2025 (5) TMI 1793 - AT - Income Tax

Disallowance of claim of deduction u/s. 80P(2)(d) - interest income earned by the assessee out of the deposits made in co-operative bank - assessee contended that it is a settled position of law that even interest income received by the assessee out of deposits made in co-operative bank are entitled to deduction u/s. 80P(2)(d) - HELD THAT - As decided in Shree Madhi Vighag Khand Udyog Sahakari Mandli Ltd. 2025 (1) TMI 767 - GUJARAT HIGH COURT though it was on the revisional powers u/s. 263 of the Act has extensively dealt with this issue and has held that the deduction u/s. 80P(2)(d) was available for a co-operative society on interest income received from co-operative bank and had distinguished co-operative banks which function like other commercial banks lending money to members of the public as per Section 5(b) of the Banking Regulation Act 1949 as held in the case of Mavilayi Service Co-operative Bank 2021 (1) TMI 488 - SUPREME COURT Further various decisions of the Tribunal relied upon by the ld. AR has also upheld this view and has held that the interest income derived by a co-operative society from its investment held with co-operative bank is entitled for claiming deduction u/s. 80P(2)(d) - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this appeal is whether the assessee, a co-operative credit society, is entitled to claim deduction under Section 80P(2)(d) of the Income Tax Act, 1961, in respect of interest income earned from deposits made in co-operative banks. The dispute centers on the interpretation and applicability of Section 80P(2)(d) concerning interest income from co-operative banks, particularly in light of judicial precedents and statutory amendments affecting the definition and tax treatment of co-operative banks versus co-operative societies.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Entitlement to deduction under Section 80P(2)(d) for interest income earned by a co-operative credit society from deposits in 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 by way of interest on securities issued by the Central Government, State Government, or a co-operative bank. The interpretation of this provision has been subject to judicial scrutiny, especially in the context of interest income earned from co-operative banks.

The Hon'ble Apex Court in Totgar's Cooperative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) had earlier dealt with the scope of deductions under Section 80P(2)(d). Subsequently, amendments in Section 194A(3)(v) via the Finance Act, 2015, introduced complexities regarding the tax deduction at source (TDS) obligations of co-operative banks and their classification vis-`a-vis co-operative societies.

Further, the Hon'ble High Court of Karnataka interpreted the amendment to Section 194A(3)(v) as excluding co-operative banks from the definition of co-operative societies for TDS purposes, affecting the deductibility of interest income under Section 80P(2)(d).

Contrastingly, the Hon'ble High Court of Gujarat in Principal Commissioner of Income-tax vs. Shree Madhi Vighag Khand Udyog Sahakari Mandli Ltd. [2025] 171 taxmann.com 22 (Gujarat) extensively analyzed the issue under revisional powers and held that deduction under Section 80P(2)(d) is available to co-operative societies on interest income received from co-operative banks. This judgment distinguished co-operative banks functioning as commercial banks under Section 5(b) of the Banking Regulation Act, 1949, as clarified by the Apex Court in Mavilayi Service Co-operative Bank vs. CIT [2021] 123 taxmann.com 161 (SC).

Several coordinate bench decisions of the Tribunal have consistently upheld the availability of deduction under Section 80P(2)(d) for interest income earned by co-operative societies from co-operative banks.

Court's Interpretation and Reasoning: The Tribunal examined the conflicting judicial pronouncements and statutory amendments. It noted that the revenue's reliance on the Totgar's Cooperative Sale Society Ltd. decision and the Karnataka High Court's interpretation of Section 194A(3)(v) was limited to TDS obligations and did not conclusively exclude co-operative banks from the ambit of Section 80P(2)(d) deduction for interest income.

The Tribunal gave significant weight to the Gujarat High Court's decision, which provided a detailed and authoritative analysis distinguishing co-operative banks that operate like commercial banks and those that do not. The Tribunal observed that the interest income earned by the assessee from deposits in co-operative banks falls within the scope of Section 80P(2)(d) deduction.

The Tribunal further relied on the Apex Court's ruling in Mavilayi Service Co-operative Bank vs. CIT, which clarified the regulatory framework distinguishing commercial banking activities from co-operative society functions, thereby supporting the view that interest income from co-operative banks is eligible for deduction under Section 80P(2)(d).

Key Evidence and Findings: The assessee's status as a co-operative credit society and the nature of its interest income from deposits in co-operative banks were undisputed. The assessment order disallowed the claim solely on the basis of the revenue's interpretation of judicial precedents and the amended Section 194A(3)(v).

The Tribunal found that the revenue's reliance on the Totgar's case was misplaced in the present factual and legal context. The Gujarat High Court's judgment and other coordinate bench decisions provided a more contemporaneous and contextually relevant interpretation favoring the assessee's claim.

Application of Law to Facts: Applying the legal principles established by the Gujarat High Court and the Apex Court, the Tribunal held that the assessee's interest income from co-operative banks qualifies for deduction under Section 80P(2)(d). The statutory amendment to Section 194A(3)(v) does not negate the assessee's entitlement to this deduction, as it pertains primarily to TDS obligations and does not redefine the scope of Section 80P(2)(d).

Treatment of Competing Arguments: The revenue's argument, grounded in the Totgar's decision and the Karnataka High Court's interpretation of Section 194A(3)(v), was acknowledged but found insufficient to override the more recent and detailed judicial pronouncements favoring the assessee. The Tribunal noted that the revenue's approach conflated TDS provisions with substantive deduction rights under Section 80P(2)(d).

The assessee's reliance on a series of favorable decisions, including those from the Gujarat High Court and various Tribunal benches, was accepted as authoritative and binding for the present appeal.

Conclusions: The Tribunal concluded that the assessee is entitled to claim deduction under Section 80P(2)(d) of the Income Tax Act in respect of interest income earned from deposits in co-operative banks. The disallowance made by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals) was set aside, and the deduction was allowed.

3. SIGNIFICANT HOLDINGS

The Tribunal held: "By respectfully following the proposition laid down in these cases, we deem it fit to allow the ground of appeal raised by the assessee and direct the ld. AO to delete the disallowance made u/s. 80P(2)(d) of the Act."

Core principles established include:

• The amendment to Section 194A(3)(v) of the Income Tax Act primarily relates to tax deduction at source obligations and does not exclude co-operative banks from the scope of Section 80P(2)(d) deduction for interest income earned by co-operative societies.
• Interest income earned by a co-operative society from deposits in co-operative banks is eligible for deduction under Section 80P(2)(d), provided the co-operative bank is distinguished from commercial banks as per the regulatory framework and judicial interpretations.
• Judicial precedents from the Gujarat High Court and the Apex Court provide authoritative guidance on the interpretation of co-operative banks and societies in the context of income tax deductions.

Final determination: The appeal was allowed, and the Assessing Officer was directed to delete the disallowance of Rs. 15,19,506/- claimed as deduction under Section 80P(2)(d) of the Income Tax Act for the Assessment Year 2017-18.