Cooperative society's interest income from other cooperative banks qualifies for section 80P(2)(d) deduction confirmed

The ITAT Rajkot held that interest income received by a cooperative society from investments with other cooperative banks qualifies for deduction under section 80P(2)(d). Following the precedent established in Shri Avadh Nagarik Sahkari Mandli Ltd., the tribunal ruled that such interest income is deductible. The revenue failed to present any material evidence to challenge this position. The assessee's appeals were allowed, confirming the availability of the deduction for cooperative societies earning interest from cooperative banks.

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The core legal question considered in these appeals is whether the assessee is entitled to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961, in respect of interest income received from co-operative banks and co-operative societies.

This issue arises from the Assessing Officer's disallowance of deductions claimed by the assessee on interest income received from certain co-operative banks and societies for Assessment Years 2018-19 and 2020-21. The Assessing Officer held that such interest income is not eligible for deduction under section 80P(2)(d) and accordingly added the amounts to the assessee's income. The appeals challenge these disallowances.

In addressing this issue, the Tribunal considered the following key aspects:

Relevant Legal Framework and Precedents: Section 80P(2)(d) of the Income Tax Act provides deduction in respect of income earned by co-operative societies from specified sources. The definition of "co-operative society" under section 2(19) includes co-operative banks, as a co-operative society may obtain a license from the Reserve Bank of India to operate as a co-operative bank. Therefore, interest income earned by a co-operative society from co-operative banks is prima facie eligible for deduction under section 80P(2)(d).

The Tribunal examined various judicial precedents, including:

• Judgments of the Hon'ble Gujarat High Court in Sabarkantha District Co-operative Milk Producers Union Ltd. and Surat Vankar Sahakari Sangh Ltd., which held that interest received from co-operative banks is allowable as deduction under section 80P(2)(d).
• The judgment of the Hon'ble Gujarat High Court in Katlary Karyana Merchant Sahkari Sarafi Mandali Ltd., which held that interest from co-operative banks is not eligible for deduction under section 80P(2)(d). However, this decision was rendered in the context of section 194A and reopening of assessment under sections 147/148, and did not expressly overrule or distinguish the earlier judgments.
• Decisions of other High Courts and Tribunals supporting the allowability of deduction under section 80P(2)(d) on interest from co-operative banks.
• The Supreme Court's ruling in Malabar Industries Ltd. vs. CIT, which laid down the twin conditions for exercise of revisional jurisdiction under section 263 of the Act: the order of the Assessing Officer must be erroneous and prejudicial to the interest of the Revenue. It further clarified that a plausible view taken by the Assessing Officer, sustainable in law, cannot be disturbed.
• The Supreme Court's decision in Totgars Co-operative Sale Society Ltd., which relates to section 80P(2)(a)(i) and is distinguishable from the present issue under section 80P(2)(d).

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer had conducted a thorough inquiry, issued notices under section 142(1), and examined the details and documents submitted by the assessee before taking a plausible view allowing deduction under section 80P(2)(d) on interest income from co-operative banks.

The Tribunal rejected the Revenue's contention that the Assessing Officer ignored the judgment of the jurisdictional High Court in Katlary Karyana, observing that the latter judgment was in a different context and did not overrule the earlier binding decisions of the Gujarat High Court which supported the assessee's claim.

The Tribunal emphasized that the Assessing Officer's order was sustainable in law and not erroneous or prejudicial to the interest of Revenue. Therefore, the Principal Commissioner of Income Tax's exercise of revisional jurisdiction under section 263 was held to be unjustified and ab initio void.

Key Evidence and Findings: The Tribunal relied on the assessee's submissions, the assessment orders, and the judicial precedents cited. It found that the Assessing Officer had properly examined the issue during assessment and taken a plausible view consistent with binding judicial precedents.

Application of Law to Facts: The Tribunal applied the principles from the Supreme Court's ruling in Malabar Industries to conclude that since the Assessing Officer's order was neither erroneous nor prejudicial to Revenue, the revisional jurisdiction under section 263 could not be invoked.

It further applied the legal definitions and judicial interpretations to hold that interest income from co-operative banks qualifies for deduction under section 80P(2)(d).

Treatment of Competing Arguments: The Tribunal carefully examined the Revenue's reliance on the Katlary Karyana judgment and distinguished it on the basis of context and non-overruling of earlier decisions. It also rejected the Revenue's reliance on the Supreme Court's decision in Totgars Co-operative Sale Society Ltd. as inapplicable to section 80P(2)(d).

The Tribunal further found the Revenue's reliance on a non-speaking coordinate bench order to be unpersuasive due to factual differences and lack of representation.

Conclusions: The Tribunal concluded that the Assessing Officer's order allowing deduction under section 80P(2)(d) on interest income from co-operative banks was a plausible view sustainable in law. The revisional order under section 263 was therefore quashed. The appeals were allowed, confirming the assessee's entitlement to the deduction.

Significant Holdings:

"The twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue... When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law."

"In section 80P(2)(d) of the Income Tax Act,1961, there is no special exclusion that interest received from co-operative bank is not eligible for deduction. The definition of 'co-operative society' as mentioned in section 2(19) of the Income Tax Act, 1961 does not make any exclusion about co-operative bank... a co-operative society, later on decides to take license from the Reserve Bank of India to do banking business... and after taking license from the Reserve Bank of India said Co-operative society, becomes a co-operative bank also."

"The judgment of the Hon'ble Gujarat High Court in the case of Katlary Karayana (supra) is in the context of a specific definition mentioned in section 194A of the Act and in the context of reopening of assessment u/s 147/148 of the Act... Hence, this judgment is not binding precedent on the assessee where there are other direct judgments of the Hon'ble jurisdictional Gujarat High Court on the issue under consideration."

"The Assessing Officer has taken a plausible view after examination of the issue under consideration which cannot be subject to revision by the ld. PCIT u/s. 263 of the Act because the view taken by the assessing officer is sustainable in law."

"Since the order of the Assessing Officer cannot be held to be erroneous as well as prejudicial to the interest of the revenue... the usurpation of jurisdiction exercising revisional jurisdiction by the Principal CIT is 'null' in the eyes of law and, therefore, we are inclined to quash the very assumption of jurisdiction to invoke revisional jurisdiction u/s 263 by the Principal CIT."

"The judgment of the Hon'ble Supreme Court in the case of Totgars Society Ltd. does not apply to the assessee under consideration, as this judgment is in the context of Section 80P(2)(a)(i) of the Act."

"The assessing officer, during the assessment proceedings has followed the judgment of the Hon'ble Jurisdictional Gujarat High Court in the case of Sabarkantha District Co-operative Milk Producers Union Ltd and in the case of Surat Vankar Sahakari Sangh Ltd, has taken a plausible view, which is sustainable in the eye, law."

In conclusion, the Tribunal held that the assessee is entitled to claim deduction under section 80P(2)(d) on interest income received from co-operative banks and societies. The revisional order passed under section 263 was quashed for lack of jurisdiction and the appeals were allowed accordingly.

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