2025 (10) TMI 79 - AT - Income Tax

Appeal dismissed: Interest or dividend from co-operative banks not deductible under s.80P(2)(d); s.80P(4) and Part V

ITAT held the appellant's appeal dismissed. The Tribunal ruled that cooperative banks have been placed on par with commercial banks for Income-tax ... Deduction claimed u/s 80P(2)(d) - Tripura State Co-operative Bank is not being a Co-op Society and therefore not allowed deduction u/s 80P(2)(d) on the interest income earned by the assessee - Scope of amendment - HELD THAT:- Legislative intention behind the amendments was to bring Cooperative Banks at par with commercial Banks and the provisions of Clause (d) of sub-Section (2) of Section 80P of the Act apply in respect of any income by way of interest or dividend derived by the co-operative Society from its investments with any other Society. Since Co-operative Bank and co-operative Society have been specified at different places in Section 80P of the Act, the reference to cooperative Society in Section 80P(2)(d) of the Act is a reference to the co-operative Society which is not a Co-operative Bank and is not carrying on any banking activity while the reference to Co-operative Bank in sub-Section (4) of Section 80P of the Act is to an entity which is a cooperative Society but is carrying on the business of banking and is governed by the rules and regulations of the RBI. Simultaneous to the insertion of sub-Section (4) to Section 80P of the Act, the Cooperative Banks were treated at par with the other commercial banks and the deduction u/s 36(1)(viia) of the Act in respect of provisions made for bad and doubtful debts was also extended to a Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank with effect from 01.04.2007. Therefore, with effect from 01.04.2007 all Co-operative Banks for the purpose of Income Tax Act have been brought at par with other commercial banks and any interest or dividend received from a Co-operative Bank is no longer allowable as a deduction u/s 80P(2)(d) of the Act. Thus, even in respect of interest from Tripura State Co-operative Bank Ltd., (which has been declared as a co-operative Society by virtue of the second amendment of the Tripura Cooperative Societies Act, 2009), by virtue of the prohibitory amendment introduced by way of introduction of sub-Section (4) to Section 80P of the Act, the interest from Tripura State Co-operative Bank Ltd., is not deductible u/s 80P of the Act. Part V of the Banking Regulation Act, 1949 specifically bars a Co-operative Bank to be a member of any other co-operative Society. Therefore, both on the principle of mutuality and the provision of Section 80P(4) of the Act read with Part V of the Banking Regulation Act, 1949, the interest from Tripura State Co-operative Bank Ltd. is also not exempt. Treating a Co-operative Bank at par with co-operative Society and allowing them the benefit of Clause (d) of sub-Section (2) of Section 80P of the Act would render the provisions of sub-Section (4) of section 80P otiose. Therefore, all the grounds of appeal are dismissed relating to interest from Tripura State Co-operative Bank Ltd. and United Bank of India and the order of the CIT(A) in this regard is hereby confirmed. Appeal of the assessee is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned by a co-operative society from deposits with a co-operative bank is eligible for deduction under section 80P(2)(d) of the Income-Tax Act when that bank is a co-operative society carrying on banking business (i.e., a co-operative bank)? 2. Whether the exclusion in section 80P(4) (which excludes 'any co-operative bank' other than specified primary agricultural credit societies) bars a co-operative society from claiming deduction under section 80P(2)(d) for interest/dividend received from a co-operative bank? 3. Whether the character of interest income (i.e., business income vs. income from other sources) changes when it is received from a co-operative bank as opposed to a non-bank co-operative society, for the purposes of section 80P(2)(d) and related jurisprudence? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility of interest from a co-operative bank for deduction under section 80P(2)(d) Legal framework: Section 80P(2)(d) provides that 'any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society' is allowable as a deduction. Section 80P(4) provides that the provisions of section 80P 'shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.' Definitions under the Banking Regulation Act, Part V (as inserted) distinguish 'co-operative society' and various forms of 'co-operative bank,' and confer application of banking provisions to co-operative banks. Precedent treatment: The parties relied on conflicting authorities. The bench considered (a) a High Court decision favoring deduction where a co-operative bank was registered under the relevant State co-operative societies statute, and (b) other judicial analyses (including a High Court decision considering section 80P(2)(d) read with section 80P(4) and Supreme Court precedent) which treat co-operative banks differently for the purpose of section 80P. The appellants' relied decision was distinguished on its facts and scope. Interpretation and reasoning: The Court examined the statutory text and legislative amendments as a whole. It held that a 'co-operative bank' is a co-operative society that is doing the business of banking (as defined in the relevant State Act and the Banking Regulation Act, 1949). However, the legislature deliberately used distinct references to 'co-operative society' and 'co-operative bank' in section 80P, and later introduced section 80P(4) to exclude co-operative banks (except specified primary agricultural credit societies) from the benefits of section 80P. The Court relied on the intent manifested in the Finance Act amendment (effective 01.04.2007) and the explanatory memorandum which explicitly withdrew section 80P benefits for co-operative banks and instead provided them other allowances under section 36(1)(viia). The statutory scheme and amendments therefore indicate that interest received from a co-operative bank is not intended to be covered by section 80P(2)(d). Ratio vs. Obiter: Ratio - section 80P(2)(d) must be read with section 80P(4) and the Part V modifications in the Banking Regulation Act; the legislative exclusion of co-operative banks precludes deduction under clause (d) for interest received from co-operative banks (except the specified primary agricultural credit societies). Obiter - critical discussion of the particular High Court authority relied upon by the appellant is explanatory and distinguished rather than forming precedent for the result. Conclusion: Deduction under section 80P(2)(d) is not allowable for interest income earned from a co-operative bank (here, the State co-operative bank), because such banks are excluded by section 80P(4) despite being co-operative societies for other purposes. Issue 2 - Effect of section 80P(4) and legislative intent bringing co-operative banks at par with commercial banks Legal framework: Section 80P(4) expressly excludes co-operative banks (other than specified primary agricultural credit societies) from section 80P; Part V of the Banking Regulation Act applies banking regulatory provisions to co-operative banks. The 2007 amendments and accompanying memorandum reallocates tax treatment of co-operative banks (withdrawal of section 80P deduction and extension of bank-type deductions under section 36). Precedent treatment: The Court reviewed judgments and reasoning from multiple authorities that emphasize purposive reading of the amendments: the amendments were intended to tax co-operative banks on parity with commercial banks and to provide alternate relief (e.g., bad and doubtful debts deduction). Prior Supreme Court rulings that characterized interest from idle funds as not business income (and therefore outside the ambit of some 80P benefits) were noted as relevant to the character analysis. Interpretation and reasoning: The Court placed weight on (i) the explicit non-application language of section 80P(4), (ii) the separate statutory treatment and definitions in Part V of the Banking Regulation Act, and (iii) the Finance Act memorandum explaining the rationale for amendment. The Court concluded that the legislative scheme purposely treats co-operative banks as banks for Income-tax purposes (except limited exceptions) and hence the provisions of section 80P were not intended to extend to ordinary co-operative banks. The Court rejected the argument that the literal term 'co-operative society' in clause (d) should be read to include co-operative banks in all cases because that reading would nullify section 80P(4) and ignore legislative intent. Ratio vs. Obiter: Ratio - section 80P(4) must be given effect and interpreted purposively; such interpretation prevents section 80P(2)(d) from applying to co-operative banks for interest/dividend receipts. Obiter - extended policy observations on mutuality and membership restrictions in Part V are explanatory to the statutory reading rather than separate grounds. Conclusion: Section 80P(4) operates to exclude co-operative banks from section 80P relief; co-operative banks are treated on par with commercial banks for income-tax purposes and are not sources from which a co-operative society may claim deduction under section 80P(2)(d), save for the specified exceptions. Issue 3 - Character of interest income and its impact on eligibility for section 80P deduction (business income vs. other sources) Legal framework: Taxability hinges on the character of income (whether it is business income attributable to operations or income from other sources). Earlier higher court and Supreme Court analyses considered whether interest on idle/surplus funds is business income (section 28) or income from other sources (section 56), which affects eligibility for section 80P relief because 80P applies to income of specified character. Precedent treatment: The Court referred to authority holding that interest on surplus/idle funds is income from other sources and not derived from the cooperative society's business operations, and thus historically not eligible for section 80P deduction under relevant clauses. The Court noted that a mere change in the depository from a scheduled bank to a co-operative bank does not alter the inherent character of the income. Interpretation and reasoning: The Court emphasized that the character of income depends on the nature of the activity producing it and not the legal status of the payor. Even if a co-operative bank is technically a 'co-operative society,' the interest on idle funds remains non-operational income where facts so indicate, and section 80P should be strictly construed. The Court held that allowing section 80P(2)(d) simply because the payer is a co-operative bank would circumvent both prior precedent and the legislative exclusion in section 80P(4). Ratio vs. Obiter: Ratio - the nature/character of interest income is not altered by shifting deposits to a co-operative bank; such income remains ineligible for section 80P(2)(d) if it is not derived from the society's business operations and if the payor is a co-operative bank excluded by section 80P(4). Obiter - observations on mutuality and membership restrictions under Part V are descriptive to support the character analysis. Conclusion: The interest in question retains its character as income from other sources (not business operational income) and cannot be converted into deductible section 80P(2)(d) income merely because it is received from a co-operative bank; legislative and precedential constraints bar such recharacterisation. Overall Conclusion of the Court The Court affirmed the tax authorities' disallowance: interest income earned from the State co-operative bank and from the commercial bank is not deductible under section 80P(2)(d) given (i) the statutory distinction between 'co-operative society' and 'co-operative bank,' (ii) the express exclusion in section 80P(4) (post-2007 amendment) treating co-operative banks akin to commercial banks for tax purposes, and (iii) the unchanged character of interest on idle funds as not being qualifying operational income for section 80P relief. All grounds of the appeal in respect of these interest receipts were dismissed.