Cooperative society wins appeal on section 80P deductions for credit facilities and investment income

ITAT Bangalore allowed assessee cooperative society's appeal for statistical purposes, remanding deduction claims under sections 80P(2)(a)(i) and 80P(2)(d) to AO for fresh consideration. Following SC precedent in Mavilayi Service Co-operative Bank Ltd., tribunal held cooperative societies providing credit facilities to members are entitled to section 80P(2)(a)(i) deduction. For section 80P(2)(d) claim, AO directed to verify if interest/dividend earned from cooperative society investments qualifies for deduction per Kerala State Co-operative Agricultural and Rural Development Bank Ltd. judgment. Regarding section 57 addition, tribunal clarified that if bank interest is taxed under "income from other sources," assessee entitled to relief under section 57.

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Issues:
1. Disallowance of deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Disallowance of interest income as income from other sources and denial of deduction u/s 80P(2) of the Act.

Analysis:
1. The appeal was against the order of CIT(A)/NFAC for the AY 2018-19 disallowing the deduction u/s 80P(2)(a)(i) of the Act. The AO held that the society did not qualify for the deduction as it failed to meet the conditions under section 80P. The AO found that the society lacked the necessary mutuality principle as nominal and associated members were not entitled to participate in profits or voting rights. Consequently, the AO disallowed the entire deduction claimed by the society u/s 80P(2) of the Act. The AO also disallowed interest income of Rs. 2,92,14,754/-, earned from investments with Co-op Banks and Scheduled Banks, as it did not qualify for deduction u/s 80P(2)(d) of the Act. Penalty proceedings u/s 270A were initiated due to underreporting of income.

2. The CIT(A)/NFAC upheld the disallowance of interest income as income from other sources and denial of deduction u/s 80P(2)(a)(i) of the Act. The CIT(A) relied on the Supreme Court's decision in Citizens Cooperative society and RBI guidelines to support the disallowance. The CIT(A) concluded that the interest income derived from investments in banks was not eligible for deduction under section 80P(2)(a)(i) and should be added to the income of the society as "Income from Other Sources" under section 56 of the Income Tax Act, 1961.

3. The ITAT, Bangalore, referred to the decision of the Hon'ble Apex Court in Mavilayi Service Co-operative Bank Ltd. v. CIT & Anr. and the Tribunal's decision in M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO. The ITAT noted that the issue of deduction u/s 80P(2)(a)(i) was remanded for de novo consideration in a similar case. Therefore, the ITAT restored the issue of claim of deduction u/s 80P(2)(a)(i) to the AO for fresh examination. Additionally, the ITAT directed the AO to verify if interest/dividend income was received from investments made with Cooperative Societies for consideration under section 80P(2)(d) of the Act.

4. The ITAT partly allowed the appeal for statistical purposes, restoring the issues of deduction u/s 80P(2)(a)(i) and interest income to the AO for reevaluation. The order was pronounced in the open court on 10th Sept, 2024.

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