2025 (6) TMI 323 - AT - Income Tax

Disallowance u/s 80P(2)(d) being the interest received from co-operative banks - assessee is a Co-operative Housing Society - HELD THAT - The assessee is entitled to claim deduction u/s. 80P(2)(d) of the Act from the interest received from co-operative banks which are akin to that of co-operative societies unless such co-operative banks requires license from the RBI as per the provisions of the Banking Regulation Act. As there is no specific finding from the lower authorities that the co-operative banks from whom the assessee has received interest income would fall under the preview of the co-operative banks as per the Banking Regulation Act and by respectfully following the above decision we deem it fit to allow the grounds of appeal raised by the assessee and thereby direct the ld. AO to delete the impugned addition/disallowance. Appeal filed by the assessee is hereby allowed.

Summary

The core legal question considered by the Tribunal is whether the assessee, a Co-operative Housing Society, is entitled to claim deduction under Section 80P(2)(d) of the Income Tax Act, 1961, on interest income received from fixed deposits in co-operative banks, specifically Shamrao Vitthal Co-op. Bank Ltd. and Citizen Credit Co Op. Bank Ltd.

The issue arises from the disallowance of Rs. 2,27,780/- of interest income by the Assessing Officer (AO) and the subsequent upholding of this disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO and CIT(A) relied on precedents including the Supreme Court decision in Totgars Co-operative Sale Society Ltd. and relevant High Court rulings, which distinguished between co-operative societies and co-operative banks, particularly those registered under the Banking Regulation Act, 1949.

Detailed analysis of the issue involves the following components:

Relevant Legal Framework and Precedents:

Section 80P(2)(d) of the Income Tax Act provides deduction in respect of income of co-operative societies, specifically including interest or dividend income derived from investments with other co-operative societies. Section 80P(4) excludes certain co-operative banks from such deductions, particularly those functioning as banking companies under the Banking Regulation Act, 1949.

The Banking Regulation Act, 1949 defines a "banking company" under Section 5(c) as a company carrying on banking business, which requires a license from the Reserve Bank of India (RBI) under Section 22(1)(b) to operate legally.

Key precedents include:

• Totgars Co-operative Sale Society Ltd. (Supreme Court) - Held that interest income from co-operative banks registered as banking companies is not eligible for deduction under Section 80P(2)(d).
• Principal Commissioner of Income-tax v. Ashwinkumar Arban Co Operative Society Ltd. (Gujarat High Court, 2024) - Provided an extensive analysis distinguishing co-operative banks requiring RBI license from other co-operative societies, emphasizing the beneficial nature of Section 80P.
• Mavilayi Service Co-operative Bank vs. CIT (Supreme Court, 2021) - Held that Section 80P is a beneficial provision to be construed liberally in favor of co-operative societies, allowing full deduction of profits and gains attributable to eligible activities.
• Kerala State Co-operative Agricultural and Rural Development Bank Ltd v. Assessing Officer (Supreme Court, 2023) - Clarified applicability of the Banking Regulation Act to co-operative banks.

Court's Interpretation and Reasoning:

The Tribunal examined whether the two co-operative banks where the assessee had deposited surplus funds fall within the definition of "banking company" under the Banking Regulation Act, 1949. The lower authorities did not establish that these banks held RBI licenses or carried on banking business as defined by the Act.

Relying on the Gujarat High Court's detailed judgment, the Tribunal noted that only those co-operative banks licensed by the RBI and carrying on banking business as defined under the Act are excluded from claiming deduction under Section 80P(2)(d). The Tribunal emphasized that the mere receipt of interest from co-operative banks does not disqualify the assessee from claiming deduction unless those banks fall within the statutory definition of a banking company.

The Tribunal highlighted that Section 80P is a beneficial provision aimed at promoting the co-operative movement and should be liberally construed in favor of the assessee. It noted that the exclusion under Section 80P(4) applies only to co-operative banks functioning as commercial banks with RBI licenses, not to all co-operative banks indiscriminately.

Key Evidence and Findings:

The record did not contain any finding or evidence that the two co-operative banks-Shamrao Vitthal Co-op. Bank Ltd. and Citizen Credit Co Op. Bank Ltd.-were registered under the Banking Regulation Act as banking companies or held licenses from the RBI.

The assessee's contention that the interest income was earned from deposits made out of surplus funds and utilized for mutual benefit and future contingencies was accepted as consistent with the principle of mutuality applicable to co-operative societies.

Application of Law to Facts:

Applying the legal framework and precedents, the Tribunal concluded that in the absence of proof that the co-operative banks are "banking companies" under the Banking Regulation Act, the interest income received by the assessee qualifies for deduction under Section 80P(2)(d).

The Tribunal distinguished the facts of the present case from the Totgars case, which involved co-operative banks functioning as commercial banks, thereby excluded from the benefit of Section 80P(2)(d).

Treatment of Competing Arguments:

The Department argued that co-operative banks are not entitled to deduction under Section 80P(2)(d) and relied heavily on the Totgars Supreme Court decision and the order of the lower authorities. However, the Tribunal found these arguments inapplicable because the co-operative banks in question were not shown to be licensed banking companies under the Banking Regulation Act.

The assessee's argument that the interest income arose from mutual deposits and was not business income was accepted, and the Tribunal relied on a series of judicial pronouncements supporting the liberal interpretation of Section 80P for co-operative societies.

Conclusions:

The Tribunal held that the assessee is entitled to claim deduction under Section 80P(2)(d) on the interest income received from the co-operative banks mentioned, as these banks do not fall within the statutory definition of banking companies requiring RBI licenses. The impugned addition/disallowance was directed to be deleted.

Significant Holdings:

The Tribunal quoted extensively from the Gujarat High Court decision which summarized the principles governing Section 80P deductions:

"Firstly, the marginal note to Section 80P which reads 'Deduction in respect of income of co operative societies' is significant as it indicates the general 'drift' of the provision."

"Secondly, for purposes of eligibility for deduction, the assessee must be a 'co-operative society'."

"Thirdly, the gross total income must include income that is referred to in sub-section (2)."

"Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being 'engaged in', inter alia, carrying on the business of banking or providing credit facilities to its members."

"Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P."

"Sixthly, the expression 'providing credit facilities to its members' does not necessarily mean agricultural credit alone."

"Seventhly, under Section 80P(1)(c), the co-operative societies must be registered either under Cooperative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities."

"Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co operative society from investments with other cooperative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole."

Further, the Tribunal emphasized:

"The object and purpose of sub-section (4) of Section 80P is to exclude only co-operative banks that function on par with other commercial banks i.e. which lend money to members of the public."

"A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication."

"Subsection (4) of Section 80P specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from Reserve Bank of India."

The core principle established is that co-operative societies are entitled to claim deduction under Section 80P(2)(d) on interest income from co-operative banks unless those banks are licensed banking companies under the Banking Regulation Act, 1949. The provision is to be construed liberally to promote the co-operative movement, and exclusions apply only to RBI-licensed co-operative banks functioning as commercial banks.

In final determination, the Tribunal allowed the appeal and directed the Assessing Officer to delete the addition/disallowance of Rs. 2,27,780/- made under Section 80P(2)(d) of the Act, thereby granting the assessee the deduction claimed on interest income from the co-operative banks in question.