2025 (12) TMI 299 - HC - Income Tax

Deduction under Section 80P(2)(d) upheld for co-operative society investing in co-operative bank; reassessment notice quashed

The Diamond Jubilee Co Operative Bank Ltd. Versus Union of India & Ors.

HC allowed the writ petition, holding the petitioner to be a co-operative society and not a co-operative bank, despite cancellation of its banking ... Deduction claimed u/s 80P(2)(d) - petitioner is not a Co-operative Bank but a Co-operative Society whose license was cancelled in 2004 and claimed deduction u/s 80P(2)(d) - reopening of assessment - HELD THAT:- As held by the Supreme Court in the case of Apex Co-operative Bank of Urban Bank of Maharashtra & Goa Ltd. Vs. The Maharashtra State Co-operative Bank Ltd & Ors. [2003 (10) TMI 388 - SUPREME COURT] for which the reliance is placed by the Co-ordinate Bench, and also in case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd [2023 (9) TMI 761 - SUPREME COURT] the present writ petition is allowed as the petitioner is not a Co-operative Bank but a Co-operative Society. Hence, as per the settled legal precedent, deduction u/s 80P(2)(d) is available to Co-operative societies on income earned as interest on investment made with Co-operative Bank which in turn, is a Co-operative Society itself and as the observations recorded by the respondent are incorrect and thus contrary to the judgement of this Court. Reopening notice set aside. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a Co-operative Society, whose banking licence has been cancelled and which is no longer a Co-operative Bank, is entitled to deduction under Section 80P(2)(d) of the Income-tax Act on interest income earned from investments with Co-operative Banks. 1.2 Whether, in view of the legal position governing Section 80P(2)(d) read with Section 80P(4), the Assessing Officer had jurisdiction to issue show-cause notices under Section 148A(1), pass an order under Section 148A(3), and issue notice under Section 148 for the relevant assessment year on the ground of alleged wrongful deduction under Section 80P(2)(d). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement of a non-banking Co-operative Society to deduction under Section 80P(2)(d) on interest from Co-operative Banks Legal framework (as discussed): 2.1 The Court considered Section 80P(2)(d) and Section 80P(4) of the Income-tax Act, the definition and scope of 'co-operative bank' and 'banking' under the Banking Regulation Act, 1949, and the principles laid down in prior decisions including the relied-on judgment concerning Section 80P(2)(d), and the Supreme Court decisions interpreting Section 80P and Section 80P(4). 2.2 The Court referred to the interpretation that Section 80P(4) operates as a proviso excluding only 'co-operative banks' carrying on banking business with a licence from the Reserve Bank of India, and that Section 80P(2)(d) contains no specific restriction or amendment limiting deduction on interest derived from investments with other co-operative societies. Interpretation and reasoning: 2.3 It was not in dispute before the Court that the petitioner is not a 'Co-operative Bank' but a 'Co-operative Society' whose banking licence had been cancelled in 2004, and that it was functioning thereafter solely as a Co-operative Society under an Official Liquidator. 2.4 The Court noted that the impugned proceedings were premised on the allegation that deduction under Section 80P(2)(d) on interest income from Co-operative Banks was wrongly claimed. The Court applied the reasoning adopted in the earlier co-ordinate Bench decision, which had held that Section 80P(4) excludes only co-operative banks that are liable to tax as banking entities, and that such exclusion does not, in the absence of any amendment to Section 80P(2)(d), disentitle a co-operative society from claiming deduction on interest income derived from investments with a co-operative bank, which itself is a co-operative society. 2.5 Relying on the Supreme Court's interpretation of Section 80P as a beneficial provision to be read liberally in favour of co-operative societies, and on the analysis that Section 80P(4) excludes only those co-operative banks which are co-operative societies possessing an RBI banking licence and engaged in lending to the public, the Court accepted the proposition that a non-banking co-operative society remains entitled to the full deduction under Section 80P(2)(d) on interest or dividend income from investments with other co-operative societies, including co-operative banks. 2.6 The Court followed the reasoning that a deduction granted by Section 80P(2)(d) 'without any reference to any restriction or limitation cannot be restricted or limited by implication' and that the exclusion in Section 80P(4), being in the nature of a proviso, is confined to co-operative banks engaged in banking business with RBI licence and does not affect the entitlement of a co-operative society. Conclusions: 2.7 The Court concluded that, as the petitioner is a Co-operative Society and not a Co-operative Bank, and its banking licence stood cancelled since 2004, it is legally entitled to deduction under Section 80P(2)(d) in respect of interest income earned from investments with Co-operative Banks. 2.8 The foundational premise in the reasons for reopening - that the petitioner could not lawfully claim deduction under Section 80P(2)(d) on such interest - was held to be contrary to the settled legal position and incorrect. Issue 2: Validity and jurisdiction of reassessment proceedings under Sections 148A(1), 148A(3) and 148 based on alleged wrongful Section 80P(2)(d) deduction Interpretation and reasoning: 2.9 The Court recorded that the return for the relevant assessment year had been scrutinised and assessed under Section 143(3) read with Section 144B after issuance of notices under Sections 143(2) and 142(1), and that the petitioner had made detailed compliance and submissions, including on the deduction claim. 2.10 The subsequent notices under Section 148A(1), the order under Section 148A(3), and the notice under Section 148 were all based on an audit memorandum objecting to the deduction under Section 80P(2)(d) on interest from Co-operative Banks. 2.11 The Court noted that the very issue raised in the impugned proceedings - eligibility of a co-operative society to claim Section 80P(2)(d) deduction on interest income from co-operative banks - stood squarely covered in favour of assessees by the co-ordinate Bench decision relied upon and by Supreme Court precedents cited therein. 2.12 As the Department's counsel was unable to dispute that the legal issue was already settled by the co-ordinate Bench and that the petitioner was a co-operative society and not a co-operative bank, the Court held that the reasons recorded for initiation of proceedings under Sections 148A and 148 were unsustainable in law. 2.13 The Court, applying the settled legal position, held that the observations of the respondent in the impugned order that the petitioner was not entitled to such deduction under Section 80P(2)(d) were incorrect and contrary to binding precedent, thereby vitiating the jurisdictional basis for reassessment. Conclusions: 2.14 The Court held that the initiation and continuation of proceedings under Sections 148A(1), 148A(3) and 148, founded solely on the alleged ineligibility of the petitioner to claim deduction under Section 80P(2)(d), were without jurisdiction and unsustainable in law. 2.15 Consequently, the notice dated 29.06.2025 issued under Section 148, the order dated 29.06.2025 passed under Section 148A(3), and the show-cause notices dated 31.03.2025 and 23.05.2025 issued under Section 148A(1) were quashed and set aside, and the writ petition was allowed.