2022 (10) TMI 1286 - AT - Income Tax

Deduction u/s. 80P(2)(d) - interest income from deposits with Co-operative banks - HELD THAT - The issue whether interest income derived from deposits with cooperative banks is eligible for deduction under section 80P(2)(d) of the Act or not has been considered by Tribunal in catena of decisions. As in the case of Kaliandas Udyog Bhavan Premises Co-op Society Ltd 2018 (4) TMI 1678 - ITAT MUMBAI as held that interest income derived by a co-operative society from investments with a co-operative bank would be entitled for deduction under section 80P(2)(d) of the Act.

Summary

The core legal question considered in the appeal is whether a co-operative housing society is eligible to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961, in respect of interest income earned from deposits made with co-operative banks.

The issue arises from the Assessing Officer's disallowance of the deduction claimed by the assessee under section 80P(2)(d) on the ground that interest income from deposits with co-operative banks does not qualify for such deduction. The assessee challenged this denial through a rectification petition under section 154, which was rejected, and subsequently appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the disallowance. The present appeal is against the CIT(A)'s order.

The legal framework central to the dispute is section 80P(2)(d) of the Income Tax Act, which provides that in computing the total income of an assessee being a co-operative society, any income by way of interest or dividends derived from investments with any other co-operative society shall be deducted. The relevant statutory provision reads as follows:

"80P(2)(d): in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other cooperative society, the whole of such income shall be deducted."

The Tribunal examined whether deposits with co-operative banks qualify as investments with "any other cooperative society" under this provision. The Tribunal referred to a series of precedents, including a coordinate bench decision which held that interest income earned by a co-operative society from investments with a co-operative bank is eligible for deduction under section 80P(2)(d).

The Tribunal noted that the insertion of subsection (4) in section 80P by the Finance Act, 2006, effective from 1 April 2007, restricts the applicability of section 80P to certain types of co-operative banks (primary agricultural credit societies or primary co-operative agricultural and rural development banks). However, this amendment does not affect the eligibility of a co-operative society to claim deduction under section 80P(2)(d) in respect of interest income earned from deposits with co-operative banks, as the co-operative bank itself remains a "co-operative society" registered under relevant state laws or the Cooperative Societies Act, 1912.

The Tribunal relied on authoritative decisions of the Hon'ble Karnataka High Court and the Hon'ble Gujarat High Court, which have held that for the purposes of section 80P(2)(d), a co-operative bank is to be considered a co-operative society. These courts recognized that interest income earned from such banks by a co-operative society is deductible under section 80P(2)(d).

The Tribunal also considered the decision of the Hon'ble Supreme Court relied upon by the CIT(A) to deny the deduction. It found the facts of that case distinguishable and thus held that the ratio therein was not applicable to the present facts.

In applying the law to the facts, the Tribunal observed that the assessee had earned interest income from deposits with co-operative banks, which are registered co-operative societies. Since the statutory provision explicitly allows deduction for interest income derived from investments with any other co-operative society, and co-operative banks fall within this definition, the assessee's claim was held to be valid.

The Tribunal rejected the Department's argument that the amendment to section 80P(4) excludes co-operative banks from the benefit, clarifying that this exclusion applies to the co-operative bank itself claiming deduction, not to a co-operative society investing in a co-operative bank.

Consequently, the Tribunal concluded that the assessee is entitled to claim deduction under section 80P(2)(d) in respect of interest income earned from deposits with co-operative banks.

Significant holdings include the following verbatim excerpt from the Tribunal's order:

"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:

• The term "co-operative society" under section 80P(2)(d) includes co-operative banks registered under the Cooperative Societies Act or other state laws.
• Interest income earned by a co-operative society from deposits with co-operative banks qualifies for deduction under section 80P(2)(d), notwithstanding the amendment in section 80P(4) restricting deduction for co-operative banks themselves.
• Precedents from High Courts and Tribunals support the eligibility of such deduction.
• Distinguishable facts in Supreme Court decisions relied upon by the Department do not override the applicability of section 80P(2)(d) in the present case.

Final determination: The appeal is allowed, and the deduction claimed by the assessee under section 80P(2)(d) in respect of interest income from deposits with co-operative banks is upheld.