2023 (8) TMI 1417 - AT - Income Tax

Cooperative bank interest qualifies for section 80P(2)(d) deduction as cooperative societies under Kerala Act

The ITAT Cochin ruled that interest from cooperative banks qualifies for deduction under section 80P(2)(d) since cooperative banks are also cooperative ... Deduction u/s 80P - interest on deposits with banks and treasuries, claimed deductible u/s.80P(1) r/ws. 80P(2)(d) - Deduction in respect of income of co-operative societies - HELD THAT:- In fine, interest from co-operative banks, inasmuch as they are also cooperative societies under the Kerala Act, is deductible u/s.80P(2)(d), while that from the treasury or other institution, not being a co-operative society, is not. The matter, in view of the said binding decision, admits of no two views, at least insofar as the Cochin Bench of the Tribunal is concerned. No contrary judgment has even otherwise been brought to our notice by the Revenue, even as the decision in Totgar’s CSS Ltd. [2017 (7) TMI 1049 - KARNATAKA HIGH COURT] stands considered in Peroorkada SCB Ltd. [2021 (12) TMI 1084 - KERALA HIGH COURT]. We may, however, before parting with our order, place on record our humble view in the matter. The Hon’ble Apex Court in Mavilayi Service Co-operative Bank Ltd [2021 (1) TMI 488 - SUPREME COURT] while discussing the import of sec.80P(4), which reads as under, clarified that the exclusion thereby extends only to co-operative banks, i.e., cooperative societies in the business of banking as defined in sec.5(b) of the Banking Regulation Act, 1949 (BRA), under the license from RBI: ‘(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.’ Whether, therefore, the co-operative societies were PACS or not, which aspect informed the decision by the Hon’ble High Court, was immaterial. In other words, even if a co-operative society was not a PACS, as contended by the Revenue with reference to s.5(cc)(iv) of the BRA, as indeed the relevant provisions of the Kerala Act (i.e., under which Act the co-operative societies were registered and constituted)– which we find to be even more stringent than that of the BRA, it was immaterial. Investment in a co-operative society, on the other hand, would restrict the access to it’s funds only to members thereof, either directly by provision of credit thereto, or get channelized to the activities in which the lendee co-operative society is engaged. In sum, placing of funds with a cooperative bank cannot be regarded as any different from that with any other commercial bank, and which was the raison de’tre of exclusion of cooperative banks from the purview of s. 80P. There is support for this view, as in Pr.CIT v. Totgars Co-operative Sale Society [2017 (7) TMI 1049 - KARNATAKA HIGH COURT] wherein the Hon’ble High Court has, with reference to sec.80P(4) and also s.194A(3), opined that the interest on deposit with co-operative banks is not eligible for deduction u/s.80P(1) r.w.s. 80P(2)(d). As explained therein, the object to be served is the extension of credit to it’s members and, not, engage in the business of banking, directly or indirectly. Lending to co-operative banks would thus attract s.80P(4). Our view, inconsequential in view of the binding judicial precedent in Peroorkada Service Cooperative Bank Ltd. [2021 (12) TMI 1084 - KERALA HIGH COURT], is nevertheless stated inasmuch as no argument along these lines was advanced before the Hon’ble High Court, which may, in a given case, consider the same if deemed fit and proper. The matter shall, accordingly, travel to the file of the AO to give effect to our order, as under: a). income assessed as business income would qualify for deduction u/s. 80P(1) r/w s. 80P(2)(a)(i) to the extent it relates to the eligible activity specified thereunder; and b). income by way of interest on deposits or dividend, assessed as income from other sources, would be deductible u/s. 80P(1) r/w s. 80P(2)(d) to the extent it relates to income arising from cooperative societies and cooperative banks; and c). balance income, if any, would be, irrespective of the head of income, taxable. The income deductible would only be net of expenditure there-against, i.e., as per the provisions of the Act. Issues Involved:1. Deduction under Section 80P(1) of the Income-tax Act, 1961.2. Classification of income as business income or income from other sources.3. Applicability of Section 80P(2)(d) for interest income from co-operative banks and treasuries.Summary:Issue 1: Deduction under Section 80P(1) of the Income-tax Act, 1961The Tribunal initially decided the appeals based on the decision in Chirakkal Service Co-operative Bank Ltd. v. CIT, which was later overruled by a larger bench decision in CIT v. Poonjar Service Co-operative Bank Ltd. The Tribunal recalled the appellate orders following the decision in Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. ITAT, with retrospective effect. The assessee societies, registered as Primary Agricultural Credit Societies (PACSs), claimed deductions under Section 80P(1) r/w Section 80P(2)(a)(i), which was denied by the Assessing Officer (AO) based on their lending profiles and definitions under the Banking Regulation Act, 1949 (BRA) and the Kerala Act.Issue 2: Classification of income as business income or income from other sourcesThe Tribunal noted that income assessed as business income would qualify for deduction under Section 80P(1) r/w Section 80P(2)(a)(i) to the extent it relates to eligible activities specified thereunder. The Tribunal emphasized that the correct way to read the different heads of exemption under Section 80P is to treat each as a separate and distinct head of exemption. Income falling within any one head of exemption would be free from tax, notwithstanding the conditions of another head of exemption.Issue 3: Applicability of Section 80P(2)(d) for interest income from co-operative banks and treasuriesThe Tribunal observed that interest on deposits with banks and treasuries, claimed deductible under Section 80P(1) r/w Section 80P(2)(d), does not find mention in the Grounds of Appeal but is permissible under the Rules. The decision in Peroorkada Service Co-operative Bank Ltd. clarified that interest income from District co-operative banks/State co-operative banks is deductible under Section 80P(2)(d), while interest income from treasuries is not. The Tribunal noted that the exclusion under Section 80P(4) applies only to co-operative banks, not co-operative societies, and the benefit of Section 80P(2)(a)(i) extends only to the provision of credit to members.Conclusion:The Tribunal directed the AO to:a) Allow deduction for income assessed as business income under Section 80P(1) r/w Section 80P(2)(a)(i) for eligible activities.b) Allow deduction for interest or dividend income from co-operative societies and co-operative banks under Section 80P(1) r/w Section 80P(2)(d).c) Tax any remaining income, irrespective of the head of income.The income deductible would be net of expenditure as per the provisions of the Act. The appeals were disposed of on these terms.