ITAT remands case to determine if interest from co-operative society qualifies for section 80P(2)(d) deduction

ITAT Bangalore remitted the matter back to AO to determine whether interest received by the assessee was from co-operative society or co-operative bank, following SC precedent in Kerela State Co-operative Agricultural Rural Development Bank Ltd. If interest was from co-operative society, deduction under section 80P(2)(d) would be allowed. If from co-operative bank, assessee would be eligible for deduction of cost of funds as per Karnataka HC ruling in Totgar Co-operative Sale Society. Appeal allowed for statistical purposes.

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Issues Involved:
1. Validity of the intimation order under Section 143(1)(a) of the Income Tax Act, 1961.
2. Disallowance of the claim under Section 80P(2)(d) of the Income Tax Act, 1961.
3. Interpretation of the status of co-operative banks versus co-operative societies.
4. Procedural fairness and natural justice in denying the claim without proper intimation.

Detailed Analysis:

1. Validity of the Intimation Order under Section 143(1)(a):
The appellant contended that the intimation order under Section 143(1)(a) and the subsequent confirmation by the Commissioner of Income Tax (Appeals) were "bad in law and against the provisions of the law and judicial precedence." The Tribunal noted that the return was processed under Section 143(1) by the CPC, disallowing the claim of deduction under Section 80P(2)(d) and determining taxable income of Rs. 12,49,887. The CIT (Appeals) had discussed the issue in detail and dismissed the appeal of the assessee.

2. Disallowance of the Claim under Section 80P(2)(d):
The appellant argued that the CPC erred in disallowing the claim under Section 80P(2)(d) without verifying that the said deduction was allowed in previous years. The Tribunal observed that the appellant had claimed a deduction of Rs. 12,49,887 under Section 80P(2)(d) on interest income received from deposits in co-operative banks. The Tribunal referred to the Supreme Court judgment in Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer, which clarified that interest received from co-operative banks registered as co-operative societies and running the business of banking under RBI regulations is not eligible for deduction under Section 80P(2)(d).

3. Interpretation of Co-operative Banks vs. Co-operative Societies:
The appellant argued that co-operative banks should be considered at par with co-operative societies under the Karnataka Co-operative Societies Act, 1959. The Tribunal noted that the Supreme Court had distinguished between co-operative societies and co-operative banks, stating that the latter are not eligible for deductions under Section 80P(2)(d) if they are engaged in banking business as defined under the Banking Regulation (BR) Act, 1949.

4. Procedural Fairness and Natural Justice:
The appellant contended that the CPC erred in disallowing the claim under Section 80P(2)(d) without giving intimation in writing or electronic mode as mandated under the proviso to Section 143(1). The Tribunal acknowledged this procedural lapse but noted that the CIT (Appeals) had stated that an opportunity was now accorded to the appellant to explain the case. The Tribunal emphasized the principle of natural justice and directed the Assessing Officer (AO) to provide a reasonable opportunity to the assessee.

Conclusion:
The Tribunal remitted the issue back to the AO for determination of whether the interest received by the assessee was from co-operative societies or co-operative banks. If the interest was received from co-operative societies, the assessee would be eligible for deduction under Section 80P(2)(d). If not, the assessee would be eligible for deduction of the cost of funds as per the judgment in Totgar Co-operative Sale Society vs ITO. The AO was directed to provide a reasonable opportunity to the assessee, and the assessee was advised not to seek unnecessary adjournments.

Outcome:
The appeal by the assessee was allowed for statistical purposes.

Pronouncement:
The judgment was pronounced in the open court on January 17, 2024.

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