2026 (3) TMI 1345 - AT - Income Tax

Deduction for interest on co-operative bank deposits allowed where a co-operative society earns investment income under the tax exemption provision.

Interest earned by a co-operative society from deposits placed with co-operative banks was held eligible for deduction, because the receipts were treated ... Deduction u/s 80P(2)(d) - Interest from investments with co-operative banks - Scope of section 80P(4) - dividend and interest received on investment made in other cooperative society banks - HELD THAT: - The Tribunal held that the controversy was governed by the principle that section 80P(2)(d) allows deduction of interest derived by a co-operative society from investments with another co-operative society, and that section 80P(4) excludes only a co-operative bank claiming deduction in its own right, not a co-operative society earning interest from deposits placed with a co-operative bank. In reaching that conclusion, the Tribunal followed the recent decision of the Sikkim High Court in Sikkim State Cooperative Supply [2025 (12) TMI 808 - SIKKIM HIGH COURT] and Marketing Federation Limited [2025 (6) TMI 1629 - ITAT KOLKATA] which had distinguished Totgars [2010 (2) TMI 3 - SUPREME COURT] on the footing that Totgars concerned section 80P(2)(a)(i) and not section 80P(2)(d). Tribunal also treated decision in Doaba Cooperative Sugar Mills Ltd. [1997 (4) TMI 49 - PUNJAB AND HARYANA HIGH COURT] as supporting the view that the nature or source of the invested funds was not material once the income was derived from investment with a co-operative society. On that reasoning, the disallowance of the claimed deduction was held to be unsustainable. [Paras 9, 10] Final Conclusion: The Tribunal allowed the appeal and held that the assessee co-operative society was entitled to deduction under section 80P(2)(d) in respect of interest earned from deposits with co-operative banks. The contrary view adopted in the impugned appellate order was rejected. Issues: (i) Whether interest earned by a co-operative society from deposits made with co-operative banks is eligible for deduction under section 80P(2)(d) of the Income-tax Act, 1961.Analysis: The interest income arose from investments of surplus funds placed with co-operative banks. The legal question turned on whether such receipts fell within the expression income by way of interest derived by the co-operative society from its investments with any other co-operative society. The Tribunal followed the most recent binding and persuasive authorities, including the decision of the jurisdictional High Court and the later High Court view holding that section 80P(2)(d) applies to interest earned from co-operative banks and that the exclusion in section 80P(4) is directed to co-operative banks claiming deduction, not to a co-operative society earning interest from such banks. The contrary view was not accepted in preference to the authorities relied upon for the assessee.Conclusion: The assessee is entitled to deduction under section 80P(2)(d) on the interest earned from deposits with co-operative banks, and the disallowance was unsustainable.Ratio Decidendi: For a co-operative society, interest derived from deposits with a co-operative bank qualifies for deduction under section 80P(2)(d) where the receiving entity is treated as a co-operative society for that purpose, and section 80P(4) does not deny the deduction to the investing co-operative society.