2022 (5) TMI 1678 - AT - Income Tax

Denying the deduction u/s. 80P (2)(d) - interest received on the reserve fund FD kept with Belgaum Dist. Central Co-Operative Bank Ltd (BDCC Bank) - reasoning given by the lower authorities for denial of exemption u/s 80P(2)(d) of the Act is that interest was received from cooperative bank has no legs to stand as a cooperative bank is also a cooperative society - HELD THAT - This issue was considered in the case of CIT vs. Totagars Cooperative Sale Society 2017 (1) TMI 1100 - KARNATAKA HIGH COURT wherein the Hon ble High Court referring to the Hon ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. 2010 (2) TMI 3 - SUPREME COURT held that the ratio of decision of the Hon ble Supreme Court in the aforesaid case (supra) not to be applicable in respect of interest income on investment as same falls under the provisions of section 80P(2)(d) and not u/s 80P(2)(a)(i) of the Act. Even the decision of Sant Motiram Maharaj Sahakari Pat Sanstha Ltd. 2020 (9) TMI 964 - ITAT PUNE wherein the Tribunal after making reference to the decisions of Totgars Cooperative Sales Society Ltd. 2017 (1) TMI 1100 - KARNATAKA HIGH COURT and having noticed the divergent views in the case of Tumkur Merchants Souharda Credit Co-op. Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT and Mantola Cooperative Thrift Credit Society Ltd. 2014 (9) TMI 833 - DELHI HIGH COURT decision of Mantola Cooperative Thrift Credit Society Ltd. 2014 (9) TMI 833 - DELHI HIGH COURT had not been preferred to view in the case of Tumkur Merchants Souharda Credit Co-op. Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the assessee cooperative society is entitled to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961, in respect of interest income earned from its investments (including reserve fund fixed deposits) with a cooperative bank, specifically Belagum District Central Co-Operative Bank Ltd. The related sub-issues included:

• Whether interest income earned from a cooperative bank qualifies for deduction under section 80P(2)(d) as income derived from investments made with other cooperative societies;
• Whether the ratio of the Supreme Court decision in Totgar Cooperative Sales Society Ltd. applies to deny such deduction;
• Whether the interest income could alternatively qualify for deduction under section 80P(2)(a)(i) as income attributable to carrying on the business of the cooperative society;
• The impact of divergent judicial precedents, including decisions of the Karnataka High Court, Delhi High Court, and various benches of the Tribunal, on the interpretation of section 80P(2)(d) and 80P(2)(a)(i) in relation to interest income from cooperative banks.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Allowability of deduction under section 80P(2)(d) for interest income from investments with cooperative banks

Relevant legal framework and precedents: Section 80P(2)(d) exempts income derived by a cooperative society from its investments held with other cooperative societies from its total income. The key legal question is whether a cooperative bank qualifies as a cooperative society for this purpose. The Supreme Court in Totgar Cooperative Sales Society Ltd. had laid down principles regarding deduction under section 80P(2)(a)(i) for income attributable to carrying on the business of the cooperative society but did not directly address section 80P(2)(d) in relation to interest income from cooperative banks.

The Karnataka High Court in CIT vs. Totagars Cooperative Sales Society (392 ITR 74) held that the Supreme Court's ratio in Totgar Cooperative Sales Society Ltd. is not applicable to interest income on investments and that such income falls under section 80P(2)(d), not 80P(2)(a)(i). The Pune Bench of the Tribunal, in Sant Motiram Maharaj Sahakari Pat Sanstha Ltd. vs. ITO (120 taxmann.com 10), examined conflicting views from the Karnataka High Court (Tumkur Merchants Souharda Credit Co-op. Ltd.) and the Delhi High Court (Mantola Cooperative Thrift Credit Society Ltd.) and preferred the Karnataka High Court's view allowing deduction under section 80P on interest income from cooperative banks.

Court's interpretation and reasoning: The Tribunal noted that the lower authorities denied deduction under section 80P(2)(d) on the ground that the interest was received from a cooperative bank, which they treated differently from a cooperative society. The Tribunal rejected this reasoning, emphasizing that a cooperative bank is also a cooperative society under the relevant legal framework. Therefore, interest income from investments with cooperative banks should be eligible for deduction under section 80P(2)(d).

The Tribunal further distinguished the facts of the Totgar Cooperative Sales Society case relied upon by the Revenue, noting that the Supreme Court's decision pertained to income under section 80P(2)(a)(i) and not section 80P(2)(d). The Tribunal relied on the Karnataka High Court's decision to clarify that interest income from investments with cooperative banks qualifies for exemption under section 80P(2)(d).

Key evidence and findings: The assessee's interest income was earned on surplus funds deposited with the Belagum District Central Co-Operative Bank Ltd., a cooperative bank. The assessee is a cooperative society but not a cooperative bank. The Karnataka Co-Operative Societies Act, 1956, mandates investment of 25% of net profits into a reserve fund, which was the source of the fixed deposit generating interest income.

Application of law to facts: Since the interest income was derived from investments with a cooperative bank, which qualifies as a cooperative society, the income falls within the ambit of section 80P(2)(d) and is eligible for deduction. The Tribunal held that the lower authorities' denial of deduction was legally unsustainable.

Treatment of competing arguments: The Revenue relied on the lower authorities' orders and the Totgar Cooperative Sales Society decision to deny deduction. The Tribunal analyzed these precedents and distinguished their applicability, preferring the more recent and jurisdictionally relevant Karnataka High Court ruling and the Pune Bench's decisions that supported the assessee's claim. The Tribunal also noted that the Revenue's reliance on the Pr. CIT vs. Totagars Cooperative Sales Society case was misplaced as that case involved a different factual matrix and was not germane to the present claim under section 80P(2)(d).

Conclusions: The Tribunal allowed the Miscellaneous Application to recall the appeal for adjudication of this ground and ultimately allowed the ground of appeal no.3, holding that the assessee is entitled to deduction under section 80P(2)(d) for interest income earned from investments with the cooperative bank.

Issue: Alternative claim of deduction under section 80P(2)(a)(i)

The assessee alternatively claimed deduction under section 80P(2)(a)(i), contending that the interest income was attributable to carrying on the business of providing credit facilities to members. However, the Tribunal's analysis focused primarily on section 80P(2)(d), as the interest income was from investments with a cooperative bank. The Tribunal noted that the Supreme Court's decision in Totgar Cooperative Sales Society Ltd. related to section 80P(2)(a)(i) and was not directly applicable to the interest income under consideration.

The Tribunal did not find it necessary to adjudicate the alternative claim under section 80P(2)(a)(i) separately, as the deduction under section 80P(2)(d) was allowable and sufficient to grant relief to the assessee.

3. SIGNIFICANT HOLDINGS

The Tribunal held: "On perusal of provisions of section 80P(2)(d), it is clear that the income derived by a cooperative society from its investment held with other cooperative societies shall be exempt from the total income of a cooperative society. Therefore, what is relevant for claiming of deduction u/s 80P(2)(d) is that interest income should have been derived from the investment made by the assessee cooperative society with any other cooperative society."

It further observed: "The reasoning given by the lower authorities for denial of exemption u/s 80P(2)(d) of the Act is that interest was received from cooperative bank has no legs to stand as a cooperative bank is also a cooperative society."

In reliance on the Karnataka High Court's decision, the Tribunal stated: "The ratio of decision of the Hon'ble Supreme Court in the aforesaid case (supra) not to be applicable in respect of interest income on investment as same falls under the provisions of section 80P(2)(d) and not u/s 80P(2)(a)(i) of the Act."

Regarding the Revenue's reliance on the Pr. CIT vs. Totagars Cooperative Sales Society case, the Tribunal concluded: "When we consider the impact of this decision, it turns out that the same is not germane to case under consideration in view of the position that the claim of the instant assessee is directly about the eligibility of deduction u/s. 80P(2)(a)(i) of the Act and not u/s. 80P(2)(d). Moreover, so many decisions relied on by the ld. AR amply go to prove that the view taken by the AO, cannot by any standard, be construed as not a possible view."

Finally, the Tribunal concluded: "In the light of the above legal position of law and the reasoning adopted by the Assessing Officer as well as the ld. CIT(A) cannot be accepted. This ground of appeal no.3 stands allowed."