Cooperative societies cannot claim section 80P(2)(d) deduction for interest from cooperative banks

The ITAT Bangalore held that cooperative societies cannot claim deduction under section 80P(2)(d) for interest earned from cooperative banks, as cooperative banks are not cooperative societies per Karnataka HC precedent in Totalgars Cooperative Sales Society. The tribunal directed the AO to examine whether investments in cooperative banks qualify for deduction under section 80P(2)(a)(i) if made for statutory SLR requirements, or under section 80P(2)(d) considering recent SC judgment in Kerala State Cooperative Agricultural Rural Development. If neither deduction applies, the AO must consider section 57 deduction for cost of funds used to earn such interest income.

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Issues Involved:

1. Deduction under Section 80P(2)(d) for interest income from cooperative banks.
2. Deduction under Section 80P(2)(a)(i) for interest income from cooperative banks.
3. Classification and taxation of interest income as "Income from Other Sources."
4. Deduction of expenses under Section 57.
5. Set-off of business loss with income from other sources before considering deductions under Section 80P(2)(a).

Detailed Analysis:

1. Deduction under Section 80P(2)(d) for interest income from cooperative banks:

The primary issue was whether the assessee, a primary agricultural cooperative society, is entitled to deduction under Section 80P(2)(d) of the Income Tax Act for interest income earned from investments made with cooperative banks. The Revenue argued that the CIT(A) erred in allowing this deduction, citing the Karnataka High Court's decision in the case of Totagars Co-operative Sale Society, which held that interest income from cooperative banks is not eligible for deduction under Section 80P(2)(d). The Tribunal upheld this view, stating that cooperative banks are not considered cooperative societies for the purposes of Section 80P(2)(d), and thus, the CIT(A) was not justified in granting the deduction for the assessment years 2017-18, 2018-19, and 2020-21.

2. Deduction under Section 80P(2)(a)(i) for interest income from cooperative banks:

The assessee contended that it is engaged solely in providing credit facilities to its members, and therefore, the interest income from funds not immediately required for lending should be deductible under Section 80P(2)(a)(i). The Tribunal noted that if the investments with cooperative banks are made out of statutory compulsion under the Karnataka Cooperative Societies Act, 1959, the interest income would be considered as business income and eligible for deduction under Section 80P(2)(a)(i). The Tribunal directed the AO to examine this aspect and grant the deduction if the investments were indeed made under such compulsion.

3. Classification and taxation of interest income as "Income from Other Sources":

The AO had classified the interest income from cooperative banks as "Income from Other Sources," which was contested by the assessee. The Tribunal referred to the Karnataka High Court's decision in Totagars Co-operative Sale Society, which held that interest income from investments in banks does not fall under the categories mentioned in Section 80P(2)(a) and should be taxed as "Income from Other Sources." However, the Tribunal allowed for a re-examination by the AO to determine if the investments were made under statutory compulsion, which could change the classification to business income.

4. Deduction of expenses under Section 57:

The assessee argued that if the interest income is classified as "Income from Other Sources," then expenses directly related to earning this income should be deductible under Section 57. The Tribunal agreed and directed the AO to consider the deduction of such expenses if the interest income is ultimately classified under "Income from Other Sources."

5. Set-off of business loss with income from other sources before considering deductions under Section 80P(2)(a):

The assessee also contended that any resultant business loss should first be offset against the income from other sources before considering the deduction under Section 80P(2)(a). The Tribunal directed the AO to consider this claim in accordance with Section 71 of the Income Tax Act, which allows for the set-off of business loss against income from other sources.

Conclusion:

The Tribunal allowed the Revenue's appeals, disallowing the deduction under Section 80P(2)(d) for interest income from cooperative banks. The assessee's cross-objections were allowed for statistical purposes, with directions to the AO to re-examine the nature of investments and consider deductions under Sections 80P(2)(a)(i) and 57, as well as the set-off of business loss against income from other sources. The judgment emphasizes the need for a detailed examination of the statutory compulsion behind investments to determine the correct tax treatment of interest income.

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