2025 (12) TMI 808 - HC - Income Tax

Co-operative society allowed s. 80P(2)(d) deduction on interest from co-operative bank deposits; s. 80P(4) inapplicable

HC held that the assessee, a co-operative society, was entitled to deduction under s. 80P(2)(d) on interest income earned from deposits with co-operative ... Deduction u/s 80P - Application of 80P(4) or 80P(2)(d) - interest received from cooperative banks - appellant before us is Sikkim State Cooperative Supply and Marketing Federation Limited (SIMFED), being a co-operative society registered under the Sikkim Co-operative Societies Act, 1978 - distinction between a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural or rural development bank) and any other co-operative entity registered as a co-operative society - HELD THAT:- SIMFED earned interest from investments made in two co-operative banks, namely, Sikkim State Cooperative Bank Limited and Citizens Urban Co-operative Bank Limited, both registered as co-operative societies under the Sikkim Co-operative Societies Act, 1978. These investments were made from the surplus funds and statutory reserves of SIMFED as required under sections under the relevant provisions of Sikkim Cooperative Societies Act, 1978, more specifically, sections 57 to 66, under Chapter V of the Sikkim Co-operative Societies Act, 1978, which mandates prudent management and investment of funds only in approved securities of co-operative banks approved by the Registrar. A plain reading of the provisions of law quoted above, clearly reveals that the learned Tribunal misinterpreted the provision of section 80P(4) of the Income Tax Act, 1961, which specifically excludes co-operative banks (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) and erroneously applied it in respect of SIMFED, thereby disentitling it from claiming benefit under section 80P of the Income Tax Act, 1961. As such, the first substantial question of law is answered in favour of the assessee. Tribunal applied the ratio in Totgars’ Cooperative Sale Society Ltd. [2010 (2) TMI 3 - SUPREME COURT] - Eligibility of deduction of interest in the facts of the instant case has to be decided u/s 80P(2)(d) and not under section 80P(2)(a)(i) - We are of the view that in the case of PCIT vs. Ashwin Kumar Urban Co-operative Society Ltd. [2024 (11) TMI 971 - GUJARAT HIGH COURT] has squarely answered this question in favour of the assessee by observing inter alia that the Hon’ble Supreme Court’s decision rendered in Totgars’ Cooperative Sale Society Ltd [2010 (2) TMI 3 - SUPREME COURT] was not applicable in the facts of that case — which is identical to the instant case — as the eligibility of deduction of interest in the facts of the instant case has to be decided under section 80P(2)(d) and not under section 80P(2)(a)(i). Totgars’ Cooperative Sale Society Ltd. (supra) was primarily concerned with section 80P(2)(a)(i) and retained members’ funds shown as liability to deny deductions under section 80P(2)(d). The facts of the Totagars’ Cooperative Sale Society Ltd (supra) — as well as the applicability of the statutory provisions insofar as in our case is concerned — are factually and materially different. Assessee is entitled to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961. Appeal decided in favour of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether section 80P(4) of the Income Tax Act, 1961 bars a non-banking co-operative society from claiming deduction under section 80P(2)(d) on interest income received from co-operative banks. 1.2 Whether the ratio of the decisions in Totgars' Cooperative Sale Society Ltd., dealing with section 80P(2)(a)(i) and retained members' funds, is applicable to deny deduction under section 80P(2)(d) on interest income earned by a non-banking co-operative society from investments with co-operative banks. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 80P(4) to deny deduction under section 80P(2)(d) to a non-banking co-operative society on interest from co-operative banks Legal framework 2.1 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, with 'co-operative bank' having the meaning assigned in Part V of the Banking Regulation Act, 1949. 2.2 Section 80P(2)(d) grants deduction in respect of any income by way of interest or dividends derived by a co-operative society from its investments with any other co-operative society, to the extent of the whole of such income. Interpretation and reasoning 2.3 The Court held that section 80P(4) draws a clear statutory distinction between a 'co-operative bank' (as defined with reference to the Banking Regulation Act, 1949) and any other co-operative entity registered as a co-operative society. 2.4 It was noted that the assessee is not a co-operative bank within the meaning of Part V of the Banking Regulation Act, 1949, but a non-banking co-operative society registered under the Sikkim Co-operative Societies Act, 1978. 2.5 The bar under section 80P(4) was construed as applying only to the eligibility of co-operative banks (other than specified exceptions) to claim deduction in respect of their own income and not as a restriction on other co-operative societies claiming deduction under section 80P(2)(d) on income derived from investments with co-operative banks. 2.6 It was found as a matter of record that the interest income in question arose from investments made in two co-operative banks which themselves are registered as co-operative societies under the Sikkim Co-operative Societies Act, 1978, and that such investments were made out of surplus funds and statutory reserves in compliance with sections 57 to 66 of that Act, mandating investment of funds in approved securities or co-operative banks approved by the Registrar. 2.7 On a plain reading of section 80P(2)(d), the Court held that interest income derived by a co-operative society from its investments with 'any other co-operative society' qualifies for deduction in full, and that co-operative banks registered as co-operative societies fall within the expression 'any other co-operative society' for this purpose. 2.8 The Court concluded that the Tribunal misinterpreted section 80P(4) by extending its exclusionary ambit to a non-banking co-operative society and using it to deny the benefit of section 80P(2)(d) on interest received from co-operative banks. Conclusions 2.9 Section 80P(4) does not operate to bar a non-banking co-operative society from claiming deduction under section 80P(2)(d) on interest income derived from investments with co-operative banks that are themselves co-operative societies. 2.10 The Tribunal erred in law in applying section 80P(4) to disentitle the assessee from deduction under section 80P, and the first substantial question of law was answered in favour of the assessee. Issue 2: Applicability of Totgars' Cooperative Sale Society Ltd. decisions to denial of deduction under section 80P(2)(d) Legal framework 2.11 The decisions in Totgars' Cooperative Sale Society Ltd. considered the scope of section 80P(2)(a)(i) in relation to interest on surplus funds, including retained members' funds shown as liability, and examined eligibility of such income for deduction under that clause. 2.12 The instant case concerns deduction claimed under section 80P(2)(d) on interest income derived from investments with co-operative banks, both registered as co-operative societies. Interpretation and reasoning 2.13 The Court noted that the Tribunal, while allowing the Revenue's appeal, relied heavily on the Supreme Court decision in Totgars' Cooperative Sale Society Ltd. and the Karnataka High Court decision in Principal Commissioner of Income-tax & Another vs. Totagars Co-operative Sale Society. 2.14 Referring to the Gujarat High Court decision in PCIT vs. Ashwin Kumar Urban Co-operative Society Ltd., the Court observed that Totgars' Cooperative Sale Society Ltd. is not applicable where the controversy concerns eligibility of deduction under section 80P(2)(d), as Totgars was primarily concerned with section 80P(2)(a)(i) and with interest on retained members' funds shown as liability. 2.15 The Court held that the facts and statutory provisions involved in Totgars' Cooperative Sale Society Ltd. are factually and materially different from the present case, where the interest income is from statutorily mandated investments of surplus funds and reserves with co-operative banks and the deduction is claimed under section 80P(2)(d). 2.16 It was further observed that the Gujarat High Court had already considered and distinguished the Karnataka High Court decision in Principal Commissioner of Income-tax & Another vs. Totagars Co-operative Sale Society as inapplicable in a similar factual situation involving section 80P(2)(d), and the same reasoning applied here. 2.17 Based on this analysis, the Court held that the Tribunal erred in relying on Totgars' line of authorities to deny deduction under section 80P(2)(d). Conclusions 2.18 The ratio of Totgars' Cooperative Sale Society Ltd. and the related Karnataka High Court decision, being confined to section 80P(2)(a)(i) and the character of interest on retained members' funds, does not govern cases where deduction is claimed under section 80P(2)(d) on interest derived from investments with co-operative societies. 2.19 The Tribunal's reliance on Totgars' decisions to deny deduction under section 80P(2)(d) was misplaced; the second substantial question of law was answered in favour of the assessee. Overall determination 2.20 In the facts of the case, the assessee, being a non-banking co-operative society, is entitled to deduction under section 80P(2)(d) on the entire interest income derived from investments with co-operative banks registered as co-operative societies, and the impugned order of the Tribunal was set aside.