2024 (12) TMI 1590 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) or 80P(2)(d) - interest income earned from co-operative banks - HELD THAT - Assessee is entitled for deduction u/s. 80P(2)(d) in respect of interest income and dividend income earned from co-operative bank as held in the case of Peroorkada Service Cooperative Bank Ltd. 2021 (12) TMI 1084 - KERALA HIGH COURT . The assessee would also be entitled for the deduction of section 80(P)(2a)(i) in respect of such income which is attributable to the business of cooperative society exclusively with the members of the society. Therefore we restore this matter to the file of the A.O. with a direction to decide the issue afresh after considering the judgment of the Hon ble Kerala High Court Supra and Mavilayi Service Co-operative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT . We also direct the assessee to produce proper bifurcation of the income earned which is eligible for deduction u/s. 80P(2)(d) and 80P(2)(a)(i) of the Act. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this appeal pertain to the eligibility of the assessee, a cooperative society, for deduction under sections 80P(2)(a)(i) and 80P(2)(d) of the Income-tax Act, 1961, specifically in respect of interest income earned from cooperative banks. The issues include:

• Whether the assessee is entitled to deduction under section 80P(2)(a)(i) for interest income earned from cooperative banks.
• Whether the assessee is entitled to deduction under section 80P(2)(d) for interest or dividend income derived from investments with other cooperative societies or banks.
• The proper interpretation and application of the provisions of section 80P in the context of the assessee's business activities and the nature of income earned.

Issue-wise Detailed Analysis

1. Deduction under Section 80P(2)(a)(i) for Interest Income from Cooperative Banks

The relevant legal framework involves section 80P(2)(a)(i) of the Income-tax Act, which provides deduction to cooperative societies in respect of the whole of the amount of profits and gains of business attributable to specified activities. The key precedent considered is the judgment of the Hon'ble Supreme Court in Totagar's Co-operative Sale Society Ltd. v. ITO, which clarified the scope of section 80P(2)(a)(i).

The Court observed that section 80P(2)(a)(i) cannot be equated with other sections such as 80HHC or 80HHD, which have different subject matters and contexts. The Supreme Court emphasized that the income eligible for deduction under section 80P must constitute operational income of the cooperative society's business, not other income. In the Totagar's case, the interest income earned on surplus funds not required for business purposes was held to be "other income" and thus not eligible for deduction under section 80P(2)(a)(i), but taxable under section 56.

The Court applied this principle to the facts, noting that the assessee must demonstrate that the interest income arises from the business activity of the cooperative society with its members. The Department's reliance on the Totagar's case was upheld to the extent that interest income from funds not used for business operations is not deductible under section 80P(2)(a)(i).

However, the Court also considered the judgment of the Hon'ble Kerala High Court in Sahyadri Co-operative Credit Society Ltd., which distinguished Totagar's case on facts. The Kerala High Court held that the making of investments by a cooperative society can itself be a business activity and that interest earned on such investments, where the funds are surplus profits already attained by the society, may be eligible for deduction under section 80P(2)(a)(i). This introduces a nuanced approach that depends on the character of the income and the nature of the society's activities.

The Court further referred to the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd., which directs a liberal and reasonable construction of section 80P, as it is a benevolent provision intended to promote the cooperative sector. Any ambiguity must be resolved in favor of the assessee, and deductions should not be restricted by implication.

2. Deduction under Section 80P(2)(d) for Interest or Dividend Income from Investments with Other Cooperative Societies

Section 80P(2)(d) allows deduction for interest or dividend income derived by the cooperative society from its investments with other cooperative societies. The key precedent is the Kerala High Court judgment in Peroorkada Service Co-operative Bank Ltd., which held that interest income earned from District or State Cooperative Banks registered under the Kerala Cooperative Societies Act qualifies for deduction under section 80P(2)(d).

The Court noted that the Supreme Court decisions relied upon by the Department pertain to cooperative banks and not cooperative societies, and thus are distinguishable. The Kerala High Court clarified that interest income from cooperative banks registered under the relevant cooperative societies legislation is eligible for deduction under section 80P(2)(d), while interest income from sources such as Treasury does not qualify.

The Court emphasized that the assessee must establish that the interest income is earned from cooperative societies registered under the applicable cooperative societies law to claim deduction under section 80P(2)(d). This approach respects the statutory scheme and the distinctions made by Parliament in section 80P.

3. Application of Law to Facts and Treatment of Competing Arguments

The assessee contended entitlement to deduction under both sections 80P(2)(a)(i) and 80P(2)(d), relying on the Kerala High Court's decision in Peroorkada Service Co-operative Bank Ltd. The Department relied on the Supreme Court's Totagar's judgment to deny deduction under section 80P(2)(a)(i).

The Court reconciled these competing views by recognizing that deduction under section 80P(2)(a)(i) is available only for income attributable to the cooperative society's business with its members, while section 80P(2)(d) covers interest or dividend income from investments with other cooperative societies. The Court directed the Assessing Officer to examine the facts afresh, with the assessee providing a proper bifurcation of income eligible under each clause.

The Court's approach reflects a balanced interpretation that respects the statutory language and judicial precedents, while ensuring that the benevolent purpose of section 80P is fulfilled.

Significant Holdings

The Court held:

"Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication."

"The interest income earned by the assessee does not come within the ambit of Section 80P(2)(a)(i) unless it is attributable to the business of the cooperative society exclusively with the members of the society."

"Interest or dividend income derived by the assessee from its investments with any other Co-operative Society registered under the Kerala Co-operative Societies Act do come within Section 80P(2)(d) and are eligible for deduction."

The final determination was that the assessee is entitled to deduction under section 80P(2)(d) for interest income earned from cooperative banks registered under the cooperative societies law and may be entitled to deduction under section 80P(2)(a)(i) for income attributable to its core business with members. The matter was remanded to the Assessing Officer for fresh adjudication with directions to consider the relevant judgments and for the assessee to furnish proper income bifurcation.