Co-operative society gets Section 80P(2)(d) deduction for interest from investments with another co-operative society

The ITAT Jodhpur allowed deduction u/s 80P(2)(d) for interest received by a co-operative society from investments with another co-operative society. The AO had disallowed the benefit through rectification u/s 154. The tribunal relied on precedent in ITO Vs. Bhilwara Zila Dugdh Utpadak Sahkari Sang Ltd., holding that Regional Rural Banks are deemed co-operative societies under section 22 of the Regional Rural Bank Act, making interest earned on deposits eligible for exemption under section 80P(2)(d).

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Issues Involved:
1. Validity of proceedings initiated for rectification under Section 154 of the IT Act.
2. Eligibility for deduction under Section 80P(2)(d) of the IT Act.
3. Disallowance of interest under Section 36(1)(iii) of the IT Act.
4. Validity of penalty proceedings under Section 271(1)(c) of the IT Act.

Summary:

1. Validity of proceedings initiated for rectification under Section 154 of the IT Act:
The assessee challenged the initiation of rectification proceedings under Section 154, arguing it was bad in law and facts, especially since the deduction under Section 80P(2)(d) was allowed in the original return and by the CIT(A) in a previous order dated 26/07/2018. The Tribunal noted that the issue of rectification under Section 154 is not permissible on debatable points of law, referencing the Supreme Court's decision in Volkart Brothers and other relevant case laws.

2. Eligibility for deduction under Section 80P(2)(d) of the IT Act:
The primary issue was whether interest income earned from investments with cooperative banks qualifies for deduction under Section 80P(2)(d). The Tribunal relied on various judicial precedents, including the Karnataka High Court's decision in Totagars Cooperative Sale Society, which held that interest earned from cooperative banks is not deductible under Section 80P(2)(d). However, the Tribunal also considered contrary decisions from other jurisdictions and ultimately decided in favor of the assessee, allowing the deduction under Section 80P(2)(d) based on the principle of judicial consistency and the specific facts of the case.

3. Disallowance of interest under Section 36(1)(iii) of the IT Act:
The Tribunal addressed the disallowance of interest on borrowed capital, holding that interest on loans used for working capital purposes is allowable as a revenue expenditure. The Tribunal referenced decisions such as Devi Construction vs. DCIT, which support the deductibility of interest on loans used for business purposes, whether for capital or revenue expenditures.

4. Validity of penalty proceedings under Section 271(1)(c) of the IT Act:
The Tribunal did not adjudicate the penalty proceedings under Section 271(1)(c) since the quantum appeal was decided in favor of the assessee, rendering the penalty issue academic.

Conclusion:
The Tribunal allowed the appeals of the assessee, granting the deduction under Section 80P(2)(d) and addressing the rectification and interest disallowance issues in favor of the assessee. The penalty proceedings were not adjudicated due to the favorable decision on the quantum appeal.

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