2024 (5) TMI 1580 - AT - Income Tax

Deduction u/s 80P(2) and 80P(2)(d) - interest income earned by the cooperative society from deposits with cooperative banks - HELD THAT - Hon ble Tribunal 2023 (1) TMI 826 - ITAT MUMBAI has passed the order relied on catena of judicial decisions were the co-operative society receives/earns interest on deposits with the co-operative bank is eligible for claim of deduction u/s 80(2)(d) of the Act. Accordingly direct the AO to allow the claim of deduction u/sec 80P(2)(d) of the Act on the interest income received /earned from the co-operative banks and basic exemption u/sec 80P of the Act - Appeal filed by the appeal is allowed.

Summary

The core legal questions considered in this appeal revolve around the eligibility of a cooperative housing society to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961, specifically concerning interest income earned from fixed deposits with cooperative banks. The issues include:

1. Whether the deduction claimed under section 80P(2)(d) for interest income earned by the cooperative society from deposits with cooperative banks is allowable.

2. Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in disallowing the deduction and confirming the demand raised under section 143(1) and rejecting rectification under section 154 of the Act.

3. The legal interpretation of the term "cooperative society" under section 80P(2)(d) and the impact of the insertion of subsection (4) to section 80P on the eligibility of cooperative banks for deduction claims.

Issue-wise Detailed Analysis:

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

Relevant Legal Framework and Precedents: Section 80P(2)(d) provides that a cooperative society is entitled to deduct income by way of interest or dividends derived from its investments with any other cooperative society. The term "cooperative society" is defined under section 2(19) as a society registered under the Cooperative Societies Act, 1912 or any other law for registration of cooperative societies.

Subsection (4) of section 80P, inserted by the Finance Act 2006 effective from 01.04.2007, excludes cooperative banks (other than primary agricultural credit societies or primary cooperative agricultural and rural development banks) from claiming deductions under section 80P.

Judicial precedents include decisions by various coordinate benches of the Tribunal and High Courts, notably:

• Hon'ble Karnataka High Court in Pr. Commissioner of Income Tax & Anr. vs. Totgar's Cooperative Sale Society (2017) 392 ITR 74 (Karn)
• Hon'ble Gujarat High Court in State Bank of India vs. CIT (2016) 389 ITR 578 (Guj)
• Tribunal decisions in M/s Solitaire CHS Ltd. vs. Pr.CIT, Land and Cooperative Housing Society Ltd. vs. ITO, and others.

Court's Interpretation and Reasoning: The Court examined whether the interest income earned by the cooperative society from deposits with cooperative banks qualifies for deduction under section 80P(2)(d). Although subsection (4) excludes cooperative banks from claiming deduction under section 80P, the Court observed that cooperative banks themselves continue to be cooperative societies registered under the Cooperative Societies Act or similar state laws.

Therefore, the interest income derived by a cooperative society from investments held with a cooperative bank (which is itself a cooperative society) falls within the ambit of section 80P(2)(d).

The Court distinguished the Supreme Court judgment in Totgar's Cooperative Sale Society Ltd. vs. ITO, which dealt with section 80P(2)(a)(i) and not section 80P(2)(d), holding that the Supreme Court decision was not directly applicable to the present issue.

Key Evidence and Findings: The appellant society earned interest on fixed deposits with five cooperative banks. The AO disallowed the deduction, treating the cooperative banks as urban commercial banks not eligible under section 80P(2)(d). The CIT(A) upheld this view. However, the appellant relied on judicial precedents and the definition of cooperative society to support the claim.

Application of Law to Facts: The Tribunal found that the interest income was earned from cooperative banks that are registered cooperative societies. Hence, the deduction under section 80P(2)(d) is applicable. The AO's and CIT(A)'s denial was contrary to the settled legal position.

Treatment of Competing Arguments: The Revenue's argument was based on the exclusion of cooperative banks from section 80P deductions per subsection (4). The Court acknowledged this but emphasized that subsection (4) does not affect the eligibility of cooperative societies to claim deduction on income derived from investments in cooperative banks, which remain cooperative societies. The Court also noted conflicting High Court decisions but preferred the view favorable to the assessee as per the Bombay High Court's precedent on jurisdictional conflicts.

Conclusions: The deduction under section 80P(2)(d) is allowable in respect of interest income earned by a cooperative society from deposits with cooperative banks. The AO and CIT(A) erred in disallowing the claim.

2. Validity of Rectification Order under Section 154 and the Scope of Section 143(1) Adjustments

Relevant Legal Framework and Precedents: Section 154 allows rectification of mistakes apparent from record. Section 143(1) deals with summary assessment based on returns filed. The question was whether disallowance of deduction under section 80P(2)(d) could be rectified under section 154 after summary assessment.

Court's Interpretation and Reasoning: The Court noted that the disallowance was not due to an error apparent on record but a substantive issue of law and fact. Hence, rectification under section 154 was not appropriate. The AO's order under section 143(1) disallowing deduction was a considered view and not an apparent mistake.

Key Evidence and Findings: The rectification petition was rejected by the AO and upheld by CIT(A). The Court found no error in rejecting rectification as the issue required adjudication, not mere correction of an apparent error.

Application of Law to Facts: The Court held that the demand raised was not due to an error apparent on record and thus rectification under section 154 was not maintainable.

Treatment of Competing Arguments: The appellant argued that the disallowance was an error apparent on record. The Court rejected this, emphasizing the nature of the dispute as a substantive legal issue.

Conclusions: The rectification petition was rightly rejected; the issue had to be decided on merits through appeal and not rectification.

3. Exercise of Revisional Powers under Section 263 by the Pr. CIT

Relevant Legal Framework and Precedents: Section 263 empowers the Principal Commissioner of Income Tax to revise orders if they are erroneous and prejudicial to the interests of the revenue.

Court's Interpretation and Reasoning: The Tribunal observed that the AO had taken a possible view in allowing the deduction under section 80P(2)(d) based on the facts and legal position. The Pr. CIT's exercise of revisional jurisdiction to dislodge this view was erroneous.

Key Evidence and Findings: The AO's order was supported by judicial precedents and the legal definition of cooperative society. The revisional order was set aside and the AO's order restored.

Application of Law to Facts: The revisional jurisdiction cannot be exercised merely because the Pr. CIT disagrees with a possible view taken by the AO. The AO's order was not erroneous or prejudicial to revenue.

Treatment of Competing Arguments: The Pr. CIT relied on the Supreme Court decision in Totgar's case and the exclusion of cooperative banks under subsection (4) of section 80P. The Tribunal distinguished these and held the revisional order unjustified.

Conclusions: The revisional order under section 263 was quashed, and the AO's order restored.

Significant Holdings:

"...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 cooperative society from its investments held with a cooperative bank would be entitled for claim of deduction under Sec.80P(2)(d) of the Act."

"...the issue that interest received by a co-operative society on its deposits with co-operative banks would be eligible for deduction w/s 80P(2)(d) of the Act is covered in assessee's favour by orders of the various coordinate benches of the Tribunal..."

"...the Hon'ble High Court of Karnataka 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 cooperative bank would be eligible for claim of deduction under Sec. 80P(2)(d) of the Act."

"...the revisional jurisdiction under Sec. 263 cannot be exercised merely because the Pr. CIT disagrees with the possible view taken by the AO. The AO's order was not erroneous or prejudicial to the interest of the revenue."

The Court finally allowed the appeal, set aside the orders of the CIT(A) and the rectification order, and directed the Assessing Officer to allow the deduction claimed under section 80P(2)(d) on the interest income earned from cooperative banks. The appeal was allowed in favor of the assessee, affirming the entitlement of cooperative societies to claim deduction under section 80P(2)(d) for interest income from cooperative banks.