Interest income earned by a co-operative society from deposits with another co-operative bank is eligible for deduction under Section 80P(2)(d) of the Income Tax Act, 1961, unless such bank is engaged in 'banking business' as defined under Section 5(b) of the Banking Regulation Act, 1949, triggering Section 80P(4) exclusion.

ORDER

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against the order dated 11.12.2025 passed by the Ld. Commissioner of Income-tax (Appeals) Act - National Faceless Appeal Centre (NFAC), Delhi [Ld. CIT(A)] for A.Y. 2020-23, raising following grounds:

“1. On the facts, in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals), National faceless Appeal Centre (NFAC) [CIT(A)'s], erred in upholding disallowance of Rs. 20,58,658/- claimed as deduction claimed u/s 80P(2)(d) of the Income Tax Act, 1961, ['the Act'] being interest income earned on deposits with co-operative banks/societies, thereby denying the legitimate benefit available to a Co-operative Housing Society.

2. The Ld. CIT(A) erred in holding that the interest income does not qualify for deduction u/s 80P(2)(d), ignoring the plain language of the provision which explicitly allows deduction on interest or dividends on securities, deposits, loans or advances made by the assessee co-operative society to other co-operative societies, without any restriction on the nature of deposits or recipient society.

3. On the facts and in the circumstances of the case, the learned CIT(A)'s failed to consider that in the various judicial pronouncement of Hon'ble High courts / ITAT - Mumbai as well as judgments in earlier years in Appellant's own case, deduction u/s 80P(2)(d) is held to be allowed to Co.Op. Housing Societies.

4. The Appellant prays that the order of the CIT(A)'s, passed without assigning cogent reasons for rejecting the assessee's contentions, be set aside and the Appellant be allowed deduction u/s 80P(2)(d) amounting to Rs. 20,58,658/- of the Act claimed in the return of income.

5. The Appellant craves leave to add, alter, amend or substitute the above referred ground or to add any other grounds of appeals.

2. The central grievance of the Assessee in grounds raised is the disallowance of deduction amounting to ₹20,58,658/- claimed under Section 80P(2)(d) of the Income Tax Act, 1961 (‘the Act’), representing interest income derived from deposits held with various co-operative banks.

3. Briefly stated facts of the case are that the assessee is a co-operative housing society and in the return of income filed for the year under consideration shown interest income amounting to Rs. 20,58,658/- from deposits with co-operative bank and claimed the same for deduction u/s. 80P(2)(d) of the Act. The Assessing Officer, while completing the assessment under section 143(3), disallowed the claim on the ground that (i) Co-operative banks are commercial entities and do not qualify as "co-operative societies" for the purpose of Section 80P(2)(d); (ii) As per the decision in Totgar’s Co-operative Sale Society Ltd. vs. ITO (322 ITR 283), interest earned on surplus funds constitutes "Income from Other Sources" and not operational business income; and (iii) The principle of mutuality is defeated by the commerciality element inherent in earning interest from banking institutions. The relevant findings of the Ld. AO is reproduced as under:

Further, in a very recent landmark judgment in the case of M/s Bangalore Club Vs. Commissioner of Income tax (CIT), the Hon’ble Supreme Court of India has gone into minute details for deciding the nature /character of “principle of mutuality” under which the tax exemption has been claimed by various societies. The Hon’ble Supreme Court held that “in our opinion, unlike the surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee (Bangalore Club) from the member banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to income Tax in hands of the assessee-club.” In this case, the surplus funds in the hands of the assessee were placed at the disposal of the corporate members viz