Section 81

CHAPTER VII — INCOMES FORMING PART OF TOTAL INCOME ON WHICH NO INCOME-TAX IS PAYABLE

SECTION 81 — INCOME OF CO-OPERATIVE SOCIETIES (OMITTED)

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

STATUTORY POSITION (Income-tax Act, 1961, as in force)

Marginal heading (as originally enacted): Income Of Co-Operative Societies

81. to 85C. [Omitted by the Finance (No. 2) Act, 1967, w.e.f. 1-4-1968. Provisions of sections 81, 82, 83, 84, 85, 85A, 85B and 85C were incorporated from the same date in sections 80P, 80Q, 10(29), 80J (now omitted), 80K (now omitted), 80M (now omitted), 80N (now omitted) and 80-O, respectively.]

A. SECTION COMMENTARY

A.1 Original subject-matter (pre-1968 position)

Section 81, as it stood until 31 March 1968, exempted from income-tax specified categories of income of a co-operative society — most importantly income from carrying on the business of banking or providing credit facilities to its members, a cottage industry, the marketing of the agricultural produce of its members, the purchase of agricultural implements/seeds/livestock for supply to members, and the processing without power of the agricultural produce of its members, subject to monetary and qualitative conditions. It was the principal co-operative-sector relief of the 1961 Act.

A.2 Insertion and statutory history

Original provision was part of the Income-tax Act, 1961 as enacted (w.e.f. 1-4-1962); it carried forward the exemption for co-operative societies that had existed under section 14(3) of the Indian Income-tax Act, 1922.

A.3 Omission and migration of the provision

With effect from 1 April 1968 the Finance (No. 2) Act, 1967 recast the co-operative exemption as a Chapter VI-A deduction in section 80P. The substance of the old section 81 relief (banking/credit to members, cottage industry, marketing of members' produce, etc.) is now found in section 80P(2). The change converted an 'income on which no tax is payable' (Chapter VII) into a 'deduction from gross total income' (Chapter VI-A), but the policy of fiscal support to the co-operative movement was carried forward intact.

A.4 Current status

Section 81 does not exist as a live operative provision of the Income-tax Act, 1961. The Chapter VII slot bears only the omission entry reproduced above. Its policy lives on in section 80P (and the provisions that have in turn succeeded it). For an assessment under the 1961 Act there is nothing to apply under section 81 itself; the analysis must proceed under the successor provision and the head of income to which the receipt belongs.

A.5 CA practitioner pointers

(1) Do not cite section 81 in a current return, computation, assessment or appeal — it has stood omitted since the date shown above and any reference to it is liable to be treated as a mistake. (2) Where the receipt in question is of the kind the old section addressed, frame the claim under the successor provision and satisfy its conditions. (3) When relying on older judgments decided on the omitted section, treat them as authority on the underlying concept only, and check that the successor provision has not altered the conditions on which the earlier ruling turned.

B. FA 2026 IMPACT NOTE

The Finance Act, 2026 does not revive or amend section 81; the section remains omitted. FA 2026 makes no change to Chapter VII. (For completeness, the only live section of Chapter VII — section 86 — is also not amended by FA 2026.)

Transition note: the Income-tax Act, 2025 (which commences on 1 April 2026 and replaces the 1961 Act) does not re-enact this omitted provision under its old number; the relief, to the extent it still exists, is found in the corresponding deduction/exemption of the new Act.

C. CASE LAW

No case law subsists under section 81 as a live provision: it was omitted with effect from the date noted above, so no assessment is decided under it today. The jurisprudence on its subject-matter now resides under the successor provision (section 80P). For cross-reference and continuity of doctrine, the leading authorities on the successor provision are set out below; they are noted here as authority on the underlying concept, decided under the successor section and not under section 81.

1. Totgar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (SC)

Facts: A co-operative society engaged in marketing the agricultural produce of its members invested its surplus funds (retained from members' sale proceeds) in short-term bank deposits and Government securities and claimed the interest as exempt under section 80P(2)(a)(i).

Held: The Supreme Court held that such interest, being earned on surplus funds not immediately required for business, was assessable as 'Income from other sources' under section 56 and was not 'profits and gains of business' attributable to the society's specified activities; the section 80P(2)(a) deduction was therefore denied on that interest.

Relevance: Leading authority on the scope of the co-operative-society deduction that succeeded section 81; marks the boundary between operational income (deductible) and investment income (not deductible).

2. Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 431 ITR 1 (SC)

Facts: Primary agricultural credit societies registered under the Kerala Co-operative Societies Act claimed deduction under section 80P(2)(a)(i); the Revenue sought to deny it on the footing that they were really carrying on banking business hit by section 80P(4).

Held: The Supreme Court held that section 80P is a beneficial provision to be construed liberally in favour of the assessee; the limited exclusion in section 80P(4) applies only to co-operative banks which are co-operative societies that must possess a banking licence from the RBI, and not to primary agricultural credit societies. Deduction was allowed.

Relevance: Restates the liberal-construction rule for the successor co-operative-society exemption and confines the section 80P(4) carve-out; the leading modern authority on section 80P.