2025 (10) TMI 770 - HC - Income Tax

Interest from investments in a co-operative bank not deductible under section 80P(2)(d) and sub-section (4) bars claim

HC held that interest on investments in a co-operative bank is not deductible under section 80P(2)(d) because a co-operative bank holding a banking ... Deduction u/s 80P(2)(d) - interest derived by the Co-operative society from its investments - AO rejected the claim as the investment made was in Co-operative Bank - whether the Co-operative Society assumes the character of the Cooperative Bank? - HELD THAT:- It is undisputed that the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., has banking license issued by the Reserve Bank of India under the Banking Regulation Act and engaged in banking activities. Merely the Co-operative Bank is also a Co-operative Society, the investment in Co-operative Bank cannot be considered for deduction under Section 80P(2)(d) of the Act. In the light of the judgment in second TOTAGARS CO-OPERATIVE SALE SOCIETY [2017 (1) TMI 1100 - KARNATAKA HIGH COURT] followed by the Tribunal, we are of the view that in view of the banking license of the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., the same is a Co-operative Bank. Once the investment is made in a Co-operative Bank, Sub-Section (4) of Section 80P steps in and operates as a bar for deduction u/s 80P(2)(d) of the Act. Tribunal rightly following the judgment of this Court in the second TOTAGARS CO-OPERATIVE SALE SOCIETY (supra) has held that the assessee is not entitled to claim deduction under Section 80P(2)(d) of the Act. Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether interest earned by a co-operative society from investments made in a co-operative bank is deductible under Section 80P(2)(d) of the Income Tax Act, 1961. 2. Whether a co-operative bank, though registered as a co-operative society, must be treated as a distinct 'co-operative bank' for the purposes of Section 80P, thereby invoking the exclusion in Section 80P(4) and precluding deduction under Section 80P(2)(d). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility under Section 80P(2)(d): Legal framework Section 80P(2)(d) provides a deduction for certain income of cooperative societies, including interest derived from investments made in specified co-operative bodies. Section 80P(4) imposes a bar on application of Section 80P in certain circumstances, which may exclude incomes when the recipient or payer falls within the scope of that exclusion. Issue 1 - Precedent Treatment The Tribunal followed a prior judgment of the Court that applied Section 80P(4) to deny deduction for investment income where the recipient institution functioned as a co-operative bank. The Court recognised that an earlier, contrary decision of the same Court had allowed such deduction but noted a subsequent, later decision of the Court rejecting the claim, which the Tribunal and the Court followed. Issue 1 - Interpretation and reasoning The Court examined the nature of the institution from which interest was earned. It emphasised that mere registration as a co-operative society does not determine the tax consequence; the characterisation depends on the activities carried on. The Mysore and Chamarajanagar District Co-operative Central Bank Ltd. holds a banking licence under the Banking Regulation Act and carries on banking activities, thereby assuming the character of a co-operative bank. Once the payor is a co-operative bank so characterised, Section 80P(4) operates as a statutory bar to the deduction claimed under Section 80P(2)(d). Issue 1 - Ratio vs. Obiter Ratio: Where the payor of interest is a co-operative bank by virtue of carrying on banking activities and holding a banking licence, the exclusion in Section 80P(4) precludes the claimant co-operative society from claiming deduction under Section 80P(2)(d) for interest from that payor. Issue 1 - Conclusions The Court concluded that interest earned from the co-operative bank in question is not deductible under Section 80P(2)(d) because the payor is properly characterised as a co-operative bank and falls within the exclusionary scope of Section 80P(4); accordingly the Tribunal's denial of the deduction was correct. Issue 2 - Status of co-operative bank as 'co-operative society' under Section 80P: Legal framework The statutory scheme recognises entities registered under co-operative law; however, Section 80P must be read with Section 80P(4) which addresses specific exclusions related to certain institutions. The functional character of an entity (e.g., carrying on banking business under a banking licence) is relevant to determine applicability of the exclusion. Issue 2 - Precedent Treatment The Court acknowledged two conflicting prior pronouncements of this Court: an earlier decision that treated investments in a co-operative bank as eligible for deduction and a later decision that considered the effect of Section 80P(4) and concluded to the contrary. The Tribunal followed the later decision; the Court endorsed that approach. Issue 2 - Interpretation and reasoning The Court reasoned that registration as a co-operative society does not immunise an entity from being categorised as a co-operative bank if it carries on banking activities and holds a Reserve Bank licence. The functional transformation to a banking character triggers the operation of Section 80P(4), which bars the deduction under Section 80P(2)(d). Thus, for purposes of Section 80P, a co-operative bank carrying on banking activities is to be treated as a co-operative bank distinct for the purpose of invoking the statutory exclusion, notwithstanding its registration as a co-operative society. Issue 2 - Ratio vs. Obiter Ratio: A co-operative society that carries on banking activities under a banking licence is to be treated as a co-operative bank for the purposes of Section 80P, and such characterisation engages Section 80P(4) to exclude deduction under Section 80P(2)(d) for interest paid by that co-operative bank. Issue 2 - Conclusions The Court held that the payor's banking licence and banking activities establish its status as a co-operative bank for Section 80P purposes; consequently Section 80P(4) bars the claimed deduction and the Tribunal's decision to deny the deduction was upheld. No distinguishable fact or law was shown to warrant a different view; therefore no substantial question of law arises. Cross-reference The conclusions on both issues are interlinked: the characterisation of the payor as a co-operative bank (Issue 2) is dispositive of the deductibility question under Section 80P(2)(d) because of the statutory bar in Section 80P(4) (Issue 1); the Tribunal's reliance on the later decision of the Court that addressed Section 80P(4) is endorsed.