Primary credit co-op society allowed s.80P(2)(a)(i) deduction on interest from co-op banks, despite s.80P(4) restriction, regardless of income head

The ITAT held that the assessee, a primary credit co-operative society, is entitled to deduction under s. 80P(2)(a)(i) on interest income earned from co-operative societies, including co-operative banks. It ruled that the deduction is allowable from the gross total income irrespective of whether such interest is assessed as business income or income from other sources, as long as it forms part of the gross total income. Relying on SC interpretation in relation to s. 80P and the object of promoting the co-operative movement, the ITAT clarified that the restriction in s. 80P(4) applies to co-operative banks as assessees, not to co-operative societies earning interest from them. The AO was directed to delete the disallowance and the assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether interest income earned by a primary credit co-operative society from deposits with co-operative banks is eligible for deduction as "profits and gains of business attributable to" providing credit facilities to members under section 80P(2)(a)(i).

1.2 Whether, in light of section 80P(4) and the judicial precedents cited, deduction under section 80P(2)(d) on interest from co-operative banks to a co-operative society stands excluded or restricted, and whether this question required adjudication in the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deduction under section 80P(2)(a)(i) on interest from deposits with co-operative banks

(a) Legal framework as discussed

2.1 The Tribunal considered section 80P(2)(a)(i), which grants deduction of the "whole of the amount of profits and gains of business attributable to" the business of providing credit facilities to members.

2.2 The Tribunal relied on the interpretation of the word "attributable" as laid down by the Supreme Court (11 ITR 842) and as applied by the jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd., holding that "attributable to" has a wider ambit than "derived from".

2.3 The Tribunal also considered section 80P(4), which excludes certain co-operative banks from claiming deduction under section 80P, and the Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd., clarifying that section 80P(4) is aimed at excluding co-operative banks functioning on par with commercial banks from claiming deduction in their own case, and that section 80P continues to apply to co-operative societies as defined in section 2(19).

(b) Interpretation and reasoning

2.4 The Tribunal found as a fact that the assessee is a primary credit co-operative society, not a bank, carrying on the business of providing credit facilities to its members and dealing in seeds and fertilizers to members only.

2.5 The assessee received interest of ?20,64,423 from deposits with co-operative banks, which was credited in the profit and loss account; the net profit of ?10,20,139 was claimed as deductible under section 80P(2)(a)(i). The Assessing Officer disallowed deduction only to the extent of ?10,20,139, though the interest income itself was higher, thereby in effect allowing deduction on part of the interest while denying it on the remainder. The Tribunal characterised this as an internal inconsistency and a fallacy in the assessment order, amounting to the Assessing Officer both accepting and rejecting the same kind of income for deduction.

2.6 On the core legal issue, the Tribunal applied the ratio of the jurisdictional High Court in Tumkur Merchants Souharda Credit Co-operative Ltd., where it was held that a co-operative society carrying on the business of providing credit facilities to its members may deposit temporarily surplus funds (not immediately required for lending) in banks, and the interest so earned is "attributable to" the business of providing credit to members and hence eligible for deduction under section 80P(2)(a)(i), so long as the society is not carrying on any separate distinct business.

2.7 The Tribunal noted that in that decision, the High Court, following the Supreme Court's interpretation of "attributable to", held that such interest forms part of the profits and gains of the business of the co-operative society and is fully deductible under section 80P(2)(a)(i).

2.8 The Tribunal also examined the later Karnataka High Court judgment in Totagars Co-operative Sale Society (395 ITR 611) which had distinguished Tumkur Merchants on facts, particularly where it is established that the assessee is carrying on the business of banking; and the earlier decision in Totgars Co-operative Sale Society (392 ITR 74), which was held by the High Court itself to be distinguishable in the later ruling. The Tribunal observed that, on a survey of these rulings, two decisions of the jurisdictional High Court (Tumkur Merchants and Totgars - 392 ITR 74) supported the assessee's position, while one (395 ITR 611) went against, but on distinguishable facts.

2.9 With reference to Mavilayi Service Co-operative Bank Ltd., the Tribunal read that judgment to mean that section 80P(4) was introduced to withdraw deduction from co-operative banks themselves, and that neither section 80P(4) nor the CBDT circulars/clarifications considered therein state that co-operative societies receiving interest from co-operative banks are denied deduction under section 80P(2). It further noted that section 80P deductions are to be allowed from the "gross total income" if the income falls within the specific heads of section 80P(2), regardless of whether such income is assessed as "business income" or "income from other sources".

2.10 The Tribunal concluded that in the present case the assessee's factual position was closer to Tumkur Merchants and Totgars (392 ITR 74) than to the Karnataka High Court judgment relied upon by the Revenue, since the assessee is a primary credit co-operative society and not a co-operative bank.

(c) Conclusions

2.11 The Tribunal held that interest earned by the assessee from deposits with co-operative banks is "profits and gains of business attributable to" the business of providing credit facilities to its members and, therefore, eligible for deduction under section 80P(2)(a)(i).

2.12 It directed deletion of the disallowance of ?10,20,139 and reversed the orders of the lower authorities.

Issue 2: Necessity to decide claim under section 80P(2)(d)

(a) Legal framework as discussed

2.13 Section 80P(2)(d) allows deduction in respect of "any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society". The Assessing Officer had contended that, post insertion of section 80P(4), deduction under section 80P(2)(d) stood effectively curtailed where deposits were made with co-operative banks.

(b) Interpretation and reasoning

2.14 The Tribunal, having already held that the assessee was entitled to deduction on the relevant interest income under section 80P(2)(a)(i), considered that adjudication of the alternative claim under section 80P(2)(d) was not required for disposal of the appeal.

(c) Conclusions

2.15 The Tribunal treated the assessee's alternative ground under section 80P(2)(d) as academic and did not render a decision on the merits of that provision in the facts of the case.

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