2025 (7) TMI 973 - AT - Income Tax

Denial of deduction u/s. 80P(2)(d) - interest earned from investments made with Cooperative Banks - 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 has allowed the deduction claimed by the assessee u/s. 80P(2)(d). Assessee deserves to be allowed as deduction u/s. 80P(2)(d) for interest earned on investment/deposits held with Cooperative Banks and ld. AO is directed to give the deduction for the said sum. Assessee appeal allowed.

Summary

The core legal issues considered in this appeal pertain primarily to the validity of reassessment proceedings under the Income-tax Act, 1961, and the allowability of certain deductions and disallowances in the assessment for the assessment year 2015-16. Specifically, the issues raised and considered include:

1. Whether the notice issued under Section 148 of the Income-tax Act was valid and in accordance with Section 151A, and consequently, whether the reassessment order under Section 147 was valid.

2. Whether the reassessment proceedings and order were barred by limitation under the provisos to Section 149 of the Act.

3. Whether the appellate authority erred in dismissing the appeal ex parte without considering the merits.

4. Whether the disallowance of rent expenses amounting to Rs. 1,80,000/- was justified.

5. Whether the disallowance of commission expenses of Rs. 6,99,624/- was justified.

6. Whether the disallowance of interest income from Fixed Deposits with banks amounting to Rs. 10,18,435/- under Section 80P(2)(a)(i) was justified.

7. Whether the interest income should be treated as business income rather than income from other sources, given that it arises from credit facilities extended to members of the appellant society.

8. Whether the disallowance of Rs. 10,18,435/- under Section 80P(2)(d) of the Act was justified.

Upon hearing, the assessee chose not to press the legal grounds challenging the validity of the notice under Section 148 and the limitation issues (grounds 1 to 3), which were accordingly dismissed as not pressed.

The principal issue pressed before the Tribunal was the allowability of deduction under Section 80P(2)(d) of the Act for interest income earned from investments made with Cooperative Banks.

Regarding the legal framework, Section 80P(2)(d) of the Income-tax Act provides a deduction for income by way of interest or dividend derived by a Cooperative Society from its investments with any other Cooperative Society. The provision is intended to exempt such income from tax, recognizing the cooperative nature of the entities involved.

The Court noted that the issue of allowability of deduction under Section 80P(2)(d) for interest income earned from deposits with Cooperative Banks has been extensively considered and consistently decided in favor of the assessee by various coordinate benches of the Tribunal. Cooperative Banks, though licensed as banks, are essentially Cooperative Societies, and hence the interest income they pay to other Cooperative Societies qualifies for deduction under this section.

In support of this interpretation, the Tribunal relied on recent authoritative decisions of this Bench, including a detailed order in a similar case where the deduction was allowed for interest income from Cooperative Banks. The Tribunal in that precedent observed:

"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 have 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. The Tribunal in case of Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd., Vs. ITO 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."

Applying the above legal principles to the facts, the Tribunal observed that the assessee had earned interest income of Rs. 10,18,435/- from deposits with Cooperative Banks, which was treated as income from other sources by the Assessing Officer and disallowed for deduction under Section 80P(2)(d). The Tribunal found no justification for such disallowance, given the settled legal position that such interest income qualifies for deduction.

The Tribunal further noted that other disallowances raised by the assessee, such as rent and commission expenses, were not pressed before it and hence were not adjudicated upon. Similarly, the issue regarding classification of interest income as business income was also not pressed.

In conclusion, the Tribunal allowed the deduction under Section 80P(2)(d) of the Act for the interest income earned from Cooperative Banks, set aside the findings of the Commissioner of Income Tax (Appeals) on this issue, and directed the Assessing Officer to grant the deduction accordingly. The remaining grounds of appeal were dismissed as infructuous.

Significant holdings and principles established include:

"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."

"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."

The final determination was that the assessee is entitled to deduction under Section 80P(2)(d) for the interest income of Rs. 10,18,435/- earned from Cooperative Banks, and the Assessing Officer is directed to allow the same. Other grounds not pressed or not relevant were dismissed.