2025 (6) TMI 1996 - AT - Income Tax

Deduction u/s.80P(2)(a)(i) - character of income - interest income earned by the assessee a cooperative credit society from deposits with cooperative banks - HELD THAT - Hon ble High Court of AP TS 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT held that Interest Income earned by investing Income derived from Business of providing credit facilities Loans by a Co-Operative Society was eligible for deduction u/sec.80P(2)(a) of the Act. Kerala High Court in the case of Pr.CIT Vs. Sahyadri Co-operative Credit Society Ltd. 2024 (9) TMI 1278 - KERALA HIGH COURT has held that the character of income does not change. The Hon ble Kerala High Court held that interest earned from deposits in permitted banks will be eligible for deduction u/s.80P of the Act. The Hon ble Kerala High Court s decision is dated 04.09.2024 means after the decision of Hon ble Supreme Court in the case of Totagar s Co.operative Sales Society Ltd. 2010 (2) TMI 3 - SUPREME COURT Accordingly we hold that assessee is eligible for deduction u/s.80P of the Act on the interest income earned by the assessee from Co-operative Banks and Nationalized Banks. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether the interest income earned by the assessee, a cooperative credit society, from deposits with cooperative banks is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, considering the principle of mutuality and the nature of the income as business income.

2. Whether the interest income earned from deposits with cooperative banks qualifies for deduction under Section 80P(2)(d), given the legal status of cooperative banks as registered cooperative societies operating under banking licenses.

3. Whether binding judicial precedents, including Supreme Court and High Court decisions, have been correctly applied, particularly the applicability and interpretation of the Supreme Court ruling in Totgar's Co-operative Sale Society Ltd. vis-`a-vis the present facts.

Issue 1: Eligibility of Interest Income for Deduction under Section 80P(2)(a)(i) and Principle of Mutuality

The legal framework centers on Section 80P(2)(a)(i) of the Income Tax Act, which grants deduction to cooperative societies on profits and gains of business attributable to activities such as providing credit facilities to members. The principle of mutuality, which governs cooperative societies, implies that income earned from transactions among members or related to the cooperative's core business should not be treated as taxable income but rather as part of the business income.

The Assessing Officer (AO) accepted that the assessee is a cooperative credit society providing credit facilities to members and that interest income from members is deductible under Section 80P(2)(a)(i). However, the AO disallowed the deduction on interest income earned from deposits with cooperative banks, treating it as income from other sources based on the Supreme Court decision in Totgar's Co-operative Sale Society Ltd.

The Tribunal examined the decision of the Hon'ble High Court of Andhra Pradesh and Telangana in Vavveru Co-operative Rural Bank Ltd., which distinguished the facts of Totgar's case and held that interest income earned from fixed deposits made out of income derived from the business of providing credit facilities is eligible for deduction under Section 80P(2)(a). This decision emphasized that the character of income attributable to the core business does not change merely because it is invested in banks.

Further, the Kerala High Court in Pr.CIT vs. Sahyadri Co-operative Credit Society Ltd. (2024) reinforced this position, holding that interest earned on deposits made from surplus profits, which are part of the principal business activity, retains its character as business income and is eligible for deduction under Section 80P(2). The Court rejected the Revenue's contention that such interest income loses its character due to the mode of investment, underscoring that prudent financial management should not be discouraged.

The Tribunal applied these precedents and reasoned that since the interest income was earned from deposits made out of working capital and operational funds in the normal course of business, it is directly attributable to the business activity of providing credit facilities. The principle of mutuality was also noted as relevant, reinforcing that such income should be treated as business income eligible for deduction under Section 80P(2)(a)(i).

The Tribunal therefore held that the interest income from cooperative banks qualifies for deduction under Section 80P(2)(a)(i), reversing the AO's and CIT(A)'s disallowance.

Issue 2: Eligibility of Interest Income under Section 80P(2)(d) Regarding Cooperative Banks

Section 80P(2)(d) provides deduction for income derived by a cooperative society from investments made with specified institutions, including cooperative banks. The assessee contended that cooperative banks, being registered cooperative societies licensed by the Reserve Bank of India, qualify under this provision.

The AO and CIT(A) rejected this contention, relying on the Karnataka High Court decision in Totgar's case, which held that interest income from investments, whether in scheduled or cooperative banks, does not qualify for deduction under Section 80P(2)(d) because such income is not attributable to the business activities enumerated in Section 80P(2)(a).

The Tribunal noted that the Karnataka High Court's ruling in Totgar's case was factually distinguishable, as it involved a marketing cooperative society engaged in agricultural produce marketing, which incurred losses in its core business and invested members' funds. The present case involves a credit cooperative society whose interest income arises from its core business activities.

While the Tribunal did not expressly grant deduction under Section 80P(2)(d), it emphasized that interest income from cooperative banks in this case is eligible under Section 80P(2)(a)(i) due to its direct connection with the business of providing credit facilities.

Issue 3: Application and Misapplication of Binding Precedents, Including Totgar's Case

The assessee argued that the CIT(A) erred in not following binding precedents, including the Supreme Court decision in Mavilayi Service Cooperative Bank Ltd. and the Bombay High Court decision in Quepem Urban Co-operative Credit Society Ltd., which held that cooperative credit societies providing credit to members are eligible for deduction under Section 80P(2)(a)(i), including interest earned from statutory deposits.

The Tribunal observed that the Supreme Court's decision in Totgar's case was relied upon by the AO and CIT(A) to deny deduction on interest income from investments. However, the Tribunal found that Totgar's case concerned a cooperative marketing society with facts distinguishable from the present case of a credit cooperative society engaged primarily in lending activities.

The Tribunal further relied on the Andhra Pradesh and Telangana High Court decision in Vavveru Co-operative Rural Bank Ltd., which explicitly distinguished Totgar's case and held that interest income earned from fixed deposits made out of business income is eligible for deduction under Section 80P(2)(a). This decision was supported by the recent Kerala High Court ruling in Sahyadri Co-operative Credit Society Ltd., which post-dates Totgar's decision and affirms the eligibility of such interest income for deduction.

The Tribunal accordingly held that the CIT(A) misapplied Totgar's decision and failed to follow binding precedents favorable to the assessee. It directed the Assessing Officer to allow the deduction under Section 80P(2)(a)(i) on the interest income earned from cooperative and nationalized banks.

Significant Holdings

The Tribunal held:

"The character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee."

It further stated:

"Interest income earned by investing income derived from business of providing credit facilities, loans by a Co-Operative Society was eligible for deduction u/sec.80P(2)(a) of the Act."

And:

"The Hon'ble High Court of Karnataka cited supra has been categorically held that the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a scheduled bank or a co-operative bank."

Finally, the Tribunal concluded:

"Accordingly, we hold that assessee is eligible for deduction u/s.80P of the Act, on the interest income earned by the assessee from Co-operative Banks and Nationalized Banks."

Accordingly, the appeal was allowed, and the Assessing Officer was directed to grant deduction under Section 80P(2)(a)(i) on the interest income earned from deposits with cooperative and nationalized banks.