2025 (2) TMI 1206 - AT - Income Tax

Deduction u/s 80P(2)(d) - Interest and dividend received by the Appellant Society from other co-operative societies - assessee is an Employees Cooperative Society wherein employees of BSNL are its members - Membership of the assessee society is restricted only to employees of BSNL. Deposits for assessee are generated through deduction from salary and advances are strictly given to members only HELD THAT - The issues before us is no longer res integra as we find that while deciding similar issue Coordinate Bench of ITAT Mumbai in the case of Pathare Prabhu Co operative Housing Society 2023 (7) TMI 1272 - ITAT MUMBAI held that interest income earned from investment with Co-operative Bank is eligible for deduction under section 80P(2)(d) of the Act. Thus we allow the claim of assessee for deduction u/s. 80P(2)(d) in respect of interest and dividend income earned by it from Cooperative Banks. Accordingly grounds raised by the assessee are allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the interest and dividend income received by the assessee from other cooperative societies is eligible for deduction under section 80P(2)(d) of the Income-tax Act.

2. Whether the interest and dividend income from cooperative societies can alternatively be allowed as a deduction under section 80P(2)(a)(i) of the Act.

3. The proper interpretation and applicability of section 80P(2)(d) vis-`a-vis section 80P(4) concerning income earned from cooperative banks.

Issue-wise Detailed Analysis:

Issue 1: Eligibility of deduction under section 80P(2)(d) for interest and dividend income from cooperative societies

Relevant legal framework and precedents: Section 80P(2)(d) allows deduction in respect of any income by way of interest or dividends derived by a cooperative society from its investments with any other cooperative society. Section 2(19) defines "cooperative society" as a society registered under any cooperative societies law in force in a state. Section 80P(4) excludes cooperative banks licensed by RBI from claiming deduction under section 80P.

Precedents include the Coordinate Bench decision in Pathare Prabhu Co-operative Housing Society v. ITO, which held that interest income earned from investments with cooperative banks is eligible for deduction under section 80P(2)(d). The Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT clarified that section 80P(4) excludes only cooperative banks functioning as commercial banks licensed by RBI, not cooperative societies investing in cooperative banks.

Another relevant precedent is Kaliandas Udyag Bhavan Premises Co-op Society Ltd. v. ITO, where the Tribunal held that interest income derived by a cooperative society from investments in cooperative banks is deductible under section 80P(2)(d), despite section 80P(4) excluding cooperative banks themselves from claiming deductions.

Conflicting views from the Hon'ble Karnataka High Court in Pr. CIT v. Totagars Co-operative Sales Society were noted, but the Tribunal adopted the principle from the Supreme Court in CIT v. Vegetable Products Ltd. that if two reasonable constructions are possible, the one favorable to the assessee should be adopted.

Court's interpretation and reasoning: The Court noted that the assessee is a cooperative society registered under the Maharashtra Cooperative Societies Act, 1960, and earns interest and dividend income from deposits and shares held in cooperative banks, which are themselves cooperative societies. The Court emphasized that the income must be from investments in cooperative societies to qualify under section 80P(2)(d), which is satisfied here.

The Court rejected the Assessing Officer's reliance on section 80P(4), holding that it applies only to cooperative banks themselves claiming deductions, not to cooperative societies investing in cooperative banks.

The Court followed the Coordinate Bench decisions and held that interest and dividend income earned from cooperative banks is eligible for deduction under section 80P(2)(d).

Key evidence and findings: The assessee's interest income from fixed deposits with Saraswat Co-operative Bank and Mumbai District Co-operative Bank totaled Rs. 23,14,495, and dividend income from shares in these banks totaled Rs. 2,76,453, aggregating Rs. 25,90,948. The cooperative banks are registered under the Maharashtra Cooperative Societies Act, fulfilling the statutory definition of cooperative societies.

Application of law to facts: Since the income arises from investments with cooperative societies, the deduction under section 80P(2)(d) is allowable. The Court applied the legal principle that cooperative banks, though excluded under section 80P(4) when claiming deductions themselves, remain cooperative societies for the purpose of income earned by other cooperative societies from investments with them.

Treatment of competing arguments: The Assessing Officer and CIT(A) disallowed the deduction, treating the income as "income from other sources" and relying on section 80P(4). The Court distinguished these views based on authoritative precedents and statutory interpretation. The conflicting Karnataka High Court decisions were considered, but the Court adopted the view favoring the assessee as per Supreme Court guidance.

Conclusion: The deduction under section 80P(2)(d) for Rs. 25,90,948 in respect of interest and dividend income earned from cooperative banks is allowed.

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

Relevant legal framework: Section 80P(2)(a)(i) allows deduction in respect of profits and gains of business carried on by a cooperative society.

Court's reasoning: The Assessing Officer disallowed the deduction under section 80P(2)(a)(i) on the ground that interest and dividend income is not business income but income from other sources. The assessee claimed the deduction alternatively under this section.

The Court did not elaborate extensively on this alternative claim, as the primary claim under section 80P(2)(d) was upheld, rendering the alternative claim unnecessary to decide. The Court allowed the appeal on the primary ground.

Conclusion: The alternative claim under section 80P(2)(a)(i) was not separately adjudicated but the primary claim under section 80P(2)(d) was allowed, effectively granting relief to the assessee.

Significant Holdings:

"For the purpose of provisions of section 80P(2)(d) of the Act, two conditions are required to be cumulatively satisfied- (i) income by way of interest or dividend is earned by the Co-operative Society from the investments, and (ii) such investments should be with any other Co-operative Society."

"Section 80P(4) is of relevance only in a case where the assessee, who is a Co-operative Bank, claims a deduction under section 80P of the Act which is not the facts of the present case."

"Though the co-operative bank pursuant to the insertion of Sub-section (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 co-operative society registered under the Co-operative Societies Act... the interest income derived by a co-operative society from its investments held with a cooperative bank, would be entitled for claim of deduction under sec.80P(2)(d) of the Act."

"If two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted."

The Court directed the Assessing Officer to grant deduction under section 80P(2)(d) in respect of interest and dividend income earned from cooperative banks.