Interest income from cooperative bank fixed deposits qualifies for Section 80P(2)(a)(i) deduction as business income

ITAT Pune allowed the assessee's appeal regarding disallowance of deduction under section 80P(2)(a)(i) for interest earned from cooperative bank. The tribunal held that interest income earned on fixed deposits with cooperative bank/scheduled bank constitutes business income eligible for deduction under section 80P(2)(a)(i). Following the precedent in Vivekvardhani Nagari Sahakari Patsanstha Ltd, the tribunal directed the AO to allow exemption under sections 80P(2)(a)(i) and 80P(2)(d). The appeal was allowed in favor of the assessee.

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ISSUES:

Whether deduction under section 80P(2)(a)(i) of the Income Tax Act is allowable on interest income earned by a co-operative society from investments/deposits with co-operative banks and nationalized banks.Whether interest income earned by a co-operative society from investments with other co-operative societies qualifies for deduction under section 80P(2)(d).Whether interest income earned from co-operative banks can be treated as business income attributable to credit facilities provided to members, thus qualifying for deduction under section 80P.The impact of section 80P(4) and the Finance Act 2015 amendment excluding co-operative banks from the definition of co-operative society on the allowability of deduction under section 80P.The scope and applicability of section 80P(2)(d) regarding interest income from investments in co-operative banks vis-à-vis other co-operative societies.The tax treatment of interest income earned by a co-operative society from scheduled banks and co-operative banks-whether taxable under business income or income from other sources.

RULINGS / HOLDINGS:

Deduction under section 80P(2)(a)(i) is allowable to a co-operative society engaged in providing credit facilities to its members on interest income earned from investments/deposits with co-operative and nationalized banks, as such interest income is attributable to the business activities of the society.Interest income earned by a co-operative society from investments with other co-operative societies qualifies for deduction under section 80P(2)(d), as the provision aims at furtherance of the co-operative movement as a whole.The Supreme Court has held that the deduction under section 80P(2)(a)(i) is available to all co-operative societies providing credit facilities to members, irrespective of whether the loans are agricultural or non-agricultural, and that profits attributable to non-members cannot be included for deduction.Section 80P(4) excludes co-operative banks (other than primary agricultural credit societies or primary co-operative agricultural and rural development banks) from claiming deduction under section 80P; however, since co-operative banks are registered under co-operative societies legislation, interest income earned by a co-operative society from investments in co-operative banks is eligible for deduction under section 80P(2)(d).Interest income earned from scheduled banks or co-operative banks, which is not business income but income from other sources, is not eligible for deduction under section 80P; such income is taxable under section 56.The Assessing Officer's view allowing deduction under section 80P(2)(d) on interest income from co-operative banks was a plausible view and the revisional order under section 263 dislodging this view was held to be erroneous and set aside.In case of conflicting High Court decisions on the allowability of deduction under section 80P(2)(d) for interest income from co-operative banks, the view favorable to the assessee is to be preferred.

RATIONALE:

The Court applied the statutory provisions of section 80P of the Income Tax Act, 1961, particularly subsections (2)(a)(i), (2)(d), and (4), alongside relevant amendments introduced by the Finance Act 2006 and Finance Act 2015.Judicial precedents, including Supreme Court decisions in Mavilayi Service Cooperative Bank and Totagars Cooperative Sale Society, were relied upon to interpret the scope of section 80P deductions, emphasizing the cooperative society's role in providing credit facilities to members and the exclusion of income attributable to non-members.The Court acknowledged the distinction between co-operative societies and co-operative banks as clarified by legislative amendments, yet held that co-operative banks remain co-operative societies under registration laws, thus supporting deduction claims under section 80P(2)(d) for interest income from such banks.The Court emphasized strict construction of exemption and deduction provisions, ruling that interest income not chargeable as business income cannot qualify for deduction under section 80P and must be taxed under income from other sources.The Court followed coordinate bench decisions of the Tribunal and relevant High Court rulings favoring the assessee, applying the principle that in case of conflicting High Court decisions, the view beneficial to the assessee prevails.The Court set aside the revisional order under section 263 for lack of jurisdiction and restored the Assessing Officer's order allowing deduction under section 80P(2)(d), reinforcing the principle of judicial restraint in revisional powers when a plausible view is taken.

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