ITAT Chennai grants deduction on interest income for cooperative societies, supports liberal interpretation

The ITAT Chennai allowed the appeal, directing the AO to allow the deduction under Section 80P(2)(a)(i) for interest income earned from loans given to associate members. The ITAT also instructed the AO to re-examine the claim for deduction under Section 80P(2)(d) for interest income earned from deposits with other cooperative banks, considering the governing regulations of the banks involved. The judgment emphasized a liberal interpretation of Section 80P to support the cooperative sector and resolve ambiguities in favor of the assessee.

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Issues Involved:

1. Denial of deduction under Section 80P(2)(a)(i) for interest income earned from associate members.
2. Denial of deduction under Section 80P(2)(d) for interest income earned from deposits with other cooperative banks.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80P(2)(a)(i) for Interest Income Earned from Associate Members:

The assessee, a Primary Agricultural Co-operative Credit Society, claimed a deduction under Section 80P of the Income-tax Act, 1961, for the assessment year 2018-19. The Assessing Officer (AO) disallowed the deduction of Rs. 72,58,525/- on the grounds that the interest income earned from loans given to associate members was not eligible for deduction under Section 80P(2)(a)(i). The AO's decision was based on the observation that the assessee did not provide complete details about its members and mentioned its status as a "Co-operative Bank" in its audit report.

The CIT(A) upheld the AO's decision, relying on the Supreme Court's judgment in the case of Totgars' Cooperative Sale Society Limited vs. ITO, which held that interest income on investments not immediately required for business purposes falls under "Income from other sources" and is not eligible for deduction under Section 80P(2)(a)(i).

However, the ITAT Chennai, referencing its own decision in the assessee's case for the assessment year 2017-18 and the Supreme Court's ruling in Mavilayi Service Co-operative Bank Limited vs. CIT, Calicut, found that the assessee was entitled to the deduction. The Tribunal noted that Section 80P should be read liberally and reasonably, and if there is ambiguity, it should be resolved in favor of the assessee. It directed the AO to allow the deduction for interest income earned from loans given to associate members.

2. Denial of Deduction under Section 80P(2)(d) for Interest Income Earned from Deposits with Other Cooperative Banks:

The AO disallowed the deduction under Section 80P(2)(d) for interest income earned from deposits with District Central Co-operative Banks, arguing that these banks are not cooperative societies. The CIT(A) supported this view, referencing the Supreme Court's decision in Totgars' Cooperative Sale Society Limited and other relevant case laws.

The ITAT Chennai, however, referred to its earlier decision for the assessment year 2017-18, where it had remanded the issue back to the AO to verify whether the interest income was earned from cooperative banks governed by the Reserve Bank of India under the Banking Regulations Act, 1949, or by the Tamil Nadu Co-operative Societies Act, 1983. The Tribunal directed the AO to re-examine the claim for the assessment year 2018-19 in light of these directions and decide accordingly.

Conclusion:

The ITAT Chennai allowed the appeal for statistical purposes, directing the AO to:

1. Allow the deduction under Section 80P(2)(a)(i) for interest income earned from loans given to associate members.
2. Re-examine the claim for deduction under Section 80P(2)(d) for interest income earned from deposits with other cooperative banks, based on the governing regulations of the banks involved.

The judgment emphasizes a liberal and reasonable interpretation of Section 80P to encourage and promote the cooperative sector, resolving ambiguities in favor of the assessee.

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