2024 (7) TMI 1662 - AT - Income Tax

Deduction u/s 80P(2)(d) - assessee has received interest income from co-operative bank - HELD THAT - As undisputed that assessee is not co-operative bank and therefore not hit by the provisions of section 80P(4) of the Act. It is not denied by the Revenue that all these co-operative banks are also co-operative societies. Looking to the relevant co-operative Societies Act it is also found that though this co-operative societies are carrying on banking business but in substance those are co-operative societies who are carrying on banking business but does not loses its character of co-operative society. According to Section 28(10) of the Maharashtra Co-operative Societies Act 1960 Co-operative Bank means society carrying on the banking business. According to Section 2(27) society means co-operative society. Thus even those co-operative banks are also co-operative society. Accordingly the claim of the assessee for deduction under Section 80P(2)(d) of the Act is allowable. Accordingly of the appeal is allowed and AO is directed to grant deduction of the interest income under Section 80P(2)(d) of the Act. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the interest income earned by a co-operative housing society from fixed deposits placed with co-operative banks qualifies for deduction under Section 80P(2)(d) of the Income-tax Act, 1961Rs.

(b) Whether the principle of mutuality and the Supreme Court decision in Totgar's Co-operative Sales Society Ltd., which dealt with Section 80P(2)(a)(i), apply to deny deduction under Section 80P(2)(d) for interest incomeRs.

(c) Whether Section 80P(4), which denies benefits to co-operative banks, applies to co-operative housing societies investing in co-operative banksRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Deduction under Section 80P(2)(d) for interest income from co-operative banks

Relevant legal framework and precedents: Section 80P(2)(d) of the Income-tax Act provides deduction to co-operative societies on income derived from specified sources, including income from other co-operative societies. The Maharashtra Co-operative Societies Act, 1960 defines "co-operative bank" as a "society carrying on the banking business" (Section 28(10)) and defines "society" as a "co-operative society" (Section 2(27)). The Supreme Court decision in Totgar's Co-operative Sales Society Ltd. was cited by the Revenue but concerned Section 80P(2)(a)(i) and the nature of interest income.

Court's interpretation and reasoning: The Tribunal noted that the co-operative banks with which the assessee placed fixed deposits are themselves co-operative societies under the relevant co-operative laws. The Tribunal emphasized that carrying on banking business does not strip these entities of their character as co-operative societies. Therefore, income earned by the assessee from these co-operative banks falls within the ambit of Section 80P(2)(d).

Key evidence and findings: The assessee submitted that interest was earned from Maharashtra State Co-operative Bank, Shamrao Mittal Co-operative Bank, Saraswat Co-operative Bank Ltd, and Cosmos Bank Co-operative Ltd, all registered as co-operative societies. The Revenue did not dispute their status as co-operative societies.

Application of law to facts: Since the co-operative banks are co-operative societies, the interest income earned by the assessee from them qualifies for deduction under Section 80P(2)(d). The Tribunal directed the Assessing Officer to grant the deduction accordingly.

Treatment of competing arguments: The Revenue argued that the interest income was not eligible for deduction as it was not earned from investment with other co-operative societies but from co-operative banks. The Tribunal rejected this argument, holding that co-operative banks are co-operative societies in substance and law. The Tribunal also noted that the assessee is not a co-operative bank and thus not subject to the restrictions under Section 80P(4).

Conclusions: The Tribunal allowed the deduction under Section 80P(2)(d) on interest income from co-operative banks.

Issue (b): Application of the principle of mutuality and reliance on Totgar's Co-operative Sales Society Ltd.

Relevant legal framework and precedents: The Supreme Court in Totgar's Co-operative Sales Society Ltd. held that interest on surplus funds deposited with banks is income from other sources and not business income for purposes of Section 80P(2)(a)(i). The principle of mutuality exempts certain income from tax where transactions occur between members of a mutual organization.

Court's interpretation and reasoning: The Tribunal observed that the assessee did not claim exemption on the basis of mutuality for the interest income. Instead, the interest income was offered to tax, and a deduction was claimed under Section 80P(2)(d). Therefore, applying the principle of mutuality to deny deduction was erroneous. The Tribunal distinguished the facts from Totgar's case since the latter dealt with Section 80P(2)(a)(i) and business income, whereas the present case concerns Section 80P(2)(d) which is not confined to business income.

Key evidence and findings: The assessee's grounds clarified that the interest income was offered to tax and deduction was claimed under the specific provision of Section 80P(2)(d).

Application of law to facts: The Tribunal held that the principle of mutuality and the Supreme Court decision in Totgar's case were not applicable to the facts and provisions invoked by the assessee.

Treatment of competing arguments: The Revenue relied on Totgar's decision and mutuality to deny deduction. The Tribunal rejected this reliance as misplaced and irrelevant to the provision under which deduction was claimed.

Conclusions: The application of mutuality and Totgar's decision was held to be erroneous in the context of Section 80P(2)(d) and the facts of the case.

Issue (c): Applicability of Section 80P(4) denying benefits to co-operative banks

Relevant legal framework: Section 80P(4) denies the benefit of Section 80P to co-operative banks themselves.

Court's interpretation and reasoning: The Tribunal noted that the assessee is a co-operative housing society and not a co-operative bank. Therefore, the denial of deduction under Section 80P(4) does not apply to the assessee.

Key evidence and findings: The nature of the assessee as a co-operative housing society was not disputed.

Application of law to facts: Since the assessee is not a co-operative bank, Section 80P(4) is not attracted and cannot be used to deny deduction.

Treatment of competing arguments: The Revenue argued that the denial under Section 80P(4) should apply by analogy or otherwise. The Tribunal rejected this argument on the plain language and legislative intent of the provision.

Conclusions: Section 80P(4) does not apply to the assessee and cannot be invoked to deny deduction under Section 80P(2)(d).

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"The denial of deduction under Section 80P(2)(d) of the Act is not proper where the interest income is earned from co-operative banks which are also co-operative societies under the relevant Co-operative Societies Act."

"Though these co-operative societies are carrying on banking business, they do not lose their character of co-operative society."

"The application of the principle of mutuality and reliance on the Supreme Court's decision in Totgar's Co-operative Sales Society Ltd. is erroneous with respect to interest income claimed under Section 80P(2)(d), as the assessee offered the interest income to tax and claimed deduction accordingly."

"Section 80P(4), which denies benefit of Section 80P to co-operative banks, does not apply to co-operative housing societies investing in co-operative banks."

Accordingly, the Tribunal allowed the appeal and directed the Assessing Officer to grant deduction under Section 80P(2)(d) on the interest income earned from fixed deposits with co-operative banks.