2023 (4) TMI 1421 - AT - Income Tax

Disallowance u/s. 80P(2)(d) - interest income earned from investments in cooperative banks - HELD THAT - We are inclined to allow the claim of the assessee by holding that the interest income derived by a cooperative society from its investments held with a cooperative bank would be entitled for claim of deduction u/s. 80P(2)(d) of the Act. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the claim of deduction under section 80P(2)(d) of the Income-tax Act, 1961, by a cooperative housing society on interest income earned from investments in cooperative banks is admissible.

(b) Whether the disallowance of the deduction claim made during processing of the return under section 143(1) of the Act, without assigning reasons, is valid and sustainable.

(c) Whether the assessee could challenge the disallowance of the deduction under section 80P(2)(d) through an appeal against an order passed under section 154 of the Act, or whether the appeal should have been preferred against the original intimation under section 143(1).

(d) The legal effect of the rectification application under section 154 of the Act and its relation to the original intimation under section 143(1) in respect of the disallowance of the deduction.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Eligibility of deduction under section 80P(2)(d) on interest income from cooperative banks

Relevant legal framework and precedents: Section 80P(2)(d) of the Income-tax Act provides that in computing the total income of a cooperative society, 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 cooperative society registered under any law for the time being in force in any state.

Notably, subsection (4) of section 80P, inserted by the Finance Act, 2006, restricts the applicability of section 80P benefits in relation to cooperative banks, except primary agricultural credit societies or primary cooperative agricultural and rural development banks.

A Coordinate Bench of the Tribunal in the case of Ashoka Palace Co-Op. Hsg. Soc. Ltd. v. ITO, after considering various High Court and Tribunal decisions, held that interest income derived by a cooperative society from investments in a cooperative bank is eligible for deduction under section 80P(2)(d). The reasoning was that a cooperative bank is itself a cooperative society registered under the relevant cooperative societies law. Therefore, the interest income earned from such a cooperative bank qualifies for deduction under section 80P(2)(d), notwithstanding the insertion of subsection (4) which restricts deduction to certain cooperative banks.

Court's interpretation and reasoning: The Tribunal emphasized that the key criterion for claiming deduction under section 80P(2)(d) is that the income must be derived from investments with another cooperative society. Since cooperative banks are registered cooperative societies, interest income from such banks falls within the ambit of the provision. The Tribunal disagreed with the view that subsection (4) of section 80P nullifies the deduction claim on interest income from cooperative banks, holding that the restriction applies only to the cooperative bank itself claiming deduction, not to other cooperative societies investing in such banks.

Application of law to facts: The assessee, being a cooperative housing society, earned interest income from deposits with cooperative banks. Following the Coordinate Bench decision, the Tribunal held that the assessee is entitled to claim deduction under section 80P(2)(d) on such income.

Conclusions: The claim of deduction under section 80P(2)(d) on interest income from cooperative banks is valid and should be allowed.

Issue (b): Validity of disallowance of deduction under section 143(1) without reasons

Relevant legal framework: Section 143(1) of the Income-tax Act deals with processing of returns and issuance of intimation. The Centralized Processing Centre (CPC) disallowed the deduction claim under section 80P(2)(d) during processing, without assigning any reasons. The assessee filed a rectification application under section 154 seeking correction of this disallowance, which was rejected by the CPC without reasons.

Court's interpretation and reasoning: The Tribunal observed that the disallowance made under section 143(1) without reasons and the subsequent rejection of rectification under section 154 without proper explanation is not sustainable. The Tribunal noted that the Ld. Commissioner of Income Tax (Appeals) did not decide the merit of the deduction claim but dismissed the appeal on a technical ground relating to the forum of appeal.

Application of law to facts: Since the disallowance lacked proper reasoning, and the rectification was denied without adequate explanation, the Tribunal found the action of the CPC arbitrary and unjustified.

Conclusions: The disallowance of deduction under section 80P(2)(d) during processing without reasons is not valid, and the rectification application should have been considered on merits.

Issue (c): Appropriate forum and timing for challenging disallowance - appeal under section 143(1) or section 154

Relevant legal framework: Section 143(1) intimation is a summary assessment based on processing of return, and section 154 provides for rectification of mistakes apparent from record. The question arises whether the assessee should challenge the disallowance through an appeal against the original intimation under section 143(1) or through an appeal against the order rejecting rectification under section 154.

Court's interpretation and reasoning: The Ld. CIT(A) held that since the disallowance was made in the original intimation under section 143(1), the concept of merger applies, and the rectification order under section 154 cannot be independently challenged. Therefore, the appeal against the rectification order was dismissed on the ground that the assessee should have preferred appeal against the original intimation.

The Tribunal disagreed with this technical approach, noting that the rectification application was refused without reasons and that the Ld. CIT(A) did not decide the substantive issue of deduction. The Tribunal referred to the Coordinate Bench decision in Ashoka Palace Co-Op. Hsg. Soc. Ltd. v. ITO, which allowed the assessee to challenge such disallowance through appeal against the rectification order, recognizing the practical difficulties faced by the assessee in challenging the original intimation.

Application of law to facts: The Tribunal held that the assessee's appeal against the rectification order rejecting the claim of deduction was maintainable and the merits of the deduction claim should be adjudicated.

Conclusions: The appeal against the order under section 154 rejecting rectification is maintainable and the assessee is entitled to have the deduction claim under section 80P(2)(d) examined on merits.

Issue (d): Effect of rectification application under section 154 vis-`a-vis original intimation under section 143(1)

Relevant legal framework: Section 154 allows rectification of mistakes apparent from record. The concept of merger implies that a rectification order forms part of the original intimation and cannot be challenged independently.

Court's interpretation and reasoning: The Ld. CIT(A) relied on the concept of merger to hold that the rectification order under section 154 is not an independent order and hence not subject to separate appeal. However, the Tribunal observed that the rectification application was rejected on grounds beyond the scope of section 143(1) processing, and the refusal of rectification was independent of the original intimation.

The Tribunal noted that the rectification was refused without proper reasons and that the denial of deduction was not an incorrect claim apparent from the return. Therefore, the rectification refusal should be treated as a separate order and appeal against it is maintainable.

Application of law to facts: The Tribunal treated the rectification refusal as an independent order and allowed the appeal to proceed on merits.

Conclusions: The rectification order rejecting the claim of deduction under section 80P(2)(d) is an independent order and can be challenged by the assessee through appeal.

3. SIGNIFICANT HOLDINGS

The Tribunal held, preserving the crucial legal reasoning verbatim from the Coordinate Bench decision in Ashoka Palace Co-Op. Hsg. Soc. Ltd. v. ITO:

"The term 'cooperative society' had been defined under Sec. 2(19) of the Act, as under:

'(19) "Co-operative society" means a cooperative society registered under the Cooperative 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;'

We are of the considered view, that though the cooperative bank pursuant to the insertion of Subsection (4) of Sec. 80P would no more be entitled for claim of deduction under Sec. 80P of the Act, but however, as 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 co-operative 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 under Sec.80P(2)(d) of the Act."

Core principles established include:

- Interest income earned by a cooperative society from investments in a cooperative bank qualifies for deduction under section 80P(2)(d).

- The restriction in section 80P(4) on cooperative banks claiming deduction does not affect the eligibility of other cooperative societies investing in such banks to claim deduction.

- Disallowance of deduction during processing under section 143(1) without reasons and rejection of rectification under section 154 without explanation is not sustainable.

- Appeals against rectification orders under section 154 rejecting deduction claims are maintainable and can be adjudicated on merits.

Final determinations on each issue:

(i) The assessee is entitled to claim deduction under section 80P(2)(d) on interest income from cooperative banks.

(ii) The disallowance of such deduction during processing without reasons and rejection of rectification is invalid.

(iii) The appeal against the rectification order under section 154 is maintainable.

(iv) The matter is remanded for adjudication on merits of the deduction claim.