2025 (9) TMI 1302 - AT - Income Tax

Restored to AO to verify if cooperative banks fall under section 5(b) BR Act before denying s.80P(2)(d) deduction

Shrikumar Co-operative Housing Society Ltd., Versus Asst. Dir. Of I. Tax, CPC JAO MUM-W-22 (3) (1), Mumbai

ITAT MUMBAI - AT restored the matter to the AO, directing verification whether the cooperative banks from which interest was received are registered under ... Deduction u/s 80P(2)(d) - Interest Income derived from Cooperative Banks -HELD THAT:- We find that in the case of Kerala State Co-Operative Agricultural & Rural Development Bank Ltd.[2023 (9) TMI 761 - SUPREME COURT] held that if the co-operative bank is carrying out the business of banking as defined u/s 5(b) of the Act Banking regulation Act then only such co-operative bank shall be barred for deduction u/s 80P(2)(d) of the Act in view of prohibition u/s 80P(2)(4) of the Act, otherwise the cooperative bank not falling u/s 5(b) of the Act Banking regulation Act shall be considered as co-operative society eligible for deduction u/s 80P(2)(d) of the Act. Accordingly, the matter is restored back to the file of the Assessing Officer for verifying whether the Co-operative Banks from whom interest is received, are registered u/s 5(b) of the Banking Regulation Act or not and thereafter shall decide the issue in accordance with law. The assessee may file necessary document in support of its contention before the AO. Accordingly, the grounds of appeal of the assessee are allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether interest income received from entities styled as 'co-operative banks' is eligible for deduction under Section 80P(2)(d) of the Income-tax Act. 2. Whether the exclusion in Section 80P(4) bars deduction for interest from a co-operative bank that carries on 'banking' as defined in Section 5(b) of the Banking Regulation Act, 1949. 3. The proper appellate/assessment course where the deductibility depends on factual determination whether the payor co-operative bank carries on banking as defined in Section 5(b) of the Banking Regulation Act. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of interest from co-operative banks under Section 80P(2)(d) Legal framework: Section 80P(1)-(2)(d) permits deduction in computing total income of a co-operative society in respect of 'any income by way of interest or dividend derived by the co-operative society from its investments with any other co-operative society.' Section 80P(4) provides a statutory exclusion in relation to 'any co-operative bank other than a primary agricultural credit society.' Precedent treatment: The Court relied on the Supreme Court decision interpreting whether a co-operative entity is a 'co-operative bank' for the purpose of exclusion under Section 80P(4), and on coordinate tribunal authority applying that principle to interest receipts. Interpretation and reasoning: The determinative inquiry is functional - whether the payor entity actually carries on the business of banking as defined in Section 5(b) of the Banking Regulation Act, 1949 (accepting deposits from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise). If the payor entity does not carry on such banking business and instead functions as a co-operative society providing credit mainly to member societies (not the public), then it falls within the descriptive scope of 'co-operative society' in Section 80P(2)(d) and the interest income qualifies for deduction. Conversely, if the payor carries on banking as per Section 5(b), the statutory exclusion in Section 80P(4) applies and deduction is barred. Ratio vs. Obiter: The binding ratio adopted is that the exclusion in Section 80P(4) is triggered only where the payor is a co-operative bank carrying on banking as defined in Section 5(b). Observations distinguishing corporate form from functional activity and noting legislative amendments (e.g., to Section 194A(3)(v)) that affect classification are explanatory but the central ratio is the functional test based on Section 5(b). Conclusions: Interest received from a co-operative bank is deductible under Section 80P(2)(d) if, on the facts, the payor does not transact 'banking' as defined in Section 5(b) of the Banking Regulation Act. If the payor does transact banking as so defined, deduction is excluded by Section 80P(4). Issue 2 - Effect of legislative amendments and interaction with Section 194A(3)(v) Legal framework: Section 80P(4) (Finance Act 2006) expressly excludes application of Section 80P to co-operative banks except for primary agricultural credit societies; amendments to Section 194A(3)(v) (Finance Act 2015) also bear on the definition/coverage of 'co-operative society' for withholding provisions. Precedent treatment: The Court considered prior authorities that relied on corporate/registration form and those that applied the functional test mandated by the Supreme Court decision. Interpretation and reasoning: Mere registration under a State Co-operative Societies Act or nomenclature 'co-operative bank' is not conclusive. The statutory exclusion in Section 80P(4) must be applied in light of whether the entity carries on banking activity as defined under the Banking Regulation Act. The 2015 amendment to Section 194A(3)(v) underscores legislative differentiation between cooperative societies and cooperative banks for certain tax provisions, but the decisive inquiry remains the functional test. Ratio vs. Obiter: The principle that legislative amendments create an exclusionary regime for co-operative banks (subject to the primary agricultural credit society exception) is treated as ratio in so far as it supports applying Section 80P(4) only to entities carrying on banking as defined. Conclusions: Legislative amendments support treating co-operative banks differently from co-operative societies; however, application depends on factual determination whether the payor engages in banking within the meaning of Section 5(b). Issue 3 - Requirement of factual enquiry and appellate disposition when deductibility depends on payor's status Legal framework: The right to claim deduction under Section 80P(2)(d) depends on factual classification of the payor; assessment/appeals authorities must examine evidence of the payor's operations against the Section 5(b) benchmark. Precedent treatment: Tribunal authorities applying the Supreme Court's functional test have remanded matters where the record did not establish whether the payor carried on banking as defined. Interpretation and reasoning: Where the assessing records and appellate orders do not establish whether the payor co-operative bank carries on banking as defined in Section 5(b), it is appropriate to remit the issue to the assessing officer for verification and adjudication in accordance with law. The assessee must be afforded opportunity to produce documentary proof regarding the nature of the payor's business (e.g., whether deposits are accepted from the public, withdrawal by cheque, etc.). Ratio vs. Obiter: The direction to remit for fact-finding is ratio when the appellate tribunal cannot determine entitlement on the existing record; guidance that interest cost adjustment may be available where deduction is denied is persuasive (obiter guidance) for parity of treatment but not necessary to the central holding. Conclusions: The matter should be restored to the assessing authority to determine, on evidence, whether the payor entities carry on banking as defined in Section 5(b). If not, interest income qualifies for deduction under Section 80P(2)(d); if yes, deduction is barred by Section 80P(4). The assessee may supply supporting documents to the assessing officer.