2023 (9) TMI 150 - AT - Income Tax

Interest income from cooperative bank investments qualifies for deduction under section 80P(2)(d) - Tribunal ruling

The Totgars’ Co-operative Sale Society Ltd., Versus The Asst. Commissioner of Income-tax, Circle-1 (1) & TPS, Hubli.

The Tribunal held that interest income earned by a cooperative society from investments in cooperative banks qualifies for deduction under section ... Deduction denied u/s 80P(2)(d) - interest and dividend received from cooperative bank/cooperative society from the investments made in other cooperative banks - assessee is a cooperative society and is carrying on the activities of marketing agricultural produce grown by the members and providing credit facilities to the members by advancing loans to them - HELD THAT:- In the instant case, the amount which was invested in banks to earn interest was not any amount due to its members. Further the claim of the assessee in u/s 80P(2)(d) was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to its members, as there were no takers. Therefore they had deposited the money in a co-operative bank again which interest/dividend was earned. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. See Andhra Pradesh State Co-operative Bank [2011 (6) TMI 215 - ANDHRA PRADESH HIGH COURT]. We respectfully following the view taken in the case of PCIT & Anr. Vs. Totagars Cooperative Sale Society [2017 (1) TMI 1100 - KARNATAKA HIGH COURT] and State Bank Of India [2016 (7) TMI 516 - GUJARAT HIGH COURT] hold that the interest income earned by a cooperative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec. 80P(2)(d) of the Act. It is directed that the interest earned by the assessee from commercial banks may be considered under the head ‘income from other sources’ and relief may be granted as available to the assessee u/s 57 of the Act in accordance with law. Accordingly ground No. 2 and 3 raised by the assessee stands partly allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether interest and dividend earned by a cooperative society on investments/deposits made with cooperative banks/cooperative societies are eligible for deduction under section 80P(2)(d) of the Income Tax Act. 2. Whether the Supreme Court decision in Totgars (distinguishing interest attributable to retained sale proceeds/liabilities) applies to deny deduction under section 80P(2)(d) on the facts where invested funds are not amounts due to members but surplus/profits deposited with cooperative banks. 3. Whether interest received from cooperative banks can alternatively be allowed as deduction under section 80P(2)(a)(i) or 80P(2)(a)(iii), or should be treated as income taxable under the head 'income from other sources' with attendant allowable expenses under section 57. 4. Whether the view on issue (1) for the assessment year 2015-16 applies mutatis mutandis to subsequent assessment years 2016-17, 2017-18 and 2018-19. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility of deduction under section 80P(2)(d) for interest/dividend from cooperative banks Legal framework: Section 80P(2)(d) grants deduction in respect of income by way of interest, dividend, etc., received from cooperative societies (interpretation hinges on definition and scope of 'co-operative society' and whether 'co-operative bank' is included). Precedent treatment: Conflicting High Court decisions were noted - one line (Karnataka High Court in earlier decision; Gujarat High Court) held that a cooperative bank is a species of the genus 'co-operative society' and thus interest from cooperative banks is covered by section 80P(2)(d); another line (Karnataka High Court in a different Totagars-related decision and the Supreme Court in Totgars on related facts) took a narrower approach in specific factual contexts. Interpretation and reasoning: The Tribunal examined the nature of the invested funds - here the amounts invested in cooperative banks were not amounts retained as liabilities payable to members nor shown as liabilities in the balance sheet; they constituted available funds/surplus not immediately required for lending. Given that a 'co-operative bank' is a variety of 'co-operative society' (a species within the genus), the expression 'co-operative society' in section 80P(2)(d) encompasses cooperative banks. The Tribunal distinguished the Supreme Court's Totgars decision on the factual basis that, in Totgars, invested amounts represented retained sale proceeds payable to members and thus were liabilities; by contrast, in the present facts the invested sums were not amounts due to members and therefore the interest is attributable to activities covered by section 80P. Ratio vs. Obiter: The holding that interest/dividend earned on investments with cooperative banks is deductible under section 80P(2)(d) - on the facts that invested funds were not amounts due to members - is ratio for the present appeals. The discussion distinguishing Totgars as fact-specific is ratio insofar as it explains the narrow applicability of that precedent to dissimilar facts; broader generalizations about interpretation of 'co-operative society' reflect authoritative reasoning relied upon from High Court decisions and serve as operative precedent for these appeals. Conclusions: Deduction under section 80P(2)(d) is allowable for the interest/dividend earned by the assessee from investments in cooperative banks on the facts before the Tribunal. Ground(s) claiming disallowance under section 80P(2)(d) are partly allowed for statistical purposes. Issue 2 - Applicability and distinction of the Supreme Court's Totgars decision Legal framework: Totgars addressed treatment of interest earned on amounts retained from sale proceeds of members and whether such interest is attributable to activities enumerated in section 80P(2)(a)(i) and hence deductible. Precedent treatment: The Supreme Court in Totgars upheld taxation of such interest where retained sale consideration constituted liability to members; the Supreme Court also confined its decision to the particular facts of that case. Subsequent High Court decisions have both followed and distinguished Totgars depending on facts. Interpretation and reasoning: The Tribunal emphasized the factual limitation in Totgars: where retained sale proceeds are liabilities to members (reflected on the liability side of the balance sheet), interest on their temporary investment cannot be attributed to the cooperative society's specified activities and therefore is taxable. In the present case the invested amounts were not such liabilities and were not shown as amounts payable to members; therefore Totgars is distinguishable. The Tribunal relied on High Court decisions that treat cooperative banks as within the scope of 'co-operative society' for purposes of section 80P(2)(d). Ratio vs. Obiter: The distinction made is ratio to rebut the Revenue's reliance on Totgars; the Tribunal's characterization of Totgars as fact-specific and not determinative where invested funds are not member liabilities is an operative finding applicable to these appeals. Conclusions: Totgars does not govern the present appeals; its application is confined to cases where the invested amounts represent member liabilities. The Tribunal therefore declined to apply Totgars to deny deduction under section 80P(2)(d) on the facts before it. Issue 3 - Alternative entitlements under section 80P(2)(a)(i)/(a)(iii) and treatment under section 57 Legal framework: Sections 80P(2)(a)(i) and (a)(iii) provide deduction in respect of income from certain cooperative society activities (e.g., providing credit facilities); section 57 allows deduction of expenses incurred in relation to 'income from other sources'. Precedent treatment: The Supreme Court in Totgars and other authorities considered whether interest income is attributable to specified activities or is other income; High Court decisions have varied on whether interest on investments qualifies under the various limbs of section 80P. Interpretation and reasoning: The assessee advanced alternative pleas under section 80P(2)(a)(i) and (a)(iii) that interest was connected to lending/banking activities. The Tribunal, having allowed deduction under section 80P(2)(d), considered alternative grounds unnecessary to decide and left those issues open for the assessee to pursue in appropriate circumstances. The Tribunal further directed that interest earned from commercial banks be treated as 'income from other sources' with relief under section 57 to the extent allowable, indicating that where section 80P(2)(d) does not apply, section 57 remedies remain available. Ratio vs. Obiter: The Tribunal's decision not to adjudicate alternative grounds is obiter in relation to those specific statutory limbs but operative in leaving the assessee free to press those grounds later; the direction regarding treatment under section 57 for commercial bank interest is an applied conclusion for the present case. Conclusions: Alternative claims under section 80P(2)(a)(i) and (a)(iii) were not adjudicated as unnecessary in light of allowance under section 80P(2)(d); interest from commercial banks should be considered under 'income from other sources' with allowable section 57 deductions considered in accordance with law. Issue 4 - Application of the view to subsequent assessment years Legal framework: Principle of consistency and applicability of identical findings to identical facts across assessment years. Precedent treatment: The Tribunal applied the same legal reasoning and outcome to subsequent years on the basis of identical facts and issues. Interpretation and reasoning: The issues for assessment years 2016-17, 2017-18 and 2018-19 were identical and arose on the same facts; the Tribunal applied the view recorded for 2015-16 mutatis mutandis to those years. Ratio vs. Obiter: The application to subsequent years is a ratio decision as it directly disposes of those appeals on the same legal basis. Conclusions: The view allowing deduction under section 80P(2)(d) (and related directions regarding section 57 treatment for commercial bank interest) for 2015-16 applies mutatis mutandis to assessment years 2016-17, 2017-18 and 2018-19; the appeals are partly allowed for statistical purposes.