Cooperative society entitled to Section 80P(2)(d) deduction on interest income from cooperative banks despite Sub-section (4) restrictions

The ITAT Mumbai held that a cooperative society can claim deduction under Section 80P(2)(d) for interest income received from cooperative banks. Despite cooperative banks being disqualified from claiming Section 80P deductions after insertion of Sub-section (4), they remain cooperative societies registered under relevant acts. The tribunal relied on SC precedent in Totgars Cooperative Sale Society Limited case, ruling that interest income earned by cooperative societies on investments with cooperative banks qualifies for deduction under Section 80P(2)(d). The decision favored the assessee.

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Issues Involved:
1. Disallowance of deduction under section 80P(2)(d) for interest income received from cooperative banks.

Issue-wise Detailed Analysis:

Disallowance of Deduction under Section 80P(2)(d):
The primary issue in this case is whether the assessee, a cooperative society, is entitled to a deduction under section 80P(2)(d) of the Income Tax Act, 1961, for interest income earned from investments made with cooperative banks.

Facts of the Case:
- The assessee filed its return of income declaring total income after claiming a deduction under section 80P.
- The Assessing Officer (AO) observed that the assessee earned interest income from investments held with cooperative banks and disallowed the deduction claimed under section 80P(2)(d), citing the principle of mutuality and referencing Supreme Court judgments in M/s. Bangalore Club vs. CIT and Totgars Co-operative Sale Society Ltd. vs. ITO.

CIT(A) Findings:
- The CIT(A) upheld the AO's disallowance, stating that section 80P(4) had withdrawn the deduction for cooperative banks, except for primary agricultural credit societies or primary cooperative agricultural and rural development banks.
- The CIT(A) relied on the Supreme Court judgment in Totgars Co-operative Sale Society Ltd. vs. ITO, which held that interest income from surplus funds not required for business purposes should be taxed as "Income from other sources" under section 56.

Assessee's Arguments:
- The assessee argued that the interest income from investments with cooperative banks should be eligible for deduction under section 80P(2)(d).
- The assessee cited various Tribunal decisions and High Court judgments supporting the claim that interest income from cooperative banks qualifies for the deduction.
- The assessee also referenced the CBDT Circular No. 14, which clarified that cooperative banks functioning like other banks would not be entitled to the deduction under section 80P(4), but this should not affect the deduction under section 80P(2)(d) for cooperative societies.

Tribunal's Analysis:
- The Tribunal observed that section 80P(2)(d) allows a deduction for interest income derived by a cooperative society from investments with any other cooperative society.
- The Tribunal noted that a cooperative bank is still a cooperative society registered under the Cooperative Societies Act, 1912, or any other state law for the registration of cooperative societies.
- The Tribunal disagreed with the lower authorities' view that section 80P(4) affects the deduction under section 80P(2)(d) for cooperative societies.
- The Tribunal cited various judicial pronouncements, including decisions from the High Courts of Karnataka and Gujarat, which supported the assessee's claim for the deduction under section 80P(2)(d) for interest income from cooperative banks.
- The Tribunal distinguished the Supreme Court judgment in Totgars Co-operative Sale Society Ltd. vs. ITO, stating it was in the context of section 80P(2)(a)(i) and not section 80P(2)(d).

Conclusion:
- The Tribunal concluded that the interest income earned by the assessee from investments with cooperative banks is eligible for deduction under section 80P(2)(d).
- The appeal filed by the assessee was allowed, and the disallowance of the deduction under section 80P(2)(d) was set aside.

Summary:
The Tribunal allowed the appeal of the assessee, a cooperative society, and held that the interest income earned from investments with cooperative banks qualifies for deduction under section 80P(2)(d) of the Income Tax Act, 1961. The Tribunal disagreed with the lower authorities' interpretation that section 80P(4) affects the deduction under section 80P(2)(d) and distinguished relevant Supreme Court judgments. The decision was supported by various judicial pronouncements and CBDT Circular No. 14, which clarified the legislative intent behind section 80P(4).

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