunashekar – [2026] 185 taxmann.com 948 (Article)

1. Introduction – The Cooperative Taxation Paradigm

The taxation of cooperative societies in India has historically been guided by the foundational principle of mutuality and a legislative intent to foster grassroots collective enterprises. The cornerstone of this protective fiscal framework has been Section 80P of the Income-tax Act, 1961, which provides comprehensive deductions in respect of the income generated by cooperative societies.

At the heart of an immense judicial dispute is a highly specific, yet ubiquitous, financial transaction. A primary cooperative society (such as a housing or credit society) generates surplus funds and deposits them into a cooperative bank, subsequently earning interest. Under the plain reading of Section 80P(2)(d) of the 1961 Act, any income by way of interest or dividends derived by a cooperative society from its investments in “any other co-operative society” is fully deductible from its gross total income.

However, this harmonious ecosystem was fractured by the insertion of Section 80P(4) through the Finance Act, 2006. This amendment categorically denied Section 80P benefits “in relation to” co-operative banks, recognising that many such banks had grown to function indistinguishably from commercial banks. The critical question that emerged was whether the disqualification of a cooperative bank from claiming deductions under Section 80P(4) inherently strips the bank of its foundational identity as a “co-operative society,” thereby denying the depositing primary society the Section 80P(2)(d) deduction.

This singular question has profoundly fractured the Indian judicial landscape, resulting in an alarming geographical anomaly. In the State of Karnataka, this deduction is categorically denied. Conversely, in virtually every other state, backed by the High Courts of Gujarat, Madras, Kerala, and Sikkim, the deduction is wholly allowed. As India transitions to the Income-tax Act, 2025, where Section 80P is reborn as Section 149, a subtle but vital alteration in the statutory phrasing promises to either fix this anomaly or perpetuate the confusion.

2. The Statutory Architecture – A Subtle but Crucial Shift

To comprehend the ongoing litigation, one must dissect the statutory architecture. Section 80P(2)(d) governs inter-cooperative investments, allowing a deduction of the “whole of such income” in respect of interest derived from investments with “any other co-operative society.” Sub-section (4) explicitly states:

“The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society…”

In the newly enacted Income-tax Act, 2025, Section 80P corresponds directly to Section 149. The inter-cooperative investment deduction is perfectly preserved in Section 149(2)(d). However, the exclusionary clause regarding cooperative banks in Section 149(5) features a subtle, yet potentially paradigm-shifting, alteration in its phrasing compared to its predecessor:

Statutory Theme	Income Tax Act, 1961	Income Tax Act, 2025	The Critical Shift
Inter-Cooperative Investment	Section 80P(2)(d)	Section 149(2)(d)	“in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society” (Identical)
Cooperative Bank Exclusion	Section 80P(4)	Section 149(5)	“shall not apply in relation to any co-operative bank” vs. “shall not apply to any co-operative bank”

This deletion of the phrase “in relation to” from the 2025 Act strikes directly at the heart of the restrictive jurisprudence that has plagued Karnataka taxpayers.

3. The Supreme Court’s Foundational Matrix

The debate has been heavily influenced by landmark Supreme Court decisions. In Totgars Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282 (SC)/[2010] 322 ITR 283 (SC), the Apex Court while expressly stating that their judgement was confined to the facts of the instant case, ruled that interest earned on surplus funds from marketing of the members’ agricultural produce invested in short-term deposits with scheduled banks was not operational business income deductible under Section 80P(2)(a)(i), but rather “Income from other sources” under Section 56 of the 1961 Act. Crucially, the Court was never asked to evaluate Section 80P(2)(d), which grants a deduction based purely on the status of the investee entity. Despite this caveat, the Revenue routinely utilises Totgars (2010) to argue universally that all passive interest is ineligible for any Section 80P deduction.

Later, in Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 123 taxmann.com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC) and Kerala State Cooperative Agricultural and Rural Development Bank Ltd. v. Assessing Officer [2023] 154 taxmann.com 305 (SC)/[2023] 295 Taxman 675 (SC)/[2023] 458 ITR 384 (SC), the Supreme Court clarified that the exclusion is strictly a proviso meant to exclude cooperative entities that function precisely on par with commercial banks holding RBI licenses. While these cases protected primary societies, they did not directly resolve whether a depositing society is barred from claiming 80P(2)(d) deductions on interest paid by a licensed cooperative bank.