2024 (6) TMI 1476 - AT - Income Tax

Eligibility for exemption u/s. 80P(2)(a)(i) or u/s 80P(2)(d) - interest income earned from cooperative banks - HELD THAT - The Co-ordinate Bench of the Tribunal in the case of The Ugar Sugar Works Kamgar Dr. Shirgaokar Shaikshanik Trust Nokar Co-op Credit Society 2022 (5) TMI 1678 - ITAT PANAJI held in favour of the appellant society even the interest income earned by cooperative society on deposits made out of surplus funds with cooperative banks as well as schedule bank qualifies for deduction both under the provisions of section 80P(2)(a)(i) and section 80P(2)(d) of the Act therefore the reasoning given by the lower authorities on this issue cannot be accepted. Thus we direct the AO to allow deduction u/s 80P(2)(a)(i) and 80P(2)(d) in respect of interest income earned from cooperative banks. The grounds of appeal filed by the assessee stands allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the interest income earned by a cooperative society from fixed deposits with other cooperative banks qualifies for deduction under section 80P(2)(a)(i) or section 80P(2)(d) of the Income Tax Act, 1961.
• Whether the decision of the Assessing Officer and the National Faceless Appeal Centre (NFAC) disallowing the deduction claimed under section 80P(2)(a)(i) on the ground that interest income from cooperative banks does not qualify for exemption is legally sustainable.
• The applicability and interpretation of judicial precedents, especially the Supreme Court decision in Totgars Co-operative Sale Society Ltd. and subsequent High Court and Tribunal rulings, in determining the eligibility of deduction under sections 80P(2)(a)(i) and 80P(2)(d) for interest income earned by cooperative societies from cooperative banks.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Eligibility of deduction under section 80P(2)(a)(i) or 80P(2)(d) for interest income earned by a cooperative society from deposits with cooperative banks

Relevant legal framework and precedents:

Section 80P(2)(a)(i) of the Income Tax Act provides deduction in respect of income earned by cooperative societies engaged in providing credit facilities to their members. Section 80P(2)(d) provides deduction for income derived by a cooperative society from its investments held with other cooperative societies.

The Supreme Court in Totgars Co-operative Sale Society Ltd. held certain principles regarding the scope of exemption under section 80P, but its ratio was primarily concerned with income from business activities and not investment income.

The Karnataka High Court in CIT vs. Totagars Cooperative Sale Society clarified that the Supreme Court's decision does not apply to interest income on investments, which falls under section 80P(2)(d).

Other relevant judicial precedents include:

• Tumkur Merchants Souharda Credit Co-op. Ltd. vs. ITO (Karnataka High Court) allowing deduction under section 80P on interest income.
• Mantola Cooperative Thrift Credit Society Ltd. vs. CIT (Delhi High Court) denying such deduction.
• Decisions of Pune Benches of the Tribunal (e.g., The Ugar Sugar Works Kamgar & Dr. Shirgaokar Shaikshanik Trust Nokar Co-op Credit Society vs. ITO and Sant Motiram Maharaj Sahakari Pat Sanstha Ltd. vs. ITO) favoring the assessee's claim for deduction on interest income from cooperative banks.

Court's interpretation and reasoning:

The Tribunal noted that the issue is no longer res integra and is covered by a catena of decisions allowing deduction under section 80P(2)(a)(i) for interest income earned by cooperative societies from deposits with other cooperative banks. The Tribunal relied heavily on the coordinate bench decisions which held that cooperative banks are themselves cooperative societies; hence, interest income earned from them qualifies for exemption under section 80P(2)(d).

The Tribunal distinguished the facts of the Supreme Court decision in Totgars Co-operative Sale Society Ltd., emphasizing that the Supreme Court's ruling was not applicable to investment income but rather to income from business activities of the cooperative society.

The Tribunal also examined the divergent views of various High Courts and preferred the Karnataka High Court's view in Tumkur Merchants Souharda Credit Cooperative Ltd. over the Delhi High Court's contrary view in Mantola Cooperative Thrift Credit Society Ltd., as well as the Pune Bench's consistent approach favoring exemption.

Key evidence and findings:

The appellant cooperative society had earned interest income of Rs.52,68,351/- on fixed deposits with other cooperative banks. The Assessing Officer disallowed deduction under section 80P(2)(a)(i), treating the interest income as taxable. The NFAC upheld this disallowance relying on the Supreme Court decision in Totgars Co-operative Sale Society Ltd.

The Tribunal found that the lower authorities erred in their reasoning by failing to appreciate that cooperative banks qualify as cooperative societies for the purpose of section 80P(2)(d), and that interest income earned on deposits with such banks is eligible for deduction.

Application of law to facts:

Applying the legal principles and precedents to the facts, the Tribunal concluded that the interest income earned by the appellant cooperative society from deposits with cooperative banks is eligible for deduction under both sections 80P(2)(a)(i) and 80P(2)(d). The Tribunal directed the Assessing Officer to allow the deduction accordingly.

Treatment of competing arguments:

The Revenue relied on the Supreme Court decision in Totgars Co-operative Sale Society Ltd. and the NFAC order upholding the disallowance. The Tribunal, however, analyzed the scope of that decision and distinguished it on the facts, noting that it was not applicable to investment income.

The Tribunal also considered the conflicting High Court decisions and the Pune Benches' consistent rulings favoring exemption. It preferred the reasoning of the Karnataka High Court and the Pune Bench decisions over the contrary Delhi High Court ruling.

The absence of representation for the appellant did not deter the Tribunal from relying on the precedents and material on record to arrive at a just decision.

Conclusions:

The Tribunal concluded that the interest income earned by the cooperative society from deposits with cooperative banks qualifies for deduction under sections 80P(2)(a)(i) and 80P(2)(d). The orders of the Assessing Officer and NFAC disallowing the deduction were set aside, and the appeal was allowed.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following core principles and determinations:

"The only issue in the present appeal relates to the eligibility of the assessee for exemption u/s. 80P(2)(a)(i) or u/s 80P(2)(d) of the Act in respect of interest income earned from cooperative banks. The issue is no more res integra as the same is covered by catena of decisions passed by the Pune Benches allowing the deduction u/s.80P(2)(a)(i) of the Act."

"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. In the present case, 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."

"Following the decision of the Co-ordinate Bench of this Tribunal (supra), we are of the considered opinion that even the interest income earned by cooperative society on deposits made out of surplus funds with cooperative banks as well as schedule bank qualifies for deduction both under the provisions of section 80P(2)(a)(i) and section 80P(2)(d) of the Act, therefore, the reasoning given by the lower authorities on this issue cannot be accepted."

"We direct the Assessing Officer to allow deduction u/s 80P(2)(a)(i) and 80P(2)(d) in respect of interest income earned from cooperative banks. The grounds of appeal filed by the assessee stands allowed."

Final determination: The appeal was allowed, and the Assessing Officer was directed to grant deduction under sections 80P(2)(a)(i) and 80P(2)(d) on interest income earned by the cooperative society from deposits with cooperative banks.