Deduction for interest income allowed where recipient is a registered co operative society and payer is not an RBI licensed bank.

Deduction under Section 80P(2)(d) is available for "any income by way of interest" received by a registered co operative society where the payer co operative bank does not fall within the exclusion for RBI licensed banks that accept public deposits; this covers interest regardless of whether it is characterised as business income or income from other sources. The exclusion in Section 80P(4) applies only to co operative banks licensed by the Reserve Bank to carry on banking with the public. On that basis the disallowance of the interest deduction was found unsustainable and the appeal allowed.

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Issues: Whether a co-operative society is entitled to claim deduction under Section 80P(2)(d) of the Income-tax Act, 1961 in respect of interest income received from a co-operative bank.

Analysis: Section 80P(2)(d) allows deduction for "any income by way of interest" received by a co-operative society. A "co-operative society" is defined by registration under section 2(19) of the Income-tax Act, 1961. Section 80P(4) operates as a proviso excluding co-operative banks that function as banks licensed by the Reserve Bank of India and that accept deposits from the public. The Supreme Court in Mavilayi Services Co-operative Bank Ltd. v. CIT interpreted section 80P and related authorities to hold that section 80P(4) does not apply to a co-operative society which does not hold an RBI banking licence to lend to the public. Tribunal decisions and authoritative clarifications confirm that co-operative banks that remain registered co-operative societies remain co-operative societies for the purpose of section 80P unless they fall within the specific exclusion in section 80P(4). Section 80P(2)(d) uses the expression "any income by way of interest", which covers interest income regardless of whether that income is characterized as business income or income from other sources.

Conclusion: Deduction under Section 80P(2)(d) of the Income-tax Act, 1961 is allowable in respect of interest income received from a co-operative bank where the recipient is a co-operative society registered as required and the payer co-operative bank does not attract the exclusion in Section 80P(4) (i.e., is not an RBI-licensed co-operative bank lending to the public). The disallowance of deduction of Rs. 47,62,521 is not sustainable and the appeal is allowed.

Ratio Decidendi: Section 80P(4) excludes only those co-operative banks that are licensed by the Reserve Bank of India to carry on banking business with the public; a registered co-operative society receiving interest from a co-operative bank that does not fall within that exclusion is entitled to deduction under Section 80P(2)(d) of the Income-tax Act, 1961.

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