2025 (7) TMI 178 - AT - Income Tax

Allowability of the section 80P - Interest and dividend received by the Appellant Society from other co-operative societies - HELD THAT - We find that in Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd. 2023 (5) TMI 372 - SC ORDER held that a co-operative credit society is entitled to exemption under section 80P(2) of the Act. Decision of Totagar Co-operative Sales Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT placed reliance upon by the learned DR was duly considered in assessee s own case for the assessment year 2020-21 2025 (2) TMI 1206 - ITAT MUMBAI - Therefore respectfully following the aforesaid decisions we uphold the plea of the assessee of claiming deduction under section 80P(2)(d) of the Act in respect of interest and dividend income earned by it from Co-operative Banks. Accordingly Ground No.2 raised in assessee s appeal is allowed.

Summary

The core legal issues considered in this appeal pertain to the eligibility of deduction claimed under section 80P of the Income Tax Act, 1961, specifically:

1. Whether the reopening of the assessment under section 263 of the Act was justified.

2. Whether the interest and dividend income earned by the assessee from other co-operative societies, particularly Co-operative Banks, qualifies for deduction under section 80P(2)(d) of the Act.

3. Whether the deduction under section 80P(2)(a)(i) of the Act is allowable for interest and dividend income from Co-operative Societies.

Regarding the reopening of the assessment under section 263, the assessee did not press this ground during the hearing, resulting in its dismissal as not pressed. Therefore, no detailed analysis was undertaken on this issue.

The primary substantive issue concerns the deductibility of interest and dividend income earned from Co-operative Banks under section 80P(2)(d) of the Act. The assessee, an Employees Co-operative Society registered under the Maharashtra Co-operative Societies Act, 1960, earned interest and dividend income from deposits and investments in Co-operative Banks. The Assessing Officer disallowed the deduction claimed under section 80P(2)(a)(i), treating such income as income from other sources rather than business income. The assessee alternatively claimed deduction under section 80P(2)(d) before the CIT(A), which was also disallowed. The appeal before the Tribunal thus centered on the interpretation and applicability of these provisions.

The relevant legal framework includes section 80P of the Income Tax Act, which provides for deductions in respect of income of co-operative societies. Section 80P(1) allows deduction of income specified in subsection (2). Section 80P(2)(d) specifically permits deduction "in respect of any income by way of interest or dividends derived by the co-operative society from investments with any other co-operative society, the whole of such income." The term "co-operative society" is defined in section 2(19) of the Act as a society registered under any law for the registration of co-operative societies.

The Assessing Officer and CIT(A) denied the deduction under section 80P(2)(d), relying on section 80P(4), which excludes co-operative banks possessing an RBI license and functioning like commercial banks from claiming such deductions. However, the Tribunal examined binding precedents and authoritative interpretations that clarified the scope and application of these provisions.

The Tribunal relied heavily on a Coordinate Bench decision in the assessee's own case for the assessment year 2020-21, which followed the decision in Pathare Prabhu Co-operative Housing Society vs. ITO. In that decision, the Tribunal held that income by way of interest or dividend earned by a co-operative society from investments in co-operative banks qualifies for deduction under section 80P(2)(d), notwithstanding the proviso in section 80P(4). The reasoning was that section 80P(4) applies only to co-operative banks claiming deduction under section 80P and functioning as commercial banks, not to co-operative societies investing in co-operative banks.

The Tribunal further noted that the co-operative banks in question were registered under the Maharashtra Co-operative Societies Act, 1960, and the assessee's deposits complied with the modes prescribed under that Act. The Supreme Court decision in Mavilayi Service Co-operative Bank Ltd. v. CIT was cited, which clarified that section 80P(4) excludes only co-operative banks functioning like commercial banks from claiming deductions, not co-operative societies investing in such banks.

The Tribunal also addressed conflicting decisions of the Hon'ble Karnataka High Court in Pr. CIT v. Totagars Co-operative Sales Society, where divergent views were expressed on the eligibility of deduction under section 80P(2)(d) for interest earned from co-operative banks. The Tribunal applied the principle from the Supreme Court in CIT v. Vegetable Products Ltd., which directs that when two reasonable constructions are possible, the one favorable to the assessee should be adopted.

In light of these precedents, the Tribunal concluded that the interest and dividend income earned by the assessee from Co-operative Banks is eligible for deduction under section 80P(2)(d). The Tribunal accordingly set aside the orders of the lower authorities and directed the Assessing Officer to grant the deduction.

Regarding the claim under section 80P(2)(a)(i), since the deduction under section 80P(2)(d) was allowed, this ground was rendered academic and left open.

The Tribunal also referred to the Supreme Court decision in Pr.CIT vs. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., which held that a co-operative credit society is entitled to exemption under section 80P(2), reinforcing the eligibility of such societies for deductions under the relevant provisions.

In summary, the Tribunal's reasoning emphasized:

• The definition of co-operative society under section 2(19) and its applicability to both the assessee and the Co-operative Banks.
• The distinction between co-operative banks functioning as commercial banks (excluded under section 80P(4)) and co-operative societies investing in such banks (eligible under section 80P(2)(d)).
• The binding nature of Coordinate Bench decisions and the principle favoring the assessee where interpretations diverge.
• The factual matrix confirming the assessee's status as a registered co-operative society and its investments in registered co-operative banks.

The Tribunal's final determination allowed the deduction under section 80P(2)(d) of the Act for the interest and dividend income amounting to Rs. 16,96,255/- (as per the facts) and directed the Assessing Officer to grant the deduction accordingly. The appeal was partly allowed on this basis.

Some significant legal holdings and verbatim excerpts include:

"Thus, for the purpose of provisions of section 80P(2)(d) of the Act, two conditions are required to be cumulatively satisfied - (i) income by way of interest or dividend is earned by the Co-operative Society from the Society."

"The Hon'ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT... held that section 80P(4) is a proviso to the main provision contained in section 80P(1) and (2) and excludes only Co-operative Banks, which are Co-operative Societies and also possesses a licence from RBI to do banking business... the limited object of section 80P(4) is to exclude Cooperative Banks that function at par with other commercial banks."

"We find no merits in the aforesaid reasoning adopted by the AO and upheld by the learned CIT(A) in denying deduction under section 80P(2)(d) of the Act to the assessee."

"As long as it is proved that the interest income is being derived by a co-operative society from its investments made with other co-operative society, the claim of deduction under the aforesaid statutory provision, viz. 80P(2)(d) would be available."

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

"We uphold the plea of the assessee and direct the AO to grant the deduction under section 80P(2)(d) of the Act to the assessee in respect of interest income earned from investment with Cooperative Banks."