2023 (3) TMI 1574 - AT - Income Tax

Disallowing the claim on the interest income u/s 80P(2)(d) as received from Maharashtra State Co-operative Bank Ltd - HELD THAT - Though the co-operative banks pursuant to the insertion of sub-section (4) to Sec. 80P would no more be entitled for claim of deduction u/s 80P of the Act but as a cooperative bank continues to be a co-operative society registered under the Co-operative Societies Act 1912 (2 of 1912) or under any other law for the time being in force in any State for the registration of co-operative societies therefore the interest income derived by a co-operative society from its investments held with a co-operative bank would be entitled for claim of deduction u/s 80P(2)(d) of the Act. As relying on M/s. Rema Sahakari Karkhana Ltd 2022 (1) TMI 419 - ITAT PUNE assessee Co-operative Society s claim for deduction on Interest income from Maharashtra State Co-operative Bank Ltd. is allowable deduction u/s 80P(2)(d) of the Act. Therefore the appeal of the assessee is allowed.

Summary

The primary issue presented in this appeal concerns the allowability of deduction under Section 80P(2)(d) of the Income Tax Act, 1961, in respect of interest income earned by a cooperative housing society from its investments in a cooperative bank. Specifically, the legal questions considered are:

1. Whether the interest income earned by a cooperative housing society from deposits held with a cooperative bank qualifies for deduction under Section 80P(2)(d) of the Income Tax Act.

2. The applicability and interpretation of the principle of mutuality and relevant judicial precedents, including the relevance of the Supreme Court decision in Bangalore Club vs. CIT.

3. The legal effect of the insertion of sub-section (4) to Section 80P, which restricts cooperative banks from claiming deduction under Section 80P, and whether this affects the deduction claim of cooperative societies earning interest from cooperative banks.

Issue-wise Detailed Analysis

Issue 1: Eligibility of Deduction under Section 80P(2)(d) for Interest Income from Cooperative Banks

The relevant legal provision is Section 80P(2)(d) of the Income Tax Act, which provides that in computing the total income of a cooperative society, any income by way of interest or dividends derived by the cooperative society from its investments with any other cooperative society shall be deducted. The term "cooperative society" is defined under Section 2(19) of the Act as a society registered under the Cooperative Societies Act or any other law for registration of cooperative societies in any state.

The assessee, a cooperative housing society registered under the Maharashtra Cooperative Societies Act, had earned interest income from deposits with the Maharashtra State Cooperative Bank Ltd. The question is whether such income qualifies for deduction under Section 80P(2)(d).

The Court observed that the cooperative bank, despite the insertion of sub-section (4) to Section 80P which bars cooperative banks from claiming deduction under Section 80P, remains a cooperative society registered under relevant cooperative law. Therefore, interest income earned by a cooperative society from investments held with a cooperative bank qualifies for deduction under Section 80P(2)(d).

Judicial precedents were considered extensively. The Tribunal referred to its earlier decision in M/s. Rema Sahakari Karkhana Ltd., which held that interest income earned by a cooperative society from investments in a cooperative bank is eligible for deduction under Section 80P(2)(d). Several other decisions were cited in support, including those from the Pune and Mumbai Benches of the Tribunal and High Courts of Karnataka and Gujarat.

The High Court of Karnataka in Pr. Commissioner of Income Tax and Anr. vs. Totagars Cooperative Sale Society and the High Court of Gujarat in State Bank of India vs. CIT held that interest income earned by a cooperative society on investments in a cooperative bank is eligible for deduction under Section 80P(2)(d). These decisions were weighed against a conflicting Karnataka High Court decision which denied such deduction. The Tribunal applied the principle established by the Bombay High Court that in case of conflict between non-jurisdictional High Courts, the view favorable to the assessee should be preferred.

Thus, on the basis of the statutory language, definition of cooperative society, and judicial precedents, the Tribunal concluded that the interest income earned by the assessee from the Maharashtra State Cooperative Bank qualifies for deduction under Section 80P(2)(d).

Issue 2: Applicability of the Principle of Mutuality and the Bangalore Club Supreme Court Decision

The Revenue and the Ld. CIT(A) had relied on the Supreme Court decision in Bangalore Club vs. CIT, where the Court held that interest income earned from a member or corporate member bank is not eligible for exemption on the principle of mutuality. The Tribunal examined the applicability of this precedent.

The Tribunal found that the Bangalore Club case dealt with exemption claimed on the basis of the principle of mutuality, which is a distinct legal principle from the statutory deduction under Section 80P(2)(d). The facts in Bangalore Club involved a club earning interest income from corporate member banks, whereas in the present case, the issue is deduction claimed by a cooperative society on interest income from a cooperative bank under a specific statutory provision.

Therefore, the Tribunal held that the reliance on the Bangalore Club decision by the Ld. CIT(A) was misplaced and irrelevant to the facts and legal question in the present appeal. The principle of mutuality as expounded in Bangalore Club does not override the express statutory provision under Section 80P(2)(d).

Issue 3: Effect of Section 80P(4) on Deduction Claims by Cooperative Societies

Section 80P(4) was inserted to deny deduction to cooperative banks themselves, recognizing that they operate on par with other banks and should not enjoy such preferential treatment. The Tribunal clarified that this amendment does not affect the eligibility of cooperative societies to claim deduction on interest income earned from investments in cooperative banks.

The cooperative bank remains a cooperative society under the relevant cooperative laws. The statutory language of Section 80P(2)(d) explicitly allows deduction for income derived by a cooperative society from investments in any other cooperative society, which includes cooperative banks. Hence, the insertion of sub-section (4) does not preclude cooperative societies from claiming deduction on interest income earned from cooperative banks.

Conclusions

The Tribunal concluded that the assessee cooperative society is entitled to claim deduction under Section 80P(2)(d) of the Income Tax Act for the interest income of Rs. 1,89,143/- earned from the Maharashtra State Cooperative Bank. The order of the Ld. CIT(A) confirming the disallowance was set aside, and the appeal was allowed accordingly.

Significant Holdings

"From a bare reading of Sec. 80P(2)(d), it can be discerned that interest income derived by an assessee co-operative society from its investments held with any other co-operative society shall be deducted in computing its total income."

"Although, in all fairness, we may herein observe that the Hon'ble High Court of Karnataka in the case of Pr. CIT Vs. Totagars co-operative Sale Society (2017) 395 ITR 611 (Karn), as had been relied upon by the ld. D.R before us, had held, that a co-operative society would not be entitled to claim deduction under Sec. 80P(2)(d); but then, the Hon'ble High Court in the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn) and Hon'ble High Court of Gujarat in the case of State Bank of India Vs. CIT (2016) 389 ITR 578 (Guj), had observed, that the interest income earned by a co-operative society on its investments held with a co-operative bank would be eligible for claim of deduction under Sec. 80P(2)(d) of the Act."

"Where there is a conflict between the decisions of non-jurisdictional High Court's, then a view which is in favour of the assessee is to be preferred as against that taken against him."

"The Hon'ble Supreme Court was dealing with the exemption claimed by the Bangalore Club in respect of 'interest income' from corporate member banks on the principle of mutuality, which is not the case/lis in this appeal."

"The impugned action of Ld. CIT(A) is erroneous for relying on the ratio of the decision of Apex Court in Bangalore Club case (supra) in the facts/issue of this appeal."

In sum, the Tribunal established that the statutory language of Section 80P(2)(d) entitles a cooperative society to claim deduction on interest income earned from investments in cooperative banks, notwithstanding the insertion of sub-section (4) to Section 80P and notwithstanding conflicting judicial precedents from other High Courts. The principle of mutuality and the Supreme Court decision in Bangalore Club are not applicable to this statutory deduction claim. The Tribunal directed the Assessing Officer to allow the deduction accordingly.