2024 (5) TMI 1567 - AT - Income Tax

Deduction w/s 80P(2)(d) interest income earned from Co-operative bank treating the Cooperative bank as Co-operative society - Co-operative Society and Co- operative bank are distinct entity and it is essential for a cooperative society to loose its status as a Co-operative society so as to turn into a co-operative bank and to acquire license from the RBI so as to conduct banking business - HELD THAT - As in assessee s own case 2023 (9) TMI 1687 - ITAT MUMBAI the coordinate bench has held that assessee is a cooperative credit society eligible for benefit of deduction u/s. 80P(2)(a)(i) and that Section 80P(4) restricting the benefit of deduction does not apply to the assessee since it is neither a cooperative bank nor a cooperative society holding license from RBI for banking business. Also with detailed exposition on the issue in hand in the case of The Mavilayi Service Cooperative Bank 2021 (1) TMI 488 - SUPREME COURT and Kerala State Cooperative Agricultural and Rural Development Bank 2023 (9) TMI 761 - SUPREME COURT we do not find any reason to interfere with the well analysed and elaborate finding arrived at by the ld. CIT (A) in allowing the grounds raised by the assessee on this issue. Accordingly ground no. 1 and 3 of the Revenue are dismissed. Having held that assessee is a credit cooperative society and not a cooperative bank within the meaning of Banking Regulation Act 1949 provisions of Section 36(1)(viia)of the Act do not apply in the case of assessee which has been rightly held by the CIT(A). Accordingly ground no. 2 of the Revenue is dismissed. Deduction u/s 80P(2)(d) - We are of the considered view that though the co-operative bank pursuant to the insertion of Sub-section (4) of Sec. 80P would no more be entitled for claim of deduction under Sec. 80P of the Act however since a co-operative bank continues to be a cooperative society registered under the Co-operative Societies Act 1912 (2 of 1912) or under any other law for the time being enforced in any state for the registration of cooperative societies therefore the interest income derived by a cooperative 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. We thus hold that assessee is eligible for claiming deduction u/s. 80P(2)(d) disallowed by the AO.

Summary

The core legal questions considered in these appeals revolve around the interpretation and applicability of deductions claimed under sections 80P(2)(a)(i), 80P(2)(d), and 80P(4) of the Income-tax Act, 1961, specifically concerning the nature of the assessee as a cooperative society or a cooperative bank, and the consequent eligibility for deductions on interest income earned from deposits with cooperative banks. Additional issues include the applicability of provisions under section 36(1)(viia) relating to bad and doubtful debts in the context of the assessee's status.

The principal issues presented and considered are:

1. Whether the assessee, being a credit cooperative society and not a cooperative bank licensed by the Reserve Bank of India (RBI), is entitled to claim deduction under section 80P(2)(a)(i) of the Income-tax Act on interest income earned from loans given to its members.

2. Whether the deduction under section 80P(2)(d) is allowable on interest income earned by the assessee from investments made with other cooperative societies, including cooperative banks.

3. Whether the proviso under section 80P(4), which excludes cooperative banks licensed by RBI from claiming deductions under section 80P(2), applies to the assessee.

4. Whether provisions of section 36(1)(viia), relating to disallowance of bad and doubtful debts, apply to the assessee, considering its status as a cooperative society rather than a cooperative bank.

5. Whether the disallowance made by the Central Processing Centre under section 80P(2)(a)(i) can be treated as an apparent mistake and rectified under section 154 of the Income-tax Act.

Issue-wise Detailed Analysis

1. Eligibility for Deduction under Section 80P(2)(a)(i) and Applicability of Section 80P(4)

The legal framework involves section 80P(2)(a)(i), which provides deduction to cooperative societies engaged in providing credit facilities to their members, and section 80P(4), which excludes cooperative banks licensed by the RBI from such deduction. The Banking Regulation Act, 1949, particularly Part V and section 56, defines cooperative banks and cooperative credit societies distinctly. Cooperative banks require an RBI license and are regulated by RBI, whereas cooperative credit societies do not require such a license and are governed by state cooperative societies acts.

The Court examined the factual matrix establishing that the assessee is registered as a cooperative society under the Maharashtra Cooperative Societies Act, 1960, and does not hold any banking license from RBI. The assessee accepts deposits and grants loans exclusively to its members, without engaging in banking business as defined under the Banking Regulation Act, 1949.

Precedents relied upon include the coordinate bench decisions of the Tribunal in the assessee's own case for earlier assessment years, which held that the assessee is a cooperative credit society entitled to deduction under section 80P(2)(a)(i). The Supreme Court decisions in The Mavilayi Service Cooperative Bank Ltd. and Kerala State Agricultural and Rural Development Bank Ltd. were pivotal. These judgments emphasized that section 80P is a beneficial provision to be interpreted liberally in favor of cooperative societies. The proviso under section 80P(4) excludes only those cooperative societies which are cooperative banks licensed by RBI to conduct banking business.

The Court noted that the expression "providing credit facilities to members" is not confined to agricultural credit alone and that loans to non-members are taxable as income from other sources. The Court also highlighted the distinction between eligibility for deduction and the attributability of profits and gains from specific activities.

Competing arguments from Revenue asserting that the assessee should be treated as a cooperative bank were rejected based on the absence of RBI license and the nature of activities of the assessee. The Court also referred to detailed distinctions between cooperative societies and cooperative banks, including regulatory control, acceptance of deposits, and banking facilities, underscoring that the assessee does not qualify as a cooperative bank.

Conclusion: The Court held that the assessee is a cooperative society, not a cooperative bank within the meaning of the Banking Regulation Act, 1949, and thus eligible for deduction under section 80P(2)(a)(i). Section 80P(4) does not apply to the assessee.

2. Deduction under Section 80P(2)(d) on Interest Income from Investments with Cooperative Banks

Section 80P(2)(d) allows deduction for interest or dividend income derived by a cooperative society from investments in other cooperative societies. The Revenue challenged the deduction claimed on interest income earned from deposits with cooperative banks.

The Court referred to the decision of the coordinate bench in Rajat Apartments Co-op Housing Society Ltd., which held that cooperative banks are a species of the broader genus "cooperative societies." Although cooperative banks are excluded from claiming deduction under section 80P(2) post-insertion of section 80P(4), the income earned by a cooperative society from investments in cooperative banks remains eligible for deduction under section 80P(2)(d).

The Court also relied on the High Court of Karnataka decision in PCIT vs. Totagar Cooperative Sales Society Limited, which clarified that the term "cooperative society" is broad and includes cooperative banks as a subset, but the exclusion under section 80P(4) applies only to cooperative banks themselves claiming deduction, not to other cooperative societies earning income from them.

Conclusion: The Court upheld the deduction claimed under section 80P(2)(d) on interest income earned from investments with cooperative banks, rejecting the Revenue's disallowance.

3. Applicability of Section 36(1)(viia) on Bad and Doubtful Debts

Section 36(1)(viia) disallows certain bad debts in the case of banking companies. The Revenue contended that the assessee should be treated as a cooperative bank for this provision to apply.

Given the Court's finding that the assessee is a cooperative society and not a cooperative bank, the provisions of section 36(1)(viia) are not applicable. The Court relied on the definition and regulatory framework distinguishing cooperative banks from cooperative societies.

Conclusion: The Court upheld the CIT(A)'s order that section 36(1)(viia) provisions do not apply to the assessee, dismissing the Revenue's appeal on this ground.

4. Rectification under Section 154 of the Income-tax Act

The Revenue challenged the CIT(A)'s holding that the disallowance made by the Central Processing Centre (CPC) under section 80P(2)(a)(i) was an apparent mistake and could be rectified under section 154.

The Court did not separately elaborate on this issue in detail but applied the same reasoning as in the main appeals concerning the eligibility for deduction under section 80P(2)(a)(i), thereby implicitly affirming the rectification.

Significant Holdings

"Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the cooperative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee."

"Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI."

"The assessee is a cooperative society registered under the Maharashtra Co-operative Societies Act, 1960 and does not hold a banking license from RBI. Therefore, it cannot be treated as a cooperative bank within the meaning of the Banking Regulation Act, 1949."

"The interest income derived by a cooperative society from investments held with a cooperative bank would be entitled for claim of deduction under section 80P(2)(d) of the Act."

"Provisions of section 36(1)(viia) do not apply to cooperative societies and are applicable only to cooperative banks."

In conclusion, the Court dismissed all appeals filed by the Revenue, affirming the assessee's entitlement to deductions under sections 80P(2)(a)(i) and 80P(2)(d), and rejecting the applicability of section 80P(4) and section 36(1)(viia) to the assessee. The Court's reasoning is grounded in a detailed examination of statutory provisions, the regulatory framework distinguishing cooperative societies and cooperative banks, and authoritative judicial precedents including Supreme Court rulings. The decision underscores the principle that beneficial tax provisions for cooperative societies must be interpreted liberally and that the mere presence of banking-like activities does not convert a cooperative society into a cooperative bank for tax purposes.