Cooperative society entitled to Section 80P(2)(d) deduction for interest income from cooperative bank investments

The ITAT Mumbai held that a cooperative society is entitled to deduction under Section 80P(2)(d) for interest income earned from investments in cooperative banks. The AO had denied the deduction arguing that Section 80P(2)(d) is unavailable when investments are made in cooperative banks except those mentioned in sub-section (4). However, following the precedent in Kaliandas Udyog Bhavan Premises Coop. Society Ltd., the tribunal ruled that since cooperative banks remain cooperative societies registered under the Cooperative Society Act, interest income from such investments qualifies for deduction under Section 80P(2)(d). The assessee's appeal was allowed.

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Issues Involved:
1. Disallowance under section 80P(2)(a)(i) of the Income Tax Act, 1961
2. Disallowance under section 80P(2)(d) of the Income Tax Act, 1961
3. Disallowance of proportionate deduction for cost of funds deployed in fixed deposits and shares

Issue 1: Disallowance under section 80P(2)(a)(i) of the Income Tax Act, 1961:
The appellant contested the disallowance of Rs. 1,97,79,808 under section 80P(2)(a)(i) by the Assessing Officer (AO) on the grounds that interest and dividend income from cooperative banks were not part of the business objective. The AO observed that such income did not qualify for deduction under section 80P. The ld. CIT(A) upheld this disallowance. The appellant argued that detailed submissions were made, citing judicial pronouncements and requested allowance of the deduction. However, the ld. CIT(A) dismissed the appeal without justification. The Appellate Tribunal noted that the appellant, a Credit Cooperative Society, was not a cooperative bank and primarily provided credit facilities to its members, distinguishing it from a cooperative bank. Referring to a decision by the ITAT, the Tribunal allowed the deduction under section 80P(2)(a)(i) for interest and dividend income from cooperative banks.

Issue 2: Disallowance under section 80P(2)(d) of the Income Tax Act, 1961:
The AO disallowed the deduction under section 80P(2)(d) for the appellant, citing the provision inserted by the Finance Act 2006, which excluded cooperative banks from cooperative societies eligible for the benefit of section 80P. The AO concluded that the appellant was not entitled to the deduction under section 80P(2)(d). The ld. CIT(A) affirmed this disallowance. However, the Appellate Tribunal, after considering various ITAT decisions, allowed the alternative claim of deduction under section 80P(2)(d) for interest earned from investments in cooperative banks. The Tribunal emphasized that despite the exclusion of cooperative banks from section 80P benefits, they remained cooperative societies under the Cooperative Society Act, entitling them to the deduction under section 80P(2)(d).

Issue 3: Disallowance of proportionate deduction for cost of funds deployed in fixed deposits and shares:
The appellant raised an additional ground regarding the disallowance of proportionate deduction for the cost of funds deployed in fixed deposits and shares. However, the Tribunal's decision primarily focused on the disallowances under sections 80P(2)(a)(i) and 80P(2)(d), ultimately allowing the appellant's appeal and directing the AO to permit the alternative claim of deduction under section 80P(2)(d) for interest earned from investments in cooperative banks. The Tribunal's decision was based on the appellant's nature as a Credit Cooperative Society and the interpretation of relevant provisions and judicial precedents.

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