2025 (5) TMI 1231 - AT - Income Tax

Rectification of mistake - denial of Exemption u/s 80P(2)(d) - interest income earned from Saraswat Co-operative Bank Ltd. - HELD THAT - Though the finding of the Ld. Commissioner to the effect that the debatable issue cannot be entertained u/s 154 of the Act therefore the same cannot be stated to be mistake apparent on record is plausible however considering the peculiar facts and circumstances in totality as the issue involved in this case is now settled by various courts including by co-ordinate Bench in the case of Pathare Prabhu Cooperative Housing Society Ltd 2023 (7) TMI 1272 - ITAT MUMBAI wherein the claim of deduction u/s 80P(2) d of the Act has been allowed. Appeal of the Assessee is allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the interest income earned by the assessee, a Co-operative Housing Society, from deposits/investments made with Co-operative Banks is eligible for deduction under section 80P(2)(d) of the Income Tax Act, 1961.

2. Whether the disallowance of such deduction by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) was justified, particularly in light of the proviso under section 80P(4) excluding certain Co-operative Banks from the benefit of section 80P.

3. Whether the rectification application filed under section 154 of the Act challenging the intimation under section 143(1) could be entertained, and whether the appeal filed against the order under section 154 was maintainable.

Issue 1: Eligibility of Deduction under Section 80P(2)(d) for Interest Income from Co-operative Banks

Relevant Legal Framework and Precedents: Section 80P of the Income Tax Act provides deductions in respect of income of Co-operative Societies. Specifically, section 80P(2)(d) allows deduction for "any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society." The term "co-operative society" is defined under section 2(19) as a society registered under the Co-operative Societies Act or any other law for registration of co-operative societies.

Section 80P(4) acts as a proviso excluding Co-operative Banks that possess a license from the Reserve Bank of India (RBI) and function like commercial banks from claiming deduction under section 80P.

Key precedents include the Supreme Court decision in Mavilayi Service Cooperative Bank Ltd. vs CIT, which clarified that section 80P(4) excludes only those Co-operative Banks that operate as commercial banks with an RBI license. The decision emphasized that other Co-operative Societies are eligible for deduction under section 80P(2)(d).

Coordinate Bench decisions such as Pathare Prabhu Cooperative Housing Society Ltd. v. ITO and Kaliandas Udyog Bhavan Premises Coop Society Ltd. vs ITO have consistently held that interest income earned by a Co-operative Society from deposits/investments with Co-operative Banks qualifies for deduction under section 80P(2)(d), notwithstanding section 80P(4).

Court's Interpretation and Reasoning: The Court noted that the assessee is a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act, 1960, and invested funds in Co-operative Banks registered under the same Act. The AO denied deduction on the basis that the Co-operative Banks fall under section 80P(4) and thus deduction was not allowable.

The Court rejected this reasoning, relying on the Supreme Court ruling that section 80P(4) excludes only Co-operative Banks licensed by RBI functioning as commercial banks, which is not the case here. The Court further observed that all Co-operative Banks are Co-operative Societies but not all Co-operative Societies are Co-operative Banks, and the assessee's investments were with Co-operative Banks registered under the relevant State Act, not functioning as commercial banks.

The Court also addressed the conflicting decisions of the Karnataka High Court on this issue, noting the divergence but applying the Supreme Court principle that where two reasonable interpretations are possible, the one favorable to the assessee should be adopted.

Key Evidence and Findings: The assessee's status as a Co-operative Housing Society and the fact that deposits were made with Co-operative Banks registered under the Maharashtra Co-operative Societies Act were undisputed. The AO's denial was based on an incorrect application of section 80P(4).

Application of Law to Facts: Applying the legal framework and precedents, the Court held that the interest income earned by the assessee from Co-operative Banks qualifies for deduction under section 80P(2)(d). The AO's disallowance and the CIT(A)'s upholding of it were set aside.

Treatment of Competing Arguments: The Court considered the CIT(A)'s reliance on the Karnataka High Court decision denying deduction and balanced it against the conflicting Karnataka High Court decision allowing it, as well as the Supreme Court ruling and coordinate Bench decisions. The Court adopted the view favoring the assessee, consistent with the principle of liberal construction in taxing statutes.

Conclusion: The deduction under section 80P(2)(d) claimed by the assessee on interest income from Co-operative Banks is allowable.

Issue 2: Maintainability of Rectification Application under Section 154 and Appeal against Order under Section 154

Relevant Legal Framework: Section 154 of the Income Tax Act allows rectification of mistakes apparent on the record. However, it is well established that rectification cannot be used to reopen or challenge debatable issues or substantive assessments. Appeals under section 250 are generally preferred against orders passed under sections like 143(1) or 143(3), not against orders passed under section 154.

Court's Interpretation and Reasoning: The Commissioner of Income Tax (Appeals) had dismissed the appeal against the order under section 154 on the ground that the issue was debatable and not a mistake apparent on record, thus outside the scope of section 154. The Court acknowledged that this reasoning is plausible and consistent with the legal position that debatable issues cannot be entertained under section 154.

However, considering the peculiar facts and the settled legal position on the substantive issue of deduction under section 80P(2)(d), the Court exercised its discretion to allow the appeal and grant relief to the assessee.

Key Evidence and Findings: The assessee had initially filed a rectification application under section 154 challenging the intimation under section 143(1), which was dismissed. Subsequently, the assessee filed an appeal against the order under section 154, which was dismissed by the CIT(A). The Court found that although the procedural route was unconventional, the substantive issue warranted relief.

Application of Law to Facts: The Court effectively treated the appeal under section 250 against the order under section 154 as a means to address the substantive controversy, given the legal clarity on the issue of deduction under section 80P(2)(d).

Treatment of Competing Arguments: The Court balanced strict procedural norms against the interest of substantial justice and the settled legal position, favoring the latter to avoid injustice to the assessee.

Conclusion: The appeal against the order under section 154 was allowed in the interest of justice, and the deduction was granted.

Significant Holdings:

"Section 80P(4) is a proviso to the main provision contained in section 80P(1) and (2) and excludes only Co-operative Banks, which are Co-operative Societies and also possess a licence from RBI to do banking business. The limited object of section 80P(4) is to exclude Co-operative Banks that function at par with other commercial banks i.e. which lend money to members of the public."

"As long as it is proved that the interest income is being derived by a co-operative society from its investments made with any other co-operative society, the claim of deduction under section 80P(2)(d) would be duly available."

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

The Court concluded that the interest income earned by the assessee from Co-operative Banks registered under the State Co-operative Societies Act is eligible for deduction under section 80P(2)(d) of the Act. The AO's disallowance and CIT(A)'s order upholding it were set aside. The appeal against the order under section 154 was allowed in the interest of substantial justice, and the deduction was granted to the assessee.