Cooperative society entitled to Section 80P(2)(d) deduction on interest income from cooperative banks

ITAT Mumbai held that a cooperative society is entitled to deduction under Section 80P(2)(d) for interest income earned from cooperative banks. The tribunal ruled that cooperative banks remain cooperative societies under the Cooperative Societies Act despite Section 80P(4) restrictions. Following Karnataka HC precedent in PCIT vs. Totagar Cooperative Sales Society Limited, the tribunal distinguished that while cooperative banks cannot claim Section 80P deductions themselves, other cooperative societies can claim deductions on interest earned from deposits with cooperative banks. The assessee's appeal was allowed.

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Issues Presented and Considered

The core legal questions considered in this appeal are:

1. Whether interest income earned by a co-operative housing society from deposits made with co-operative banks qualifies for deduction under section 80P(2)(d) of the Income-tax Act, 1961.

2. Whether a co-operative bank is to be treated as a co-operative society for the purposes of section 80P(2)(d) deduction.

3. Whether the Supreme Court decision in Totgar's Co-operative Sales Society Ltd., which dealt with section 80P(2)(a)(i), is applicable to the claim under section 80P(2)(d).

4. The applicability and scope of the principle of mutuality in relation to the interest income and its deduction under section 80P.

5. The effect of insertion of subsection (4) in section 80P, which excludes co-operative banks from claiming deduction under section 80P, on the entitlement of other co-operative societies investing in such banks.

6. The condonation of delay in filing the appeal and whether sufficient cause exists for the delay.

Issue-wise Detailed Analysis

1. Eligibility of Deduction under Section 80P(2)(d) for Interest Income from Co-operative Banks

Relevant Legal Framework and Precedents: Section 80P(2)(d) allows a deduction to co-operative societies in respect of income by way of interest or dividends received from investments made with other co-operative societies. The insertion of subsection (4) in section 80P excludes co-operative banks from claiming deduction under section 80P.

The Supreme Court in Totgar's Co-operative Sales Society Ltd. (2010) interpreted section 80P(2)(a)(i), holding that interest on surplus funds deposited with banks is income from other sources and not business income, thus not eligible for deduction under that clause. However, this decision is limited to section 80P(2)(a)(i) and does not deal with section 80P(2)(d).

The Hon'ble High Court of Karnataka in Pr. Commissioner of Income Tax v. Totagars Cooperative Sales Society [2017] clarified that a co-operative bank is a species of the genus 'co-operative society' and interest income earned by a co-operative society from a co-operative bank is deductible under section 80P(2)(d). This view has been followed by other High Courts including Gujarat and various ITAT benches.

Court's Interpretation and Reasoning: The Tribunal noted that the co-operative bank, despite being excluded from claiming deduction under section 80P(4), remains a co-operative society registered under relevant laws. Therefore, the interest income earned by a co-operative society from deposits with a co-operative bank qualifies for deduction under section 80P(2)(d).

The Tribunal distinguished the Supreme Court's decision in Totgar's case as it pertains to section 80P(2)(a)(i) and not section 80P(2)(d). The latter provision does not restrict deduction to business income alone, and interest income from investments in co-operative banks is covered.

Key Evidence and Findings: The assessee is a co-operative housing society earning interest income from deposits with various co-operative banks. The Assessing Officer and CIT(A) denied the deduction claiming that co-operative banks are not co-operative societies for this purpose.

The Tribunal relied on judicial precedents including the Karnataka High Court ruling and recent coordinate bench decisions of ITAT Mumbai, which consistently held that interest income from co-operative banks by co-operative societies is deductible under section 80P(2)(d).

Application of Law to Facts: Applying the legal principles and precedents, the Tribunal held that the assessee's claim for deduction of Rs. 29,58,400/- under section 80P(2)(d) in respect of interest income from co-operative banks is valid and the disallowance by the authorities below was erroneous.

Treatment of Competing Arguments: The Revenue relied on the CIT(A)'s order and the Supreme Court's Totgar's decision, but the Tribunal found these inapplicable on facts and legal provisions. The Revenue's reliance on other ITAT decisions concerning co-operative banks themselves claiming deduction under section 80P(2)(a)(i) was also distinguished as factually and legally different.

Conclusion: The assessee is entitled to deduction under section 80P(2)(d) for interest income earned from deposits with co-operative banks.

2. Whether a Co-operative Bank is a Co-operative Society for Section 80P(2)(d) Purposes

Relevant Legal Framework and Precedents: The Karnataka High Court held that the term 'co-operative society' is a genus and 'co-operative bank' is a species within that genus. The Banking Regulation Act, 1949 also defines primary co-operative banks as co-operative societies.

Court's Interpretation and Reasoning: The Tribunal agreed with this interpretation, emphasizing that a co-operative bank is a variety of co-operative society and thus interest income from it falls within section 80P(2)(d) deduction.

Key Evidence and Findings: The assessee's deposits were with co-operative banks registered under relevant laws as co-operative societies.

Application of Law to Facts: Since the co-operative banks are registered co-operative societies, the interest income earned by the assessee society from such banks qualifies for deduction.

Treatment of Competing Arguments: The Revenue's argument that co-operative banks are distinct and excluded under section 80P(4) was accepted only in respect of the banks themselves claiming deduction but not applicable to other co-operative societies investing in them.

Conclusion: Co-operative banks are co-operative societies for the purpose of section 80P(2)(d) deduction.

3. Applicability of Supreme Court Decision in Totgar's Case

Relevant Legal Framework and Precedents: The Supreme Court decision in Totgar's case dealt with section 80P(2)(a)(i) and held that interest on surplus funds deposited with banks is income from other sources, not business income, and thus not deductible under that clause.

Court's Interpretation and Reasoning: The Tribunal held that this decision is distinguishable and not applicable to section 80P(2)(d) claims, which do not confine deduction to business income alone.

Key Evidence and Findings: The assessee claimed deduction under section 80P(2)(d), not section 80P(2)(a)(i).

Application of Law to Facts: The principles in Totgar's case do not apply to the present claim and cannot be used to deny deduction under section 80P(2)(d).

Conclusion: The Supreme Court decision in Totgar's case is not applicable to the present issue.

4. Principle of Mutuality and its Application

Relevant Legal Framework: The principle of mutuality generally exempts income arising from mutual dealings within a cooperative society from taxation.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee did not claim exemption on the basis of mutuality. The interest income was offered as income, and deduction was claimed under section 80P(2)(d). Therefore, the principle of mutuality was not relevant to the present deduction claim.

Conclusion: Application of mutuality principle to deny deduction was erroneous.

5. Effect of Section 80P(4) Exclusion of Co-operative Banks

Relevant Legal Framework: Section 80P(4) excludes co-operative banks from claiming deduction under section 80P.

Court's Interpretation and Reasoning: The Tribunal held that this exclusion applies only to co-operative banks themselves and does not deny deduction to other co-operative societies investing in such banks.

Conclusion: Deduction under section 80P(2)(d) is available to co-operative societies on interest income earned from co-operative banks notwithstanding section 80P(4).

6. Condonation of Delay in Filing Appeal

Relevant Legal Framework: Delay in filing appeal can be condoned if sufficient cause is shown.

Key Evidence and Findings: The assessee explained lack of full-time accounting staff, no exclusive email for society matters, and confusion due to partly allowed order and concurrent appeals for other years. There was no intention to delay or prejudice Revenue's interest.

Court's Reasoning: Considering the explanation and absence of prejudice, the Tribunal condoned the delay and admitted the appeal for adjudication.

Conclusion: Delay in filing appeal was condoned on sufficient cause.

Significant Holdings

"The word 'Co-operative Society' are the words of a large extent, and denotes a genus, whereas the word 'Co-operative Bank' is a word of limited extent, which merely demarcates and identifies a particular species of the genus Co-operative Societies. Co-Operative Society can be of different nature, and can be involved in different activities; the Cooperative Society Bank is merely a variety of the Co-operative Societies."

"The provisions of section 80P(2)(d) of the Act are very clear and assessee is entitled for deduction u/s.80P(2)(d) of the Act in respect of interest or dividends received from investments made with any other cooperative societies."

"The decision of Hon'ble Supreme Court in the case of The Totagar Cooperative Sales Society Limited v. ITO has no application to the facts of the present case."

"Though the co-operative bank pursuant to the insertion of Sub-section (4) of Sec 80P would no more be entitled for claim of deduction under Sec. 80P of the Act, but however, since a co-operative bank continues to be a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being enforced in any state for the registration of cooperative societies, therefore, the interest income derived by a cooperative society from its investments held with a co-operative bank, would be entitled for claim of deduction under Sec.80P(2)(d) of the Act."

"The reliance placed by the CIT(A) on the judgment of the Hon'ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (S.C) being distinguishable on facts, thus, had wrongly been relied upon by him."

"Where there is a conflict between the decisions of non-jurisdictional High Courts, then a view which is in favour of the assessee is to be preferred as against that taken against him."

"There is no intention to jeopardize the interest of Revenue, by delaying the filing of the present appeal and hence delay is condoned."

Final Determinations:

- The assessee, a co-operative housing society, is entitled to claim deduction under section 80P(2)(d) in respect of interest income earned from deposits with co-operative banks.

- Co-operative banks are to be treated as co-operative societies for the purpose of section 80P(2)(d).

- The Supreme Court decision in Totgar's case (2010) is not applicable to deductions claimed under section 80P(2)(d).

- The principle of mutuality is not relevant to the present deduction claim.

- The exclusion of co-operative banks under section 80P(4) does not affect the deduction entitlement of other co-operative societies investing in such banks.

- Delay in filing the appeal is condoned due to sufficient cause.

Accordingly, the appeal filed by the assessee is allowed and the disallowance of deduction under section 80P(2)(d) is set aside.

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