2025 (5) TMI 206 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income earned from investments made with Co-operative Banks and other financial institutions - HELD THAT - Assessee has received interest from Co-operative banks from other than Co-operative banks and claimed deduction u/s 80P(2)(a)(i)/ 80P(2)(c)/80P(2)(d) of the Act which has been disallowed by the AO in entirety and allowed in part by the Ld. CIT(A) for the reasons reproduced above. We find that the issue is squarely covered in favour of the assessee by catena of decisions of various judicial forums including Jurisdictional Pune and Mumbai Tribunal wherein it has been consistently held that interest income earned from Co-operative banks as well as non-Cooperative banks are eligible for deduction u/s 80P(2) of the Act as the same is attributable to the business of the assessee society. We hereby set aside the impugned order of the CIT(A) and allow the deduction claimed by the assessee u/s 80P(2)(a)/80P(2)(c)/80P(2)(d) of the Act. The solitary ground of appeal raised by the assessee is accordingly allowed.

Summary

The core legal questions considered in the appeals pertain to the eligibility of the assessee, a Co-operative Credit Society, to claim deduction under Section 80P(2) of the Income Tax Act, 1961, in respect of interest income earned from investments made with Co-operative Banks and other financial institutions. Specifically, the issues are:

1. Whether the interest income earned by the assessee from deposits with Co-operative Banks and other banks/financial institutions qualifies as business income eligible for deduction under Section 80P(2)(a)(i) of the Act.

2. Whether, alternatively, the interest income is eligible for deduction under Section 80P(2)(d) of the Act.

3. Whether the deduction under Section 80P(2)(c) or Section 57 of the Act should be allowed if deductions under Sections 80P(2)(a)(i) or 80P(2)(d) are denied or restricted.

4. The applicability of judicial precedents, including Supreme Court and High Court decisions, on the interpretation of Section 80P(2) and its sub-clauses in the context of income earned by Co-operative Credit Societies from investments with Co-operative Banks and other financial institutions.

Issue-wise Detailed Analysis:

Issue 1: Eligibility of deduction under Section 80P(2)(a)(i) for interest income from Co-operative Banks and other financial institutions

The legal framework revolves around Section 80P(2)(a)(i) of the Income Tax Act, which allows deduction in respect of profits and gains of business carried on by a Co-operative Society with its members. The assessee contended that the interest income earned from deposits with Co-operative Banks forms part of its business income and is thus eligible for deduction.

The Assessing Officer (AO) disallowed the deduction, treating the interest income as "other income" taxable under Section 56, reasoning that the income was not derived from business activities with members but from investments with banks and financial institutions, which are non-members.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, relying heavily on the Supreme Court decision in Mavilayi Service Co-operative Bank Ltd. Vs. Commissioner of Income Tax, which held that only income from eligible activities carried on with members is eligible for deduction under Section 80P(2)(a)(i). The CIT(A) emphasized that interest income from investments with non-member banks and financial institutions does not qualify for deduction under this clause.

The CIT(A) further clarified that the assessee, not being a banking company licensed by the Reserve Bank of India, is outside the purview of Section 80P(4), which restricts deductions for banking companies, and thus eligible for deduction subject to other conditions.

The Court interpreted the Supreme Court's ruling as restrictive, disallowing deduction for profits or income derived from transactions with non-members, including interest on investments with commercial banks and financial institutions.

The assessee's argument that the source of funds for investments was surplus business funds was rejected as insufficient to qualify the interest income as business income eligible for deduction under Section 80P(2)(a)(i).

Competing arguments included the assessee's reliance on various judicial precedents permitting deduction under Section 80P(2)(a)(i) for similar income, but the CIT(A) distinguished these in light of the Supreme Court ruling.

Conclusion: Deduction under Section 80P(2)(a)(i) was denied for interest income earned from investments with banks and financial institutions that are non-members.

Issue 2: Eligibility of deduction under Section 80P(2)(d) for interest income from investments with Co-operative Banks

Section 80P(2)(d) provides deduction in respect of income earned by a Co-operative Society from its investments in other Co-operative Societies registered under the respective State Co-operative Societies Act.

The CIT(A) partially allowed the deduction under this clause, restricting it to net interest income earned from investments with Co-operative Banks registered as Co-operative Societies, excluding interest from commercial banks and other financial institutions.

This approach was supported by decisions of the jurisdictional ITAT Mumbai and High Courts of Kerala and Madras, which held that interest income from investments in registered Co-operative Banks qualifies for deduction under Section 80P(2)(d), even after the Supreme Court's ruling in Mavilayi.

The AO's disallowance of deduction for interest income from commercial banks and other financial institutions was upheld, with such income being taxable under "Income from Other Sources."

The assessee's alternate claim for deduction under Section 80P(2)(c) and Section 57 was rendered infructuous due to partial allowance under Section 80P(2)(d).

Conclusion: Deduction under Section 80P(2)(d) was allowed only for interest income from investments in Co-operative Banks registered under the Co-operative Societies Act, excluding other banks and financial institutions.

Issue 3: Claim for deduction under Section 80P(2)(c) and Section 57

The assessee claimed that if deductions under Sections 80P(2)(a)(i) and 80P(2)(d) were denied, then deduction under Section 80P(2)(c) or Section 57 should be allowed.

The CIT(A) held these claims to be infructuous in light of the partial allowance under Section 80P(2)(d).

The Tribunal did not find merit in separately addressing these claims once the primary claims under Section 80P(2)(a)(i) and (d) were adjudicated.

Conclusion: Alternate claims under Sections 80P(2)(c) and 57 were not allowed as the partial allowance under Section 80P(2)(d) sufficed.

Issue 4: Applicability and interpretation of judicial precedents

The assessee relied on a catena of decisions from the Supreme Court, High Courts, and Tribunals, including recent decisions favorable to the assessee's claim for deduction under Section 80P(2)(a)(i) and (d). Notably, the assessee cited:

• Supreme Court decision in PCIT vs. Annasaheb Patil Mathadi Kamgar Sahakari Patpedhi Ltd., which allowed deduction under Section 80P(2).
• High Court decisions from Bombay (Nagpur Bench), Goa, and others affirming eligibility of deduction for Co-operative Credit Societies.
• ITAT decisions from Pune and Mumbai consistently allowing deduction for interest income from Co-operative Banks and other financial institutions.

The Revenue representative conceded that the issue is covered in favor of the assessee by these precedents.

The Tribunal extensively reviewed these precedents and found them binding and applicable, especially as they dealt with similar facts and legal questions. The Tribunal noted that the Supreme Court's ruling in Mavilayi restricts deduction under Section 80P(2)(a)(i) to income from transactions with members only, but does not preclude deduction under Section 80P(2)(d) for interest income from investments in registered Co-operative Banks.

The Tribunal reconciled the precedents and held that interest income earned from Co-operative Banks and other banks/financial institutions is attributable to the business of the assessee society and eligible for deduction under Section 80P(2) of the Act.

Conclusion: The Tribunal set aside the CIT(A)'s order and allowed the deduction claimed under Sections 80P(2)(a), (c), and (d), following the binding precedents.

Application of Law to Facts and Final Determinations

The Tribunal found that the facts were undisputed: the assessee is a registered Co-operative Credit Society, earning interest income from deposits with Co-operative Banks and other banks/financial institutions. The assessee claimed deduction under Sections 80P(2)(a)(i), (c), and (d).

The AO and CIT(A) disallowed or restricted such deductions based on a narrow interpretation of Section 80P(2)(a)(i) following the Supreme Court's Mavilayi decision.

However, the Tribunal observed that the Mavilayi decision restricts deduction under Section 80P(2)(a)(i) to income from business with members and does not exclude deduction under Section 80P(2)(d) for income from investments in registered Co-operative Societies.

Considering the consistent judicial pronouncements in favor of the assessee and absence of any contrary material from the Revenue, the Tribunal allowed the deduction claimed under Sections 80P(2)(a), (c), and (d) for both AY 2018-19 and AY 2020-21.

Significant Holdings:

"It is only the income from eligible activities as mentioned u/s. 80P(2) if carried on with its members, would be eligible for deduction u/s. 80P(2)(a) of the Act. It is categorically held therein that even if the activity is one of the eligible activities listed out in Sub section (2) of Section 80P, then also if the same is carried on with a non-member, it would not be eligible for deduction u/s. 80P(2)(a) of the Act."

"The impugned interest income from investments held with Cooperative Banks which by themselves are registered as Cooperative Societies under the respective State Act alone are to be allowed as deduction under Section 80P(2)(d) of the Act."

"Interest income earned from Co-operative banks as well as non-Cooperative banks are eligible for deduction u/s 80P(2) of the Act as the same is attributable to the business of the assessee society."

"Respectfully following the decision(s) (supra) and in the absence of any contrary material brought on record by the Ld. DR, we hereby set aside the impugned order of the Ld. CIT(A) and allow the deduction claimed by the assessee u/s 80P(2)(a)/80P(2)(c)/80P(2)(d) of the Act."

The Tribunal established the core principle that for a Co-operative Credit Society, interest income earned from investments in Co-operative Banks registered under the Co-operative Societies Act is eligible for deduction under Section 80P(2)(d), while income from business with members qualifies under Section 80P(2)(a)(i). Further, the Tribunal recognized that interest income from non-member banks and financial institutions can also be considered attributable to the business of the society and eligible for deduction under Section 80P(2), following binding judicial precedents.

Accordingly, the Tribunal allowed the appeals for both assessment years, granting the deductions claimed under Section 80P(2) in full.