Co-operative society entitled to section 80P(2)(d) deduction for interest income from co-operative banks

ITAT Mumbai allowed the assessee's appeal regarding deduction under section 80P(2)(d) for interest/dividend income from co-operative banks. The tribunal held that income earned by way of interest or dividend from investments with any other co-operative society, including co-operative banks, qualifies for deduction under section 80P(2)(d). Following precedent from coordinate benches including Belgaum Coal and Coke Consumer Co-operative Association Ltd., the tribunal directed the AO to allow the deduction for interest earned from co-operative banks, subject to verification.

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Issues Involved:
1. Claim of deduction under section 80P(2)(d) of the Income Tax Act, 1961.
2. Eligibility of interest income from co-operative banks for deduction under section 80P(2)(d).

Issue-Wise Detailed Analysis:

1. Claim of deduction under section 80P(2)(d) of the Income Tax Act, 1961:

The Assessee claimed a deduction of Rs. 33,57,902/- under section 80P(2)(d) of the Income Tax Act, 1961, which pertains to the Assessment Year 2020-21. The Assessee provided details of interest received from various Scheduled Banks and Co-operative Banks. The Assessing Officer (A.O.) reviewed the claim and noted that the Assessee had claimed a deduction for interest income derived from deposits made with both Scheduled Banks and Co-operative Banks. The A.O. concluded that the intention of the legislature was to exclude co-operative banks from the scope of section 80P, thus disallowing the deduction claimed by the Assessee. Consequently, the A.O. added the disallowed amount to the Assessee's income as "income from other sources" under section 56 of the Act. The Assessee appealed against this decision, but the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision. The Assessee then appealed to the Appellate Tribunal.

2. Eligibility of interest income from co-operative banks for deduction under section 80P(2)(d):

The Assessee argued that the interest earned from co-operative banks, which are primarily co-operative societies, should be exempt under section 80P(2)(d) of the Act. The Tribunal examined the provisions of section 80P(2)(d), which state that income by way of interest or dividends derived by a Co-operative Society from its investment with any other Co-operative Society shall be deductible. The Tribunal referred to several cases, including Belgaum Coal and Coke Consumer Co-operative Association Ltd. vs. ITO, Nawbharat Darpan Co-operative Credit Society Ltd. vs. CIT, and Pathare Prabhu Co-operative Housing Society Ltd. vs. ITO, where it was held that interest/dividend income earned from Co-operative Banks is allowable as a deduction under section 80P(2)(d).

The Tribunal noted that section 80P(4) excludes co-operative banks that function at par with commercial banks from claiming deductions under section 80P. However, it clarified that this exclusion applies only to co-operative banks themselves and not to co-operative societies earning interest from co-operative banks. The Tribunal found that all co-operative banks are co-operative societies, but not all co-operative societies are co-operative banks. Therefore, the interest income earned by a co-operative society from investments made with a co-operative bank is eligible for deduction under section 80P(2)(d).

The Tribunal also considered the divergent views of the Karnataka High Court in Pr. CIT vs. Totagars Co-operative Sales Society, where one decision supported the deduction under section 80P(2)(d) for interest earned from co-operative banks, while another did not. Following the principle laid down by the Supreme Court in CIT vs. Vegetable Products Ltd., the Tribunal adopted the interpretation favoring the Assessee.

Conclusion:

The Tribunal directed the A.O. to allow the deduction for interest earned from Co-operative Banks under section 80P(2)(d) of the Act, subject to verification. The appeal filed by the Assessee was allowed, and the order was pronounced in the open court on 31-10-2023.

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