2025 (6) TMI 1629 - AT - Income Tax

Deduction u/s 80P(2)(d) - interest income earned from investments made with cooperative banks - HELD THAT - Exemption provisions have to be strictly interpreted the submissions of the Ld. DR and as has been elaborately discussed and brought out in the orders of the Hon ble Karnataka High Court in the case of Bangalore Club as well as Totagars 2017 (7) TMI 1049 - KARNATAKA HIGH COURT in which reliance has been placed upon the judgment of Hon ble Supreme Court the interest received from Cooperative Banks even though they are Cooperative Societies is not allowable in view of the express provision of sub-section (4) of section 80P of the Act as the Cooperative Banks have been treated at par with the Scheduled Banks and the deduction u/s 80P of the Act is allowable only for the interest received from the Cooperative Society per se and not from the Cooperative Bank. DR has amply demonstrated how the reliance on the decisions by the Ld. AR is not applicable to the facts of the case being distinguishable. Hence the appeal of the Revenue is allowed the order of the Ld. CIT(A) is set aside and the order of the Ld. AO is confirmed on this issue. Appeals filed by the Revenue are allowed.

Summary

The core legal questions considered in this judgment revolve around the eligibility of a cooperative society to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961, for interest income earned from investments made with certain cooperative banks. Specifically, the issues are:

1. Whether interest income received by a cooperative society from the Sikkim State Cooperative Bank Limited and Citizens Urban Cooperative Bank Ltd., both registered under the Sikkim Cooperative Societies Act, 1978, qualifies for deduction under section 80P(2)(d) of the Act.

2. Whether these cooperative banks, though registered as cooperative societies, are excluded from the ambit of section 80P(2)(d) by virtue of section 80P(4), which excludes cooperative banks other than primary agricultural credit societies or primary cooperative agricultural and rural development banks.

3. The applicability of the principle of mutuality to interest income earned by a cooperative society from investments in cooperative banks.

4. The interpretation and scope of the term "cooperative society" in the context of section 80P(2)(d), and whether cooperative banks can be treated as cooperative societies for the purpose of claiming deductions.

5. The impact of various judicial precedents, including Supreme Court and High Court decisions, on the above issues.

Issue-wise Detailed Analysis:

Issue 1 & 2: Eligibility of Deduction under Section 80P(2)(d) for Interest Income from Cooperative Banks

The relevant statutory provisions are section 80P(2)(d) and section 80P(4) of the Income Tax Act, 1961. Section 80P(2)(d) allows deduction for income by way of interest or dividends derived by a cooperative society from investments with any other cooperative society. Section 80P(4) excludes the applicability of section 80P to cooperative banks other than primary agricultural credit societies or primary cooperative agricultural and rural development banks.

The Assessing Officer (AO) disallowed the deduction claimed by the assessee cooperative society on interest income from Sikkim State Cooperative Bank Ltd. and Citizens Urban Cooperative Bank Ltd., holding that these banks are cooperative banks and not primary agricultural credit societies or primary cooperative agricultural and rural development banks, and hence excluded by section 80P(4). The AO relied on Supreme Court decisions such as Totagars Co-operative Sales Society Ltd. and Mavilayi Service Co-operative Bank Ltd., which emphasize the exclusion of cooperative banks from the benefit of section 80P and the principle that interest income from investments outside the operational business is taxable as income from other sources under section 56.

The Commissioner of Income Tax (Appeals) (CIT(A)) reversed this view, relying on the fact that both banks are registered as cooperative societies under the State law and thus qualify as cooperative societies within the meaning of section 2(19) of the Act. CIT(A) referred to the Karnataka High Court decision in Pr. CIT vs Totagars Co-operative Sale Society (2017), which held that a cooperative bank is a species of the genus cooperative society and therefore interest income from such banks qualifies for deduction under section 80P(2)(d).

The CIT(A) distinguished the Supreme Court decisions cited by AO, noting that those dealt with section 80P(2)(a)(i) or principle of mutuality in different contexts, not directly with section 80P(2)(d). The CIT(A) also relied on various Tribunal and High Court decisions supporting the eligibility of deduction under section 80P(2)(d) for interest income from cooperative banks registered as cooperative societies.

However, the Revenue challenged this view before the Tribunal, reiterating the binding nature of Supreme Court decisions that interest income from cooperative banks is not eligible for deduction under section 80P(2)(d), especially after the insertion of section 80P(4) which specifically excludes cooperative banks from the benefit except for primary agricultural credit societies or primary cooperative agricultural and rural development banks.

The Tribunal examined the legislative framework, including the Banking Regulation Act, 1949 (Part V), which treats cooperative banks as distinct entities governed by RBI regulations, unlike other cooperative societies. The Tribunal noted that cooperative banks operate commercially with non-members, which ruptures the principle of mutuality, a foundational concept for exemption under section 80P.

The Tribunal also discussed the legislative intent behind section 80P(4), which was introduced to bring cooperative banks at par with commercial banks for income tax purposes and to exclude them from the benefits available to cooperative societies under section 80P. The Tribunal emphasized that the omission of an amendment to section 80P(2)(d) does not override the express exclusion in section 80P(4).

In applying these legal principles to the facts, the Tribunal found that the Sikkim State Cooperative Bank Ltd. and Citizens Urban Cooperative Bank Ltd., though registered as cooperative societies under State law, are cooperative banks engaged in banking business and regulated by RBI. Therefore, they fall within the exclusion under section 80P(4), and interest income from investments with them is not eligible for deduction under section 80P(2)(d).

The Tribunal further noted that the interest income earned by the assessee on surplus funds invested in these banks is income from other sources under section 56 and not operational business income eligible for deduction under section 80P.

Issue 3: Principle of Mutuality

The principle of mutuality requires a closed flow of funds between contributors and participators without profiteering, and that income arises from mutual dealings among members. The Revenue argued that interest income from cooperative banks fails this test because cooperative banks operate commercially with non-members, exposing the funds to third-party transactions and commercial risk.

The Tribunal relied on Supreme Court authority in Bangalore Club vs CIT, which held that interest income earned by a club from member banks does not satisfy the principle of mutuality due to commercial operations with third parties. Similarly, the interest earned by the assessee from cooperative banks is not from mutual dealings but from commercial banking activities, thus not satisfying mutuality.

The CIT(A)'s reliance on principle of mutuality was found misplaced as the principle does not extend to interest income from cooperative banks, which operate beyond the closed group of members.

Issue 4: Interpretation of "Cooperative Society" in Section 80P(2)(d)

The term "cooperative society" is defined in section 2(19) of the Income Tax Act as a society registered under any law for the registration of cooperative societies. The assessee contended that since the banks are registered under the Sikkim Cooperative Societies Act, they qualify as cooperative societies for section 80P(2)(d).

The Tribunal analyzed the legislative scheme and judicial precedents and concluded that the term "cooperative society" in section 80P(2)(d) does not include cooperative banks carrying on banking business, which are specifically excluded by section 80P(4). The legislative intent is to exclude cooperative banks from the benefit to align them with commercial banks for tax purposes.

The Tribunal also referred to the Banking Regulation Act, 1949, which treats cooperative banks as distinct entities governed by RBI regulations, unlike other cooperative societies. This distinction supports the exclusion of cooperative banks from section 80P(2)(d) benefits.

Issue 5: Treatment of Judicial Precedents and Conflicting Decisions

The Tribunal examined various decisions relied upon by both parties. The Revenue relied heavily on Supreme Court decisions including Totagars Co-operative Sale Society Ltd., Mavilayi Service Co-operative Bank Ltd., and Bangalore Club vs CIT, which support the exclusion of cooperative banks from section 80P benefits and treat interest income from investments outside operational activities as taxable under section 56.

The assessee relied on several Tribunal and High Court decisions, including Gujarat and Kerala High Courts, which took a more liberal view allowing deduction under section 80P(2)(d) for interest income from cooperative banks registered as cooperative societies.

The Tribunal distinguished these decisions by emphasizing the binding nature of Supreme Court rulings and the clear legislative intent expressed in section 80P(4). It noted that decisions permitting deduction from cooperative banks' interest income often failed to consider the effect of section 80P(4) and the regulatory framework governing cooperative banks.

The Tribunal also highlighted that the principle of strict interpretation applies to exemption provisions in taxing statutes, and no liberal interpretation can be extended to provisions granting deduction or exemption beyond their clear scope.

Conclusions

The Tribunal concluded that the interest income earned by the assessee cooperative society from investments made with Sikkim State Cooperative Bank Ltd. and Citizens Urban Cooperative Bank Ltd. is not eligible for deduction under section 80P(2)(d) of the Income Tax Act, 1961. This is because these banks are cooperative banks engaged in banking business and are excluded from the benefit of section 80P by virtue of section 80P(4).

The Tribunal held that such interest income is taxable under section 56 as income from other sources and not deductible as operational business income under section 80P.

The Tribunal allowed the appeals filed by the Revenue, set aside the orders of the CIT(A), and confirmed the assessment orders disallowing the deduction claimed under section 80P(2)(d).

Significant Holdings:

"The provisions granting concessions should be rigidly interpreted. The AO has taken a view that if the words 'cooperative society' were to be read as 'co-operative bank', the same would render the entire provision redundant, otiose and nugatory; an outcome which is surely not intended by the Parliament."

"The legislative intention behind the amendments was to bring Co-operative Banks at par with commercial Banks and the provisions of Clause (d) of sub-Section (2) of Section 80P of the Act apply in respect of any income by way of interest or dividend derived by the co-operative Society from its investments with any other Society. Since Co-operative Bank and co-operative Society have been specified at different places in Section 80P of the Act, the reference to co-operative Society in Section 80P(2)(d) of the Act is a reference to the co-operative Society which is not a Co-operative Bank and is not carrying on any banking activity while the reference to Co-operative Bank in sub-Section (4) of Section 80P of the Act is to an entity which is a cooperative Society but is carrying on the business of banking and is governed by the rules and regulations of the RBI."

"The interest income earned by the assessee on surplus funds invested in these banks is income from other sources under section 56 and not operational business income eligible for deduction under section 80P."

"The principle of mutuality does not extend to interest income from cooperative banks, which operate commercially with non-members, thereby rupturing the closed flow of funds required for mutuality."

"The interest income of the assessee cooperative society from investments in cooperative banks is not eligible for deduction under section 80P(2)(d) and is taxable under section 56."