2025 (7) TMI 1791 - AT - Income Tax

Interest Income from Kollam Co-op Bank Eligible for Deduction Under Section 80P(2)(d) of Income Tax Act

The Kundara Panchayath Service Co-operative Bank Ltd. Versus ITO Ward-4 Kollam

The ITAT Cochin allowed the appeal, holding that interest income received from Kollam District Co-operative Bank qualifies for deduction under section ... Deduction u/s 80P - interest received from Kollam District Co-operative bank - HELD THAT:- As relying on Peroorkada Service Co-Operative Bank Ltd. [2021 (12) TMI 1084 - KERALA HIGH COURT] we are of the opinion that the interest income earned from Kollam District Co-operative bank in the facts and circumstances of the case do come within section 80(2)(d) of the Act. Assessee appeal allowed. ISSUES: Whether the interest income received by a co-operative society from deposits with District/State Co-operative Banks qualifies as business income eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.Whether interest income earned from investments with other co-operative societies is eligible for deduction under section 80P(2)(d) of the Act.Whether interest income from sources such as Treasury or banks other than co-operative societies is eligible for deduction under section 80P.Whether such interest income should be taxed under the head 'Profits and gains of business' (section 28) or 'Income from other sources' (section 56) of the Act.Whether delay in filing the appeal before the Tribunal should be condoned on grounds of unintentional delay due to non-receipt of appellate order notification. RULINGS / HOLDINGS: The interest income earned by a co-operative society from deposits with District/State Co-operative Banks does not straightaway fall under section 80P(2)(a)(i) as business income eligible for deduction, because such interest arises from investments of surplus funds and not from the business of banking or providing credit facilities to members.Interest or dividends derived by a co-operative society from its investments with any other co-operative society are eligible for deduction under section 80P(2)(d) of the Act; thus, interest income earned from District/State Co-operative Banks registered under the Co-operative Societies Act qualifies for deduction under clause (d).Interest income received from Treasury or banks not registered as co-operative societies is not eligible for deduction under section 80P and must be included in total income without deduction.Interest income earned from investments of surplus funds not immediately required for business purposes is taxable under the head 'Income from other sources' (section 56), not as business income under section 28, consistent with the Supreme Court's decision in M/s. The Totgar's Co-operative Sale Society Limited.Delay of 136 days in filing the appeal was condoned on the ground of unintentional delay caused by the appellate order being received in the spam/junk folder; substantial justice was preferred over technicality as there was no allegation of deliberate delay by the revenue. RATIONALE: The Court applied the statutory framework of section 80P of the Income Tax Act, which provides deductions to co-operative societies based on the nature of income and the source thereof, distinguishing between activity-based deductions under clauses (a) to (c) and investment-based deductions under clause (d).Following the Kerala High Court decision in Pr. CIT v. Peroorkada Service Co-Operative Bank Ltd., the Court interpreted clause (d) of section 80P(2) to allow deduction only for interest or dividends derived from investments in other co-operative societies registered under the Co-operative Societies Act.The Court relied on the Supreme Court precedent in M/s. The Totgar's Co-operative Sale Society Limited to distinguish interest income arising from business activities (eligible for deduction) and interest income from surplus funds invested (taxable as income from other sources).The Court rejected the broader application of the Nawanshahar Central Co-operative Bank Ltd. decision, clarifying that it pertains to co-operative banks and not co-operative societies, and that the source of interest income must be a co-operative society registered under the relevant Act for deduction under section 80P.The Court emphasized the need to give effect to the specific provisions and categories enumerated in section 80P, noting that expanding the scope of deduction beyond the legislative intent would be contrary to the purpose of the statute.Regarding delay condonation, the Court applied principles favoring substantial justice over procedural technicalities, especially where the delay was unintentional and without malafide, and no prejudice was shown by the revenue.