2025 (10) TMI 29 - AT - Income Tax

Deduction under s.80P(2)(d) allowed for interest on fixed deposits with district co-operative bank and treasury

The Kannur District Merchants Co-op. Society Ltd. (Formerly Kannur Jilla Vyapari Vyavasai Kshema Sahakarana Sangham Ltd.) Versus The Income Tax Officer, Ward 1 & TPS, Kannur

ITAT, Cochin (AT) allowed the assessee's appeals and held that deduction under s. 80P(2)(d) is permissible in respect of interest received on fixed ... Deduction u/s 80P(2)(d) - Interest income received on fixed deposit with KDC - HELD THAT:- As relying on M/S. PEROORKADA SERVICE CO-OPERATIVE BANK LTD, VILAPPIL SERVICE CO-OPERATIVE BANK LTD. [2021 (12) TMI 1084 - KERALA HIGH COURT] we hold that the assessee is entitled for deduction under section 80P(2)(d) of the Act on account of interest received from District Co-operative Bank and Treasury. Appeals filed by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned on fixed deposits with a District Co-operative Bank and interest from Treasury qualify for deduction under section 80P of the Income Tax Act, 1961, and if so, under which sub-provision of section 80P. 2. Whether interest income from banks and treasury falls within the ambit of section 80P(2)(a)(i) (or analogous clauses) as income 'from' the business of a co-operative society, or is restricted to deduction under section 80P(2)(d) as interest/dividend from investments with other co-operative societies. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of interest income from District Co-operative Bank and Treasury under section 80P Legal framework: Section 80P provides for deduction in computing income of certain co-operative societies. Sub-sections and clauses distinguish between income 'from' co-operative activities and income by way of interest or dividend derived from investments with other co-operative societies (inter alia clause (d) of sub-section (2)). The statute contemplates different treatment depending on the source and nature of income. Precedent treatment: The Court follows the decision of the jurisdictional High Court which examined identical facts and concluded that interest income earned by a co-operative society from District Co-operative Bank or Treasury does not fall within the ambit of section 80P(2)(a)(i) (income from the co-operative's business) but must be considered under section 80P(2)(d) - permitting deduction only when interest/dividend is derived from investments with other co-operative societies registered under the relevant State Co-operative Societies Act. That authority was applied by the Tribunal in the present appeals. Interpretation and reasoning: The statutory scheme of section 80P distinguishes between (a) income that is inherently from the co-operative society's operations and (b) passive investment income derived from other co-operative societies. For an assessee to claim deduction under the operative sub-section for 'income from co-operative activities,' the income must be shown to arise from or be attributable to dealings with entities covered by the statute (i.e., co-operative societies registered under the State Act). Interest received from banks (including district co-operative banks not registered under the same State Act in the relevant sense) and from the Treasury constitutes income from sources external to the society's co-operative business and therefore does not qualify for the broader deduction under section 80P(2)(a)(i). Consequently such interest cannot be swept into the exemption intended for core co-operative activities. The only statutory provision potentially permitting relief for interest/dividend from investments is clause (d) of section 80P(2), which is strictly confined to interest or dividend derived from investments with other co-operative societies as specified. Ratio vs. Obiter: The holding that interest from District Co-operative Bank and Treasury is not deductible under the general co-operative activity clause but limited to section 80P(2)(d) when sourced from qualifying co-operative societies is treated as ratio decidendi for the issue of statutory interpretation and deductibility in the present appeals. Observations concerning the inclusion of treasury interest in total income and the limited scope of clause (d) constitute necessary subsidiary reasoning forming part of the operative ratio. Conclusion: Interest income from District Co-operative Bank and Treasury does not qualify for deduction under the broader provisions of section 80P for income 'from' co-operative activities; deduction, if any, is restricted to interest/dividend derived from investments with other co-operative societies registered under the State Co-operative Societies Act as permitted by section 80P(2)(d). Interest from Treasury must be included in the assessee's total income and is not deductible under section 80P except to the limited extent allowed by clause (d) where the payor is a qualifying co-operative society. Issue 2 - Application of binding precedent and its effect on the assessment additions Legal framework: Tribunal must apply binding decisions of the jurisdictional High Court on questions of law interpreting section 80P; where the High Court has addressed identical factual and legal issues, its decision governs subsequent appeals. Precedent treatment: The Tribunal expressly adhered to the High Court's ruling that held identical Revenue contentions to be unsustainable and clarified that interest from banks/treasury cannot be treated as deductible under the provision intended for co-operative activity income. Interpretation and reasoning: Given the High Court's authoritative interpretation, the Tribunal concluded that the assessing authority's additions (disallowing/differentially treating interest income) should be revisited in light of the correct statutory construction: interest from District Co-operative Bank and Treasury are to be treated as eligible for deduction only under the limited scope of section 80P(2)(d) where applicable, and otherwise included in total income. The Tribunal's decision reverses the CIT(A)'s confirmation of the AO's view to the extent inconsistent with the High Court's ratio. Ratio vs. Obiter: The Tribunal's application of the High Court ruling to allow the appeals and direct correct treatment of interest income constitutes the dispositive ratio in these appeals. Any ancillary observations concerning factual particulars of the assessments are incidental to the primary legal conclusion. Conclusion: Following the jurisdictional High Court, the Tribunal held that the assessee is entitled only to the deduction permitted by section 80P(2)(d) in respect of interest received from qualifying co-operative societies; interest from Treasury is not deductible under section 80P(2)(a)(i) and must be included in total income. On that basis, the Tribunal allowed the appeals and set aside the contrary treatment confirmed below.