2024 (5) TMI 1601 - AT - Income Tax

Interest on Co-operative Bank Investments Deductible Under Section 80P(2)(d), AO's Disallowance Set Aside

The ITAT Bangalore allowed the assessee's appeal, holding that interest earned on investments in co-operative banks qualifies for deduction under section ... Disallowance u/s 80P(2)(d) - interest earned on the investment made in the co-operative bank - HELD THAT:-We find that this Tribunal in the case of GSSS Credit Co-operative Society Limited [2024 (5) TMI 1600 - ITAT BANGALORE] involving identical facts and circumstances has allowed the appeal of the assessee and held assessee is eligible for 80P(2)(d) deduction in respect of interest earned from co-operative banks based on the view taken in the above decision. It is directed that any interest earned by the assessee from commercial banks may be considered. under the head Income from other sources by granting benefit available to the assessee u/s. 57 of the Act. We direct the AO to follow the directions therein and to compute the deduction in the hands of the assessee in accordance with law. Assessee appeal allowed. ISSUES: Whether the deduction claimed under section 80P(2)(d) of the Income Tax Act is allowable in respect of interest income earned on investments made in co-operative banks.Whether the provisions of section 80P(4) of the Act apply to deny deduction under section 80P(2)(a)(i)/(d) when the assessee earns interest income from co-operative banks.Whether interest income earned from nationalized banks is eligible for deduction under section 80P(2)(d).Whether corresponding interest expenditure incurred to earn interest income from banks (nationalized or co-operative) is allowable as a deduction under section 57 of the Act.Whether a co-operative bank not carrying on banking business as defined under section 5(b) of the Banking Regulation Act qualifies as a co-operative society for the purpose of deduction under section 80P(2)(d).Whether the issue requires remand to the Assessing Officer for fresh adjudication in light of relevant judicial precedents. RULINGS / HOLDINGS: The deduction under section 80P(2)(d) is allowable in respect of interest income earned from investments made in co-operative banks that are not carrying on the business of banking as defined in section 5(b) of the Banking Regulation Act.The provisions of section 80P(4) deny deduction under section 80P(2)(a)(i)/(d) only if the co-operative bank is carrying on banking business as defined under the Banking Regulation Act; otherwise, such denial does not apply.Interest income earned from nationalized banks is not eligible for deduction under section 80P(2)(d), but the corresponding interest expenditure incurred to earn such income shall be allowed as a deduction under section 57.The corresponding interest expenditure incurred in earning interest income from commercial or co-operative banks shall be allowed as a deduction under section 57 of the Act.A co-operative bank that does not transact banking business with the public as defined in section 5(b) of the Banking Regulation Act is to be treated as a co-operative society for the purpose of section 80P(2)(d), and the interest income from such entity is eligible for deduction.The issue is remanded to the Assessing Officer for fresh adjudication consistent with the legal principles and judicial precedents discussed, allowing the assessee a proper opportunity of being heard. RATIONALE: The Court applied the provisions of section 80P of the Income Tax Act, particularly clauses (2)(a)(i), (2)(d), and subsection (4), in conjunction with the definition of banking under section 5(b) of the Banking Regulation Act, 1949.Reliance was placed on the Supreme Court judgment in Kerala State Co-operative Agricultural and Rural Bank Ltd. v. ACIT, which held that a co-operative society not transacting banking business as defined is not a co-operative bank within the meaning of the Banking Regulation Act and is therefore entitled to deduction under section 80P(2).Precedents from coordinate benches of the Tribunal and High Courts were considered, including decisions clarifying that interest income from investments in co-operative societies qualifies for deduction under section 80P(2)(d), whereas interest income from nationalized or co-operative banks carrying on banking business does not.The Court distinguished the scope of section 80P(2)(a)(i) and section 80P(2)(d), noting that the Supreme Court's ruling in Totgars Co-operative Sales Society Ltd. concerned only section 80P(2)(a)(i), not section 80P(2)(d).The Court emphasized that section 80P(2)(d) contains no stipulation regarding the nature of funds or the business of the entity in which investment is made, entitling deduction for interest or dividend income derived from investments in any co-operative society.The Court recognized that interest income from banks is assessable under 'Income from Other Sources' and accordingly allowed the corresponding expenditure deduction under section 57.Given the complexity and factual determinations required, the Court remanded the matter to the Assessing Officer for fresh consideration in accordance with the legal principles and after affording the assessee an opportunity to be heard.