2025 (8) TMI 963 - AT - Income Tax

Deduction under s.80P(2)(d) allowed for interest from co-operative societies; s.80P(4) prohibition held inapplicable following binding three-judge precedent

Parampara Vividhodesha Sahakara Sangha Versus The Income Tax Officer, Ward 3, Udupi

Parampara Vividhodesha Sahakara Sangha Versus The Income Tax Officer, Ward 3, Udupi - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned by a registered co-operative society from investments/deposits with other co-operative societies is eligible for deduction under section 80P(2)(d) of the Income-tax Act. 2. Whether prior decisions treating interest from deposits with co-operative banks/societies as income from other sources (and hence not eligible for section 80P deduction) remain authoritative in light of subsequent three-Judge decisions of the Hon'ble Supreme Court. 3. Whether any prohibition contained in section 80P(4) operates to deny the section 80P(2)(d) deduction in the facts of the present case (including whether impugned activities were illegal or outside permissible co-operative activity). 4. (Implicitly addressed) Whether certain assessment additions (provision/excess provision of interest) were maintainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility under section 80P(2)(d) of interest income from other co-operative societies Legal framework 1. Section 80P(2)(d) provides deduction for income of co-operative societies arising from specified cooperative activities, including interest/dividend in certain circumstances, with section 80P(4) containing exceptions/prohibitions applicable in specified cases. Precedent treatment (followed/distinguished/overruled) 2. Earlier Supreme Court decisions (including a decision that treated certain deposit/interest income as outside section 80P) and a relevant High Court decision had been relied on by the Revenue to deny deduction. However, a later three-Judge Bench decision of the Supreme Court (Mavilayi Service Co-operative Bank Ltd. and another three-Judge decision mentioned) has revisited and clarified the scope of section 80P, expressly addressing and refining the earlier precedents. Interpretation and reasoning 3. The three-Judge Bench decision considered the object of section 80P as furtherance of the co-operative movement and held that interest or dividend income derived by a co-operative society from other co-operative societies is within the ambit of the deduction under section 80P(2)(d). The decision explains the applicability of section 80P(4) and limits its prohibition to the situations envisioned by that subsection. 4. The Tribunal applied that binding three-Judge authoritative pronouncement and examined the facts of the assessment record: the interest income in question was received from other co-operative societies (a fact not controverted by Revenue), and the assessee's activities were not found to be illegal by the Assessing Officer. The Tribunal therefore concluded that the statutory object and criteria identified by the three-Judge bench were satisfied. Ratio vs. Obiter 5. The holding that interest/dividend income received by a co-operative society from other co-operative societies falls within the deduction under section 80P(2)(d) (subject to the limits of section 80P(4)) is applied as ratio (binding authority) by the Tribunal. Distinguishing earlier contrary decisions is treated as necessary consequence of the binding three-Judge decision rather than mere obiter. Conclusions 6. Deduction under section 80P(2)(d) is allowable for the interest income at issue. The Tribunal directed grant of deduction of the entire interest amount determined in the assessment (the order directs the Assessing Officer to allow the deduction of the stated sum). Reliance by the Revenue on earlier High Court authority was held not proper in view of the binding later Supreme Court three-Judge pronouncement. Issue 2 - Applicability of section 80P(4) prohibition and permissibility of activities (e.g., lending to non-members) Legal framework 1. Section 80P(4) enumerates prohibitions/exceptions where the benefit of section 80P may not apply; factual activities of the co-operative are relevant to determine whether the prohibition operates. Precedent treatment 2. The three-Judge Bench decision considered the applicability of section 80P(4) and clarified that the prohibition does not extend to every instance of inter-co-operative transactions; specific factual illegality or contravention is necessary to attract disqualification. Interpretation and reasoning 3. The Tribunal noted that the Assessing Officer did not find the assessee's activities to be illegal (for example, no finding that deposit/loan operations were outside permissible activity or in violation), and thus the factual predicates for invoking section 80P(4) were absent. Ratio vs. Obiter 4. The Tribunal treats the three-Judge bench explanation of the limited reach of section 80P(4) as part of the binding ratio applied to these facts. Conclusions 5. Section 80P(4) does not operate to deny deduction in the present case; the deduction under section 80P(2)(d) must be allowed in full for the interest received from other co-operative societies. Issue 3 - Validity of assessment additions relating to provision/excess provision of interest (ancillary issue) Legal framework 1. Additions in assessment may be made where provisions are not in accordance with accepted accounting practice or are excessive; appellate authorities examine whether the provision is a bona fide accounting entry and whether its disallowance is justified. Precedent treatment 2. Lower authority had made an addition in respect of excess provision; the Commissioner (Appeals) deleted such addition on review. Interpretation and reasoning 3. The Tribunal notes that the Commissioner (Appeals) deleted the addition of the excess provision of interest (Rs. 1,32,635) and there is no challenge maintained that would require interference; the principal controversy concerned the section 80P deduction. Ratio vs. Obiter 4. The deletion of the addition was treated as a factual/technical appellate finding; the Tribunal did not disturb that conclusion and it is not aired as part of the primary legal ratio concerning section 80P. Conclusions 5. The addition relating to excess provision of interest has been deleted by the appellate authority and not reopened by the Tribunal; no adverse consequence flows from that item. Cross-references and overall conclusion 1. Issues 1 and 2 are interrelated: the entitlement to section 80P(2)(d) deduction for interest from other co-operative societies depends on both the statutory scope of section 80P and the reach of section 80P(4). The Tribunal applied the three-Judge Supreme Court interpretation (binding ratio) to hold the income deductible. 2. Reliance on earlier contrary High Court authority was distinguished and rejected because the later three-Judge Supreme Court decisions authoritatively settled the scope of section 80P in favour of allowing deduction where the conditions identified by that bench are met. 3. Result: Deduction under section 80P(2)(d) for the interest income in question is allowed and the Assessing Officer is directed to grant the deduction; the previously made addition in respect of excess provision was not sustained on appeal and stands deleted.