2025 (7) TMI 1023 - AT - Income Tax

Deduction u/s 80P - interest and dividend earned by the assessee from the co-operative bank - assessee claimed that the assessee is a co-operative society to be an entity registered under Co-operative Societies Act 1912 - HELD THAT - Co-operative bank is primarily the co-operative society. So the interest and dividend earned by the assessee from the co-operative bank is eligible for deduction under section 80P(2)(d) of the Act. The same issue was dealt by the co-ordinate bench in the case of Jaimuni Sahkari Patpedhi Maryadit 2025 (3) TMI 1474 - ITAT MUMBAI Disallowance of deduction u/s 80P(2)(d) is unjustified and the assessee is eligible for deduction under section 80P(2)(d) of the Act related to interest and dividend earned from co-operative bank. The assessee succeeds in its grounds.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

- Whether the assessee, a co-operative credit society, is entitled to claim deduction under section 80P(2)(d) of the Income-tax Act, 1961, in respect of interest and dividend income earned from investments in co-operative banks.

- Whether the provisions of section 80P(4) of the Act, which restrict deduction to primary agricultural credit societies, exclude the assessee from claiming deduction for interest income from co-operative banks.

- The applicability and interpretation of judicial precedents, including decisions of the Hon'ble Supreme Court and various High Courts, on the eligibility of co-operative societies for deduction under section 80P(2)(d) when interest income is earned from co-operative banks.

- The legal characterization of co-operative banks as co-operative societies for the purpose of claiming deduction under section 80P(2)(d).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility for deduction under section 80P(2)(d) on interest and dividend income from co-operative banks

Relevant legal framework and precedents: Section 80P(2)(d) of the Income-tax Act provides deduction to co-operative societies on income earned as interest from other co-operative societies. Section 80P(4) restricts such deduction in certain cases, particularly to primary agricultural credit societies. The principal judicial precedents considered included:

• Kerala State Cooperative Agricultural and Rural Development Bank Ltd. v. Assessing Officer (Hon'ble Supreme Court, 2023)
• PCIT v. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Limited (Hon'ble Supreme Court, 2023)
• PCIT v. Ashwinkumar Arban Co-operative Society Ltd. (Gujarat High Court, 2024)
• ITAT Mumbai and other coordinate bench decisions on similar facts

Court's interpretation and reasoning: The Tribunal examined the nature of the assessee as a co-operative credit society formed under the Co-operative Societies Act, 1912, with the principal object of providing credit facilities to its members. The Tribunal noted that the interest and dividend income in question was earned from co-operative banks that are themselves registered co-operative societies. The Tribunal relied heavily on the Hon'ble Supreme Court's pronouncements clarifying that co-operative banks are co-operative societies and do not qualify as banks under the Banking Regulation Act, 1949.

The Tribunal distinguished the facts from cases where interest was earned from non-co-operative banks or where section 80P(4) applied to exclude deduction. It emphasized that the restriction under section 80P(4) applies primarily to primary agricultural credit societies and not to the assessee in this case.

Key evidence and findings: The assessee's registration as a co-operative society, the nature of income earned (interest and dividend from co-operative banks), and reliance on authoritative judicial decisions formed the evidentiary basis.

Application of law to facts: Applying the legal framework, the Tribunal held that the interest and dividend income earned by the assessee from co-operative banks qualifies for deduction under section 80P(2)(d) of the Act. The restriction under section 80P(4) was found inapplicable as the assessee is not a primary agricultural credit society and the co-operative banks are themselves co-operative societies.

Treatment of competing arguments: The Revenue argued that the deduction should be disallowed relying on section 80P(4) and certain High Court decisions. The Tribunal distinguished these precedents on facts and legal grounds, noting that the relevant decisions of the Hon'ble Supreme Court and coordinate benches favored the assessee's claim. The Tribunal rejected the Revenue's contention that co-operative banks are not co-operative societies for the purpose of section 80P.

Conclusions: The Tribunal concluded that the disallowance of deduction under section 80P(2)(d) amounting to Rs. 10,87,877/- was unjustified and that the assessee was entitled to claim the deduction in respect of interest and dividend income earned from co-operative banks.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning includes the following verbatim excerpts:

"...the Hon'ble Apex Court categorically stated that cooperative bank is the cooperative society and not acted as Bank under Banking Regulation Act,1949... So, the interest earned from investment in cooperative bank is allowable deduction U/s 80P(2)(d) of the Act."

"Section 80P(2)(d) provides for deduction of interest received by a Co-operative Society from another Co-operative Society. A Co-operative Society being a Co-operative Society fits into the permissible provisions of the deductions."

"...the controversy sought to be canvassed with regard to deduction under section 80P(2)(d) of the Act is no more res integra in view of the decision of this Court in case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (supra) as well as in case of State Bank of India (supra) wherein it was held that the deduction of under section 80P(2)(d) of the Act is available to the cooperative societies on the income earned as interest on the investment made with the cooperative bank which in turn, is a cooperative society itself."

"Even otherwise, on merits also and taking into consideration the CBDT Circulars and even the definition of Bank under the Banking Regulation Act, the respondent/Assessee cannot be said to be Co-operative Bank/Bank and, therefore, Section 80(P)(4) shall not be applicable and that the respondent/Assessee shall be entitled to exemption/benefit under Section 80(P)(2) of the Income Tax Act."

Core principles established:

• Co-operative banks are co-operative societies and not banks within the meaning of the Banking Regulation Act, 1949, for the purpose of section 80P.
• Section 80P(2)(d) allows deduction for interest income earned by a co-operative society from another co-operative society.
• Section 80P(4), which restricts deduction to primary agricultural credit societies, does not exclude other co-operative societies from claiming deduction under section 80P(2)(d).
• Judicial precedents from the Hon'ble Supreme Court and coordinate benches of ITAT have settled the issue in favor of co-operative societies claiming deduction on interest income from co-operative banks.

Final determinations on each issue:

The Tribunal allowed the appeal of the assessee, setting aside the disallowance of Rs. 10,87,877/- under section 80P(2)(d). It held that the assessee is eligible for deduction under section 80P(2)(d) on interest and dividend income earned from co-operative banks, rejecting the Revenue's reliance on section 80P(4) and contrary judicial decisions. The appeal was allowed accordingly.