2025 (6) TMI 1402 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income earned by the assessee from investments with Cooperative Banks - Lower authorities have denied the deduction as Lokmangal Cooperative Bank is not a Cooperative Society. HELD THAT - This issue is no longer res integra by virtue of catena of decisions taking consistent view that interest income earned from deposits with Cooperative Banks is eligible for deduction u/s. 80P(2)(d) of the Act. Recently this Bench in the case of Annapurna Nagari Sahkari Pathsanstha Maryadit Yawal 2025 (6) TMI 963 - ITAT PUNE wherein allowed the deduction claimed by the assessee u/s. 80P(2)(d). Deduction claimed by the assessee on the interest income earned from deposits/Investments with Lokmangal Cooperative Bank u/s. 80P(2)(d) deserves to be allowed. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the interest income earned by the assessee from investments with Cooperative Banks is eligible for deduction under section 80P(2)(d) of the Income-tax Act, 1961;
• Whether such interest income should be treated as integral to the business of the cooperative society or as income from other sources;
• Whether the Assessing Officer was correct in rejecting the deduction under section 80P(2)(a)(i) and/or section 80P(2)(d) for the interest income earned;
• Whether the deduction for interest expenses against the interest income should have been allowed;
• Whether the lower authorities erred in denying the deduction on the ground that the Cooperative Bank is not a Cooperative Society.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Eligibility of deduction under section 80P(2)(d) for interest income earned from Cooperative Banks

Relevant legal framework and precedents: Section 80P(2)(d) of the Income-tax Act provides deduction for income by way of interest or dividend derived by a Cooperative Society from its investments with any other Cooperative Society. The legal question is whether Cooperative Banks qualify as Cooperative Societies for this purpose.

Precedents cited include a catena of decisions from this Tribunal, notably the decision in Annapurna Nagari Sahkari Pathsanstha Maryadit Yawal Vs. ITO, where the Tribunal held that Cooperative Banks are essentially Cooperative Societies that have obtained banking licenses, and hence interest income earned from deposits with such banks is eligible for deduction under section 80P(2)(d). Further reliance was placed on Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd. Vs. ITO and The Ugar Sugar Works Kamgar & Dr. Shirgaokar Shaikshanik Trust Nokar Co-op Credit Society Vs. ITO, which consistently supported this view.

Court's interpretation and reasoning: The Court noted that the Assessing Officer and the CIT(A) had denied the deduction on the premise that the Cooperative Bank in question was not a Cooperative Society. However, the Tribunal emphasized that this issue is no longer res integra and has been settled by consistent judicial pronouncements that Cooperative Banks are Cooperative Societies for the purpose of section 80P(2)(d).

Key evidence and findings: The interest income of Rs. 11,68,749 (and in related cases higher amounts) was undisputedly earned from investments with Cooperative Banks. The Assessing Officer accepted the receipt of such interest but denied the deduction. The assessee's contention that earning of interest is integral to the business of the society was not controverted by the Revenue with any binding precedent.

Application of law to facts: Applying the settled legal position, the Tribunal held that the assessee is entitled to deduction under section 80P(2)(d) for the interest income earned from the Cooperative Banks. The denial by the lower authorities was set aside.

Treatment of competing arguments: The Revenue's argument that the Cooperative Bank is not a Cooperative Society was rejected based on the consistent judicial view. The assessee's argument that interest income is integral to the business and eligible for deduction was accepted. The Tribunal also noted the absence of any binding precedent presented by the Revenue to the contrary.

Conclusions: Deduction under section 80P(2)(d) must be allowed for interest income earned from Cooperative Banks.

Issue: Treatment of interest income as integral to business vs. income from other sources

Relevant legal framework and precedents: The classification of income as integral to business or as income from other sources affects the availability of deductions. The assessee contended that interest income earned is integral to the business of the cooperative society.

Court's interpretation and reasoning: The Tribunal accepted the assessee's contention that earning of interest is an integral part of the society's business activity. The Assessing Officer's treatment of interest income as income from other sources was found to be erroneous.

Key evidence and findings: The interest income was earned from deposits with Cooperative Banks, which are integral to the financial activities of the cooperative society.

Application of law to facts: Since the interest income arises from the core business activity of the cooperative society, it qualifies for deduction under the relevant provisions.

Treatment of competing arguments: The Revenue did not provide substantial evidence to support the classification of the interest income as income from other sources.

Conclusions: Interest income earned from Cooperative Banks is integral to the business of the cooperative society and eligible for deduction under section 80P.

Issue: Allowance of deduction for interest expenses against interest income

Relevant legal framework and precedents: Section 80P allows deduction of income earned by cooperative societies, but the question arises whether interest expenses relating to such income can be deducted.

Court's interpretation and reasoning: The assessee contended that the entire interest income was treated as income from other sources without allowing deduction for interest expenses. However, the Tribunal focused primarily on the eligibility of deduction under section 80P(2)(d) and did not delve deeply into the issue of expenses in this order.

Key evidence and findings: Not explicitly detailed in the judgment.

Application of law to facts: The Tribunal's primary relief was to allow deduction under section 80P(2)(d), implicitly overruling the treatment of income as other sources income, which would affect the allowance of expenses.

Treatment of competing arguments: The Revenue did not press strongly on this issue in the hearing.

Conclusions: The issue of interest expenses was not specifically adjudicated in detail but is subsumed in the acceptance of the deduction under section 80P(2)(d).

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Section 80P(2)(d) of the Act provides that the sum received in respect of any income by way of interest or dividend derived by Cooperative Society from its investment with any other Cooperative Society, the whole of such income is eligible for deduction u/s. 80P of the Act. We find that this issue is no more res integra as the Coordinate Benches of this Tribunal has been consistently holding that the interest income earned out of the FDs/Investments kept with Cooperative Banks is allowable u/s. 80P(2)(d) of the Act. We find that this Tribunal in case of Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd., Vs. ITO ... has held that the interest earned from deposits with Cooperative Banks are also eligible for deduction u/s. 80P(2)(d) of the Act as Cooperative Banks are basically Cooperative Societies only but have turned into Bank on getting necessary banking license."

Core principles established include:

• Cooperative Banks are fundamentally Cooperative Societies for the purpose of section 80P(2)(d) deduction;
• Interest income earned from investments with Cooperative Banks is eligible for full deduction under section 80P(2)(d);
• Denial of deduction on the ground that the Cooperative Bank is not a Cooperative Society is contrary to settled judicial precedents;
• Interest income integral to the business of the cooperative society qualifies for deduction, not to be treated as income from other sources.

Final determinations:

• The impugned order denying deduction under section 80P(2)(d) for interest income of Rs. 11,68,749 earned from Lokmangal Cooperative Bank is set aside;
• The assessee's claim for deduction under section 80P(2)(d) is allowed;
• The appeal is allowed in favor of the assessee.