Section 80P(2)(d): Deduction of Interest on Statutory Investments with Cooperative Banks – An In-depth Legal Analysis

Introduction

The taxation regime of cooperative societies in India was significantly altered by the amendments carried out through the Finance Act, 2006. One such amendment that has become a point of considerable judicial uproar is whether cooperative societies will be allowed to claim deductions on interest income from investments made with cooperative banks. The recent judgment passed by the Gujarat High Court in the case of Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. has brought much-needed clarity to this contentious issue and has upheld the fact that cooperative societies are still entitled to deductions under Section 80P(2)(d) of the Income Tax Act, 1961, for interest earned from statutory investments with cooperative banks [1].

This legal position has far-reaching consequences for the thousands of cooperative societies in India, which are statutorily required under different state cooperative societies acts to invest their surplus funds in cooperative banks. The interrelationship between tax law and legislation on cooperatives will now assume critical dimensions for these entities in working out their various compliance requirements and optimum tax positions.

Understanding of Section 80P of the Income Tax Act:

Section 80P is thus one of the most important fiscal incentive provisions aimed at stimulating the co-operative movement in India, granting tax relief to a cooperative society for carrying on certain activities. The provision acknowledges the special socio-economic function that cooperative societies serve, especially at the rural and semi-urban levels, by facilitating access to credit, agricultural marketing, and cottage industries. The basic framework of Section 80P thus envisages a cooperative society being able to claim deductions from gross total income profits and gains derived from activities serving the interests of its members and furthering cooperative objectives.

The legislative intent behind Section 80P is the recognition that cooperative societies operate on principles different from commercial enterprise entities. These organizations, therefore, function to serve more the interest of members rather than profit maximization. These reinvest profits within their ecosystem of cooperatives for mutual strengthening. By giving this tax incentive, the legislation is promoting the creation and sustenance of the cooperative societies for financial inclusion and, thus, rural development.

Section 80P(2)(d), in particular, covers income through interest or dividend which a co-operative society derives from its investments made with any other co-operative society. This would contemplate the situation where one co-operative entity invests its surplus money with another co-operative entity and receives interest or dividend from such investment. The entire amount of such income is eligible for deduction under this sub-clause, reflecting the policy objective of promoting mutual support and financial interdependence among entities falling under the philosophy of co-operatives [3].

The Finance Act 2006 Amendment and Section 80P(4)

The Finance Act, 2006 introduced an amendment by adding sub-section (4) to Section 80P with effect from April 1, 2007. By this amendment, deduction under Section 80P was precluded as regards co-operative banks, barring the exceptions of primary agricultural credit societies and primary co-operative agricultural and rural development banks. The basis underlying the exclusion was the equivalence in the functional operation of the co-operative banks to that of the commercial banks as they were no longer different in functioning from the commercial banking institutions and were competing in the same relevant market [4].

Until the introduction of Section 80P(4), there was an apparently simple exclusion. The provision categorically states that the deduction under Section 80P shall not be allowed to any cooperative bank other than the two categories mentioned therein. However, the wording of the amendment led to an interpretational issue in deciding whether the applicability of Section 80P(2)(d) deductions on interest earnings from investments with cooperative banks in instances involving cooperative societies. The immediate question thereby arose whether the prohibition in extending the benefit of deduction to the cooperative banks themselves necessarily denied other cooperative societies the benefit of deductions on interest income derived from investments made by them with such banks.

The legislative history shows that the amendment was aimed at, and was intended to, take away the competitive advantage that cooperative banks enjoyed over commercial banks, claiming deductions under Section 80P. CBDT Circular No. 14, dated December 28, 2006, explains that sub-section (4) was inserted to bring cooperative banks that operate at par with commercial banks on equal footing with regard to taxation treatment. This stipulation would be essential in considering the fact that the amendment’s scope was just restricted to the denial of these deductions to cooperative banks themselves and did not extend to take away the eligibility of other cooperative societies earning their income from such banks [5].

Statutory Investment Requirements under State Cooperative Acts

Thus, the state cooperative societies legislation all over India has mandatory investment requirements for the cooperative societies to invest their surplus funds in such a manner as to provide likelihood for liquidity, safety, and also regulatory requirements. One good example can be drawn from Section 70 of the Maharashtra Cooperative Societies Act, 1960, which states that the societies should invest their funds or deposit their funds in one or more of the following specified avenues: investments in the State Cooperative Bank or Central Bank; securities specified under Section 20 of the Indian Trusts Act, 1882; shares or debentures issued by other cooperative societies subject to limited liability; and cooperative banks or banking companies approved by the Registrar [6].

These statutory investment requirements underscore several regulatory functions. First, they ensure that the societies maintain sufficient liquidity for operational requirements and service to their members. Second, these provisions ensure that funds are reinvested within the umbrella of the cooperative banking system to facilitate and develop the cooperative credit structure, thus providing mutual support among the various cooperative organizations. Third, they offer a means of regulatory supervision because the Registrar of Cooperative Societies can sanction modes of investment and monitor their observance.

Section 70 imposes a legal obligation on housing cooperative societies in Maharashtra to invest surplus funds, including reserve funds and other statutory funds, as prescribed. They generally keep the maintenance collections, sinking funds, and other reserves of these societies in fixed deposits or savings accounts opened with cooperative banks registered under the state cooperative societies act. The interest income therefrom from such statutorily required investments constitutes a sizable component of the society’s incomes, and its tax treatment has a direct bearing on the financial viability of the society and, therefore, on the reasonableness of the services provided to the members.

Recent Judicial Pronouncements and Legal Precedents

The judicial landscape regarding the availability of deduction under Section 80P(2)(d) has developed through a line of decisions by the tribunals and high courts, which have clarified the legal position step by step. The Income Tax Appellate Tribunal, Mumbai Bench, pronounced a set of such landmark decisions on this issue, seminal among them being the decision in Reserve Bank Staff and Officers Co-op Credit Society Ltd. The tribunal was required to consider, in the said case, whether a cooperative credit society is entitled to claim deduction under Section 80P(2)(d) in respect of interest from fixed deposits maintained with banks that also happen to be cooperative banks.

The tribunal’s reasoning was based on the statutory definition of “cooperative society” under Section 2(19) of the Income Tax Act, defining a co-operative society as any society registered under the Cooperative Societies Act, 1912, or under any other law for the time being in force in any state for the registration of cooperative societies. It was held by the Tribunal that since co-operative banks are registered under state co-operative societies acts, no doubt, they squarely fall within the definition of co-operative societies. Hence, where a co-operative society receives interest on its investments placed with a co-operative bank, it derives income from another co-operative society, clearly falling within the ambit of Section 80P(2)(d) [7].

It further held that Section 80P(4) is a disqualification provisions, which disqualifies a cooperative bank from claiming deductions regarding its own income. The sub-section does not change the inherent character of a cooperative bank as a cooperative society, for the purpose of determining whether another society is eligible to claim deductions under Section 80P(2)(d). As interpreted, it would fall in line with the rule of interpretation of the tax statute that an exclusionary clause should be strictly construed and beneficial provisions liberally in favor of the taxpayer.

The above reasoning by the Mumbai tribunal got support in the subsequent decision in the case of Laburnum Mahindra Gardens Co-operative Housing Society. The tribunal had to decide whether a housing co-operative society was entitled to deductions in respect of interest accruing from fixed deposits and savings accounts maintained with co-operative banks like Saraswat Co-operative Bank, Shamrao Vitthal Co-operative Bank, Maharashtra State Co-operative Bank, and Maharashtra District Central Co-operative Bank. The tribunal noticed that since the society was registered under the Maharashtra Co-operative Societies Act, it was statutorily obliged to invest its finances in co-operative banks as specified in Section 70 of the state act [8]

Deciding Case: Rajkot Lodhika Sahakari Kharid Vechan Sangh: Gujarat High Court

The judgment pronounced by the Gujarat High Court in the case of Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. represents a definitive judicial pronouncement on the eligibility of cooperative societies to claim Section 80P(2)(d) deductions for interest earned from cooperative banks. Assessee, in brief, is a cooperative society supplying agricultural inputs to its members and filed its income tax return for the assessment year 2018-19, claiming deductions under Sec. 80P(2)(d) for interest earned on investments made by it with cooperative banks. The assessing officer during the assessment proceedings allowed these deductions by accepting the legitimacy of the claim.

However, the Principal Commissioner of Income Tax exercised revisional powers under Section 263 of the Income Tax Act and held that the said assessment order was erroneous and prejudicial to revenue’s interest. The revenue authorities argued that Section 80-P(2)(d) granted deduction for interest from investments with co-operative societies only, and co-operative banks were not specifically mentioned therein. This would have had the effect, if the interpretation had been accepted, of denying the deduction to co-operative societies on interest earned from the very institutions in which they were statutorily required to invest their funds.

Assessee thus approached the Income Tax Appellate Tribunal, Rajkot, which decided the issue in favour of the assessee by setting aside the order of the Principal Commissioner. The revenue approached Gujarat High Court stating that cooperative banks were different from co-operative societies for the purpose of Section 80P(2)(d) of the Act and the tribunal had erred in allowing the deduction. What the revenue’s stand, in substance, aimed at was to draw an artificial line of distinction between cooperative banks and cooperative societies even though both fell within the same category of cooperative societies legislation.

The Gujarat High Court, in its judgment by a bench led by Justice Bhargav D. Karia and Justice Pranav Trivedi, comprehensively analyzed the statutory scheme and rejected the revenue’s contentions. The court held that co-operative banks, being basically cooperative societies registered under the Gujarat State Co-operative Societies Act and also satisfying all the definitional criteria contained in Section 80P(2)(d), could not be denied the benefits available to a cooperative society. The mere fact that these institutions run the business of banking cannot deprive them of their basic character as a co-operative society. In fact, the amendment to Section 80P(4) inserted by the Finance Act, 2006, had not excluded co-operative banks from the definition of a co-operative society but had merely denied them the benefit of claiming deductions for their own income [1].

The high court further explained that Section 80P(2)(d) is a beneficial provision designed to benefit and promote cooperative societies, and such provisions deserve to be construed in a broad and liberal manner in favour of the beneficiary entities. The court held that, under Section 80P(2)(d), what the legislature intended to achieve was the mutual assistance between different cooperative bodies and encourage them to invest in the shares/ securities/deposits of other cooperative bodies for the betterment of the cooperative movement. Denying deductions to cooperative societies for interest earned from investments made with cooperative banks would defeat this legislative intent and have an anomalous effect of penalizing societies for adhering to and complying with their statutory investment obligations.

The ratio of the judgment delivered in this appeal by the Gujarat High Court assumes significant importance because it lays down the authoritative pronouncement as to how Section 80P(2)(d) of the Act would apply in the case of cooperative banks. The judgment has also brought about consistency insofar as the application of the Income Tax Act is concerned for and in respect of the cooperatives. In setting aside the appeal filed by the revenue and confirming the order of the tribunal, the high court made clear the legal position in the taxpayer’s favor and gave this large hope to thousands of such societies that the interest from their investment in the cooperative bank deposits would be appropriately allowed under Section 80P

Regulatory Framework for Cooperative Societies and Banks

In India, the regulation of cooperative societies and cooperative banks has worked in a dual framework, relating to state cooperative societies legislation as well as central banking regulations. Cooperative societies derive their registration and primary governance structure from state cooperative societies acts, which vary across different states but share common principles regarding registration, management, and operations. It usually requires the cooperative societies, under these state acts, to maintain certain funds, invest surplus amounts in prescribed avenues, and submit themselves to periodic audits and regulatory oversight by the Registrar of Cooperative Societies.

This is the state-level statutory arrangement and is best represented by the Maharashtra Cooperative Societies Act, 1960. According to this act, societies are required to create reserve funds; at least one-fourth of the net profits have to be transferred to the reserve fund every year. Such reserve funds and other statutory funds have to be invested according to the provisions contained in Section 70 of the act, which stipulates the various investment avenues. Societies are also expected to maintain proper books of account, prepare an annual budget, and are subject to statutory audits conducted by audit staff called cooperative society auditors appointed by the state government [6].

Cooperative banks, although retaining their registration under state cooperative societies acts, fall additionally under the regulatory ambit of the Reserve Bank of India through the Banking Regulation Act, 1949, as it relates to cooperative societies. The RBI exercises supervisory powers over the cooperative banks in respect of their banking operations, capital adequacy, lending practices, and prudential norms. However, this dual regulation does not alter the fundamental character of the cooperative banks as cooperative societies; it merely adds an additional layer of banking-specific regulation to ensure financial stability and depositor protection.

Practical Implications for Cooperative Societies

The judicial clarification regarding Section 80P(2)(d) deductions carries serious practical implications for cooperative societies across India. Cooperative housing societies usually maintain substantial funds in fixed deposits with banks, especially cooperative banks, and henceforth are in a better position to claim such deductions without much apprehension, as established legal precedents have been laid down for the same. It directly affects the tax treatment to be accorded by the society in its financial planning since the savings can be utilized for maintenance activities, infrastructure development, or be passed on to members through reduced maintenance charges.

The credit co-operative societies granting loans to their members will have a greater benefit on account of the facility of claiming deductions on interest earned from surplus funds parked with co-operative banks. These societies typically maintain liquidity reserves to meet loan demand from their members, and the interest on these reserves supplements their income from member loans. The availability of Section 80P(2)(d) deductions ensures that these societies operate more efficiently and can offer competitive interest rates to their borrowing members.

The agricultural cooperative societies and marketing societies that invest statutory reserves in cooperative banks enjoy similar tax treatment. These societies play a very important role in the value chains, procuring produce from their farmer members, undertaking marketing, and supplying inputs. The tax saving accruing from Section 80P(2)(d) deductions enables these societies to give good prices to their farmer members and to keep input costs at reasonable levels, thereby facilitating agricultural development goals.

To satisfy the principle of substantiation and, therefore, comply, cooperative societies should maintain on record necessary documents to substantiate claims under Section 80P(2)(d). These would include investment records detailing deposits/investments made with cooperative banks, registration of banks under state Cooperative Societies Acts, and computation sheets clearly highlighting interest income earned and deduction claimed.

Societies should also ensure that income tax returns are filed within the due date prescribed under Section 139(1) of the Income Tax Act, since Section 80AC provides that no deduction under Chapter VI-A (which includes Section 80P) shall be allowed unless return of income is filed within the time prescribed under Sub-section (1) of Section 139.

Distinguishing Between Section 80P(2)(a) and Section 80P(2)(d)

Section 80P(2) of the Income Tax Act has various sub-clauses, each detailing the different types of incomes that are allowable as deductions for cooperative societies. For instance, Section 80P(2)(a)(i) specifically relates to income from business of providing credit facilities to members, while Section 80P(2)(d) covers income from investments with other cooperative societies. The differentiation between these sections comes into play when determining the applicable basis on which deductions of interest income shall be claimed.

Assessing officers have, however, tried to argue that interest income derived from cooperative banks should be assessed under Section 80P(2)(a)(i) and not under Section 80P(2)(d) of the Act, claiming that such income is business income from credit operations and not investment income. However, the said approach has been set aside by the tribunals consistently on the ground that in case a cooperative society deposits funds in fixed deposits or savings accounts with the cooperative banks, it is an investment and not business of providing credit to its members. Interest received on such deposits would, therefore, comprise income on investments and fall accordingly under Section 80P(2)(d) of the Act.

Conclusion

The legal position on the Section 80P(2)(d) deduction of interest income accrued from investment in a cooperative bank has reached a fairly settled state through judicial interpretation by successive development through various forums consistently. The judgment of the Gujarat High Court in the case of Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd., assisted by favorable tribunal decisions from Mumbai and other benches, lays down the legal principle that a cooperative society is entitled to a deduction under Section 80P(2)(d) for interest receipts derived from its investment with a cooperative bank, notwithstanding exclusion of a cooperative bank from claiming a deduction for its own income under Section 80P(4).

This explanation was in line with the basic purpose of enacting Section 80P, namely to encourage cooperative movement and to assist mutual support among the members of cooperative entities. For a cooperative bank was registered under the corresponding State Cooperative Societies Acts and thus met all definitional elements of a cooperative society, as defined by Section 2(19) of the Income Tax Act. For, the Finance Act, 2006 amendment adding Section 80P(4) was to provide a level playing field between cooperative banks and commercial banks with regard to their respective tax treatment, not to penalize other cooperative societies for earning income from bona fide investments made with the cooperative bank.

This, to a cooperative society and many others, has emerged as an area of acceptable legality with well-set precedents affording certainty on tax treatment over a key source of income. Such entities should ensure that documentation requirements, timely return filing, and proper computation of deduction for availing of this beneficial provision are complied with. As the co-operative sector continues to play an important role in the agenda of financial inclusion and rural development in India, the intent of tax treatment afforded under Section 80P(2)(d) furthers that course for sustainability and growth of this important economic ecosystem.

References

[1] Taxscan. (2025). Interest from Cooperative Banks Deductible u/s 80P(2)(d) as they Fall Under ‘Cooperative Society’: Gujarat HC. Retrieved from https://www.taxscan.in/top-stories/interest-from-cooperative-banks-deductible-us-80p2d-as-they-fall-under-cooperative-society-gujarat-hc-1427521
[2] ClearTax. (2025). Section 80P – Deduction for Co-operative Societies. Retrieved from https://cleartax.in/s/section-80p
[3] Jiraaf. (2025). Section 80P of Income Tax Act Explained | Eligibility, Deductions & More. Retrieved from https://www.jiraaf.com/blogs/taxation/section-80p-income-tax-act
[4] TaxGuru. (2018). Section 80P Deduction – Co-operative Societies – Analysis & Case Laws. Retrieved from https://taxguru.in/income-tax/section-80p-deduction-cooperative-societies-analysis-case-laws.html
[5] The Tax Talk. (2022). Section 80P(2)(d) deduction is permissible on Interest income of the Co-operative society from co-operative bank. Retrieved from https://thetaxtalk.com/2022/12/section-80p2d-deduction-is-permissible-on-interest-income-of-the-co-operative-society-from-co-operative-bank/
[6] LexTechSuite. Section 70 of the Maharashtra Co-operative Societies Act, 1960. Retrieved from https://lextechsuite.com/MAHARASHTRA-CO-OPERATIVE-SOCIETIES-ACT-1960-SECTION-70-INVESTMENT-OF-FUNDS
[7] Taxscan. (2024). Income from fixed Deposits of co-operative banks are eligible for Deduction u/s 80P(2)(d) of Income Tax Act: ITAT. Retrieved from https://www.taxscan.in/income-from-fixed-deposits-of-co-operative-banks-are-eligible-for-deduction-u-s-80p2d-of-income-tax-act-itat-read-order/385870
[8] Indian Kanoon. (2024). Laburnum Mahindra Gardens Co Op Hsg … vs Income Tax Officer – Ward 41(4)(2). Retrieved from https://indiankanoon.org/doc/19780147/

Posted on: December 29th, 2025