2025 (6) TMI 563 - AT - Income Tax

Tax Deduction Triumph: Cooperative Bank Interest Income Validated Under Section 80P(2)(d) and Section 56 Provisions

M/s. Chentrappinni Service Co-op Bank Ltd. Versus The Income Tax Officer, Thrissur.

INCOME TAX CASE SUMMARYThe SC/HC precedents guided this tax tribunal case concerning interest income from co-operative bank deposits. The tribunal ... Deduction u/s 80P(2)(d) - interest income earned from the deposits made with the Thrissur District Co-operative Bank Ltd. and Kodungallur Town Co-operative Bank Ltd - HELD THAT:- We found that the authorities below had wrongly interpreted the Hon’ble Supreme Court judgment reported in the case of Mavilayi Service Co-operative Bank Ltd. [2021 (1) TMI 488 - SUPREME COURT] Further, the Hon’ble Jurisdictional High Court also granted the relief to the assessee’s that the interest income earned from the District Cooperative Banks registered as co-operative society under the Kerala Cooperative Societies Act are eligible for deduction u/s. 80P(2)(d) of the act. Both the authorities had failed to consider the decision of Hon’ble Jurisdictional High Court. Prima facie, we see that the order of the authorities below in denying the deduction u/s. 80P(2)(d) is not correct. Admittedly, the assessee had received interest income from the two co-operative banks registered under the provisions of the Kerala Co-operative Societies Act. In order to verify the said facts including the status of the two district co-operative banks, we are remitting this issue to the file of the AO to verify the status of the two district central co-operative banks and if the AO is satisfied that the said banks are registered under the provisions of the Kerala Co-operative Societies Act, grant the necessary relief u/s. 80P(2)(d) of the Act by following the judgment of the Hon’ble Jurisdictional High Court cited supra. Appeal filed by the assessee is allowed for statistical purposes. The core legal questions considered in this appeal revolve around the tax treatment of interest income earned by the assessee from deposits made with certain co-operative banks. Specifically, the issues are:1. Whether the interest income earned from deposits with Thrissur District Co-operative Bank Ltd. and Kodungallur Town Co-operative Bank Ltd., which are registered under the Kerala Co-operative Societies Act, is eligible for deduction under section 80P(2)(d) of the Income Tax Act, 1961.2. Whether the interest income from these co-operative banks should be taxed under the head 'Income from Other Sources' as per section 56 of the Income Tax Act, as held by the assessing officer and Commissioner of Income Tax (Appeals).3. The applicability and interpretation of relevant judicial precedents, particularly the judgment of the Hon'ble Kerala High Court in The Principal Commissioner of Income Tax vs M/s Peroorkada Service Co-operative Bank Ltd. (328 CTR 443) and the Hon'ble Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. v. CIT (431 ITR 1).Issue-wise Detailed AnalysisIssue 1: Eligibility of Interest Income for Deduction under Section 80P(2)(d)Legal Framework and Precedents: Section 80P(2)(d) of the Income Tax Act provides for deduction in respect of income earned by co-operative societies registered under the Co-operative Societies Act. The key judicial precedent is the Kerala High Court decision in The Principal Commissioner of Income Tax vs M/s Peroorkada Service Co-operative Bank Ltd., which held that interest income earned by co-operative societies from deposits with district or state co-operative banks is eligible for deduction under section 80P(2)(d).The Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. v. CIT further clarifies the scope of income eligible for deduction under section 80P(2)(d), emphasizing the nature of the income as profits and gains of business carried on by the co-operative society.Court's Interpretation and Reasoning: The Tribunal observed that the lower authorities-the Assessing Officer and the Commissioner of Income Tax (Appeals)-misinterpreted the Supreme Court ruling in Mavilayi Service Co-operative Bank Ltd. and failed to consider the binding Kerala High Court decision in Peroorkada Service Co-operative Bank Ltd.It was noted that the two banks from which the interest income was earned are registered under the Kerala Co-operative Societies Act, which is a critical factor for eligibility under section 80P(2)(d).Key Evidence and Findings: The Tribunal directed the Assessing Officer to verify the registration status of Thrissur District Co-operative Bank Ltd. and Kodungallur Town Co-operative Bank Ltd. under the Kerala Co-operative Societies Act to ascertain eligibility for deduction.Application of Law to Facts: If the banks are confirmed as registered co-operative societies under the Kerala Act, the interest income earned by the assessee from deposits with these banks qualifies for deduction under section 80P(2)(d).Treatment of Competing Arguments: The Revenue contended that the interest income should be taxed under section 56 as income from other sources, relying on the lower authorities' orders. The assessee countered by citing the Kerala High Court decision and argued for deduction under section 80P(2)(d). The Tribunal found the assessee's reliance on the Kerala High Court judgment persuasive and held that the lower authorities erred in their interpretation.Conclusion: The Tribunal remitted the issue to the Assessing Officer for verification of the banks' registration status and directed that if confirmed, the deduction under section 80P(2)(d) be granted in accordance with the Kerala High Court judgment.Issue 2: Taxation of Interest Income under Section 56 as Income from Other SourcesLegal Framework and Precedents: Section 56 of the Income Tax Act deals with income from other sources, which includes interest income not chargeable under any other head. The lower authorities treated the interest income from the co-operative banks as income from other sources and taxed it accordingly.Court's Interpretation and Reasoning: The Tribunal disagreed with the lower authorities' classification, emphasizing that the interest income in question arises from deposits with co-operative banks registered under the Co-operative Societies Act and is thus eligible for deduction under section 80P(2)(d).Key Evidence and Findings: The Tribunal noted that the interest income is not simply generic income from other sources but is connected to the business of the co-operative society and supported by the statutory framework and judicial precedents.Application of Law to Facts: Since the interest income qualifies as profits and gains of business carried on by the co-operative society, it cannot be taxed as income from other sources under section 56.Treatment of Competing Arguments: The Revenue's reliance on section 56 was rejected as inconsistent with the statutory provisions and judicial pronouncements.Conclusion: The interest income should not be taxed under section 56 if the conditions under section 80P(2)(d) are met.Significant HoldingsThe Tribunal held that:'The authorities below had wrongly interpreted the Hon'ble Supreme Court judgment reported in 431 ITR 1 in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT. Further, the Hon'ble Jurisdictional High Court also granted the relief to the assessee's that the interest income earned from the District Cooperative Banks registered as co-operative society under the Kerala Cooperative Societies Act are eligible for deduction u/s. 80P(2)(d) of the act.'This establishes the principle that interest income earned by a co-operative society from deposits with district or state co-operative banks registered under the respective Co-operative Societies Act is eligible for deduction under section 80P(2)(d), and such income should not be taxed under section 56 as income from other sources.The final determination was that the appeal is allowed for statistical purposes, with the matter remitted to the Assessing Officer to verify the registration status of the two co-operative banks and grant deduction accordingly.