2025 (5) TMI 1381 - AT - Income Tax

Deduction u/s. 80P(2)(d) - interest income earned from investments made in co-operative banks - whether the appellant Co-operative Housing Society is entitled to its claim of deduction as interest income derived from its investments in the said co-operative bank? - HELD THAT - In the instant case the appellant society is registered under Maharashtra Co-operative Society Act 1960. Assessee s investee co-operative Banks are thus co-operative societies in the state of Maharashtra. Various co-ordinate benches of the Tribunal have been consistently taking the view in favour of assessee as stated herein above holding that the interest derived from the co-operative banks which are co-operative societies is allowable as deduction u/s. 80P(2)(d) of the Act. The assessee is thus entitled for the benefit u/s. 80P(2)(d). The aforesaid point is accordingly determined in favor of the assessee and against the revenue. The impugned order passed by CIT(A) thus cannot be sustained. Assessee s appeal is allowed.

The principal legal question considered in this appeal is whether a co-operative housing society is entitled to claim deduction under section 80P(2)(d) of the Income-tax Act, 1961, in respect of interest income earned from investments made in co-operative banks.

Section 80P(2)(d) provides for deduction of income by way of interest or dividends derived by a co-operative society from its investments with any other co-operative society. The controversy arises because co-operative banks, while being co-operative societies registered under relevant state laws, are also regulated banking entities, and section 80P(4) excludes certain co-operative banks from claiming deduction under section 80P.

The tribunal examined whether interest income earned by a co-operative housing society from deposits in co-operative banks is eligible for deduction under section 80P(2)(d), despite the exclusion of co-operative banks under section 80P(4).

The relevant legal framework includes:

Definition of "co-operative society" under section 2(19) of the Income-tax Act, 1961, which encompasses societies registered under the Co-operative Societies Act, 1912 or any other state law for registration of co-operative societies.
Definition of "co-operative bank" under the Maharashtra Co-operative Societies Act, 1960, which identifies a co-operative bank as a society engaged in banking business as defined under the Banking Companies Act, 1949.
Section 80P of the Income-tax Act, 1961, particularly subsection (2)(d) which allows deduction for income by way of interest or dividends derived by a co-operative society from investments with any other co-operative society, and subsection (4) which excludes certain co-operative banks from claiming deduction.
Judicial precedents including the Supreme Court's decisions in Mavilayi Service Co-operative Bank Ltd. v. CIT and Citizen Co-operative Society Limited v. CIT, which emphasize the beneficial nature of section 80P and clarify the scope of exclusion under subsection (4).
Decisions of various coordinate benches of the Income Tax Appellate Tribunal (ITAT) and High Courts, including the Karnataka High Court's rulings in Principal Commissioner of Income Tax v. Totgars Co-operative Sale Society and the Mumbai ITAT's decisions in Kaliandas Udyog Bhavan Premises Co-operative Society Ltd. and Blue Rose Industrial Premises Co-operative Ltd.

The tribunal's reasoning proceeded as follows:

It acknowledged that all co-operative banks are co-operative societies, but not all co-operative societies are co-operative banks. The term "co-operative society" is a genus, and "co-operative bank" is a species within that genus.
The Supreme Court has held that section 80P is a beneficial provision intended to promote the co-operative sector and should be interpreted liberally in favor of the assessee.
Section 80P(4) excludes only those co-operative banks which possess a license from the Reserve Bank of India and function as commercial banks lending to the public. This exclusion does not apply to a co-operative society that is not a co-operative bank itself but earns interest income from investments in co-operative banks.
The tribunal noted the divergence in judicial opinions, particularly the Karnataka High Court's conflicting decisions on the issue, but adopted the principle laid down by the Supreme Court in CIT v. Vegetable Products Ltd. that when two reasonable constructions are possible, the one favorable to the assessee must be adopted.
It relied heavily on coordinate bench decisions which consistently held that interest income earned by a co-operative society from investments in co-operative banks is eligible for deduction under section 80P(2)(d).
The tribunal rejected the reasoning of the CIT(A) and the assessing officer who denied deduction on the basis that the co-operative bank is excluded under section 80P(4), clarifying that this exclusion applies only when the assessee itself is a co-operative bank claiming deduction under section 80P.
It emphasized that since the appellant society is registered under the Maharashtra Co-operative Societies Act and its investee co-operative banks are also registered co-operative societies, the interest income qualifies for deduction under section 80P(2)(d).

Competing arguments were addressed as follows:

The Revenue's reliance on the CIT(A)'s order and the Karnataka High Court decision in Totgars Co-operative Sale Society to deny deduction was countered by distinguishing the facts and the specific provisions interpreted in those cases.
The tribunal pointed out that the Totgars case dealt with section 80P(2)(a)(i) and not section 80P(2)(d), and that the issue of whether a co-operative bank is a co-operative society for the purposes of section 80P(2)(d) has been settled in favor of the assessee by various tribunals.
The tribunal acknowledged the conflicting High Court decisions but chose the interpretation favoring the assessee, consistent with the Supreme Court's directive to adopt the construction beneficial to the taxpayer when multiple reasonable interpretations exist.

Key findings include:

The appellant co-operative housing society is entitled to claim deduction under section 80P(2)(d) for interest income of Rs. 3,94,856/- earned from investments in co-operative banks.
The exclusion under section 80P(4) does not apply to the appellant as it is not a co-operative bank itself but a co-operative society earning interest from other co-operative societies (banks).
Interest income earned from co-operative banks, which are registered co-operative societies, qualifies for deduction under section 80P(2)(d).

The tribunal concluded by setting aside the impugned order of the CIT(A) and directing the Assessing Officer to allow the deduction claimed by the appellant under section 80P(2)(d) of the Act.

Significant holdings and principles established include the following verbatim excerpts and core legal determinations:

"Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee."

"The term 'co-operative society' are the words of a large extent, and denotes a genus, whereas the word 'co-operative bank' is a word of limited extent, which merely demarcates and identifies a particular species of the genus co-operative societies."

"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 the aforesaid statutory provision, viz. sec. 80P(2)(d) would be duly available."

"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."

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

Final determinations:

The appellant co-operative housing society is entitled to deduction under section 80P(2)(d) of the Income-tax Act for interest income earned from investments in co-operative banks.
The exclusion under section 80P(4) does not apply to interest income earned by a co-operative society from co-operative banks.
The impugned order denying deduction is set aside, and the Assessing Officer is directed to allow the deduction accordingly.

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