Interest income from Kerala State Co-operative Agricultural and Rural Development Bank qualifies for Section 80P(2)(d) deduction as co-operative society

ITAT Cochin held that interest income received from Kerala State Co-operative Agricultural and Rural Development Bank Ltd. is eligible for deduction under Section 80P(2)(d) as the SC had categorically determined the entity is a co-operative society, not a bank under Banking Regulations Act. The tribunal also ruled that TDS need not be deducted on payments to co-operative societies and their members under Section 40(a)(ia). Both issues were remitted to AO for verification of correct figures and supporting records. Appeal allowed for statistical purposes.

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Issues Involved:

1. Disallowance of interest income received from Kerala State Cooperative Agricultural and Rural Development Bank Ltd. under Section 80P(2)(d) of the Income Tax Act.
2. Disallowance of 30% of interest expenses incurred by the appellant due to non-deduction of TDS under Section 40(a)(ia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Income under Section 80P(2)(d):

The appellant, a cooperative society, claimed a deduction under Section 80P(2)(d) for interest income received from Kerala State Cooperative Agricultural and Rural Development Bank Ltd. The authorities below disallowed this deduction, relying on the judgment in Totgars Co-op Sale Society Ltd v/s ITO, which categorized such income as "income from other sources." However, the appellant argued that the interest income was derived from a cooperative society, thus qualifying for deduction under Section 80P(2)(d) as interpreted by the jurisdictional High Court in Pr.CIT Vs Peeroorkada Service Co-Operative Bank Ltd. The Tribunal considered the Supreme Court's ruling in Kerala State Co-operative Agricultural & Rural Development Bank Ltd. vs. AO, which confirmed the bank's status as a cooperative society. Consequently, the Tribunal held that the interest income from the said bank is eligible for deduction under Section 80P(2)(d), provided it is indeed received from the cooperative society and not from other banks. The matter was remitted to the AO to verify the source of interest income and allow the deduction accordingly.

2. Disallowance of Interest Expenses under Section 40(a)(ia):

The second issue pertained to the disallowance of 30% of interest expenses due to non-deduction of TDS. The appellant contended that the interest payments were made to Kerala State Cooperative Agricultural and Rural Development Bank Ltd., a cooperative society, and thus exempt from TDS under Section 194A(3)(iii). Additionally, interest payments to members were claimed to be exempt under Section 194A(3)(v) & (viia). The Tribunal agreed with the appellant, citing the Supreme Court's decision affirming the cooperative status of the bank, and concluded that TDS was not required on these payments. However, since the appellant had not provided sufficient details to the CIT(A), the Tribunal remitted the issue back to the AO for verification of the interest payments. The AO was directed to ascertain whether the payments were made to the cooperative society and its members, and if so, the disallowance under Section 40(a)(ia) should not be made. The appellant was instructed to furnish necessary records to support their claims during the reassessment process.

Conclusion:

The appeal was allowed for statistical purposes, with instructions for the AO to verify the facts and apply the appropriate provisions of the Income Tax Act. The appellant was granted the opportunity for a personal hearing before the final order. The stay petition was dismissed as infructuous.

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