The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has held that interest earned by a co-operative society from deposits or investments with a co-operative bank is eligible for deduction under Section 80P(2)(d).
The bench of Tapas Ram Misra (Judicial Member) and Narendra Prasad Sinha (Accountant Member) clarified that the restriction contained in Section 80P(4) does not operate as a bar against such a deduction in the hands of the investing co-operative society.
The controversy before the Tribunal was confined to the assessee’s claim for deduction under Section 80P(2)(d) in respect of interest income of ₹68,33,529.
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The Assessing Officer had disallowed the deduction on the ground that the interest had been received from Co-operative Bank, which, according to the officer, was a “co-operative bank” rather than a “co-operative society”.
The Assessing Officer noted that the bank was functioning as a full-fledged bank and was providing banking facilities to the general public. On that basis alone, the deduction claimed on the interest income was rejected.
The Commissioner of Income Tax (Appeals) [CIT(A)] affirmed the disallowance. In doing so, the appellate authority relied, among other precedents, upon the Karnataka High Court ruling in PCIT v. Totgars Co-operative Sale Society Ltd., reported in (2017) 395 ITR 611, and the Supreme Court ruling involving the same assessee reported in (2010) 322 ITR 283.
The CIT(A) had also referred to the Gujarat High Court decision in State Bank of India v. CIT, reported in (2016) 389 ITR 578, in support of the conclusion that deduction under Section 80P(2)(d) would not be available on interest earned from a co-operative bank.
The department strongly supported the orders of the lower authorities. It contended that, in view of Section 80P(4), a co-operative society could not claim deduction under Section 80P(2)(d) in respect of interest earned from a co-operative bank.
The department again relied upon the Karnataka High Court’s decision in Totgars as well as the Supreme Court’s ruling in the earlier Totgars case to contend that Section 80P(4) prevented the deduction.
The assessee, on the other hand, relied heavily upon the Gujarat High Court’s decision in PCIT v. Ashwinkumar Arban Co-operative Society Ltd., reported in [2024] 168 taxmann.com 314.
It was argued that Section 80P(4) was introduced to deny the benefit of Section 80P to a co-operative bank itself, except a primary agricultural credit society or primary co-operative agricultural and rural development bank. According to the assessee, the provision does not deny a co-operative society the deduction available under Section 80P(2)(d) merely because its interest income is received from a co-operative bank.
The ITAT drew an important distinction between denying Section 80P deduction to a co-operative bank itself and denying a co-operative society deduction on income received from investments with a co-operative bank.
The Tribunal noted that the plain language of Section 80P(2)(d) provides for deduction of income by way of interest or dividends derived by a co-operative society from its investments with another co-operative society.
The Bench observed that the provision was introduced through the Finance Act, 2006 with effect from April 1, 2007, to deny Section 80P deduction to co-operative banks, subject to the exceptions specified in the provision. The explanatory memorandum indicated that the amendment was intended to bring co-operative banks at par with other banks for taxation purposes.
The Tribunal held that this restriction “cannot be interpreted to mean” that a deduction otherwise available to a co-operative society under Section 80P(2)(d) would be denied simply because the interest was earned from a co-operative bank.
The Tribunal specifically found that the CIT(A) had wrongly applied the Gujarat High Court judgment in State Bank of India v. CIT.
The ITAT explained that the dispute in that case concerned surplus funds invested with the State Bank of India and a deduction claimed under Section 80P(2)(a)(i). No deduction under Section 80P(2)(d) had been claimed in that case.
In fact, the Gujarat High Court had observed that Section 80P(2)(d) specifically covers interest earned from funds invested with co-operative societies. The High Court had further indicated that while interest from deposits with SBI could not qualify under the provision, a co-operative society could deposit surplus funds with a co-operative bank and claim the benefit of Section 80P(2)(d).
This distinction assumed considerable importance because the income involved in the present dispute was not interest from an ordinary scheduled or commercial bank, but interest received from a co-operative bank.
The Tribunal also examined the Supreme Court decision in Totgars Co-operative Sale Society Ltd. v. ITO, reported in (2010) 322 ITR 283. It noted that the issue before the Supreme Court concerned whether interest received from securities and bank deposits was attributable to the assessee’s business and therefore deductible under Section 80P(2)(a)(i).
The ITAT emphasised that there was no claim under Section 80P(2)(d) in respect of interest from a co-operative bank in that case. The Supreme Court and Karnataka High Court had held on those particular facts that the income did not qualify for deduction under Section 80P(2)(a)(i).
The Tribunal therefore treated the question of deduction under Section 80P(2)(d) as legally distinct from the controversy addressed by the Supreme Court in the earlier Totgars ruling.
The ITAT also referred to another Karnataka High Court decision in PCIT v. Totgars Co-operative Sale Society Ltd., reported in [2017] 392 ITR 74, where the High Court had directly considered whether a co-operative bank should be regarded as a co-operative society for purposes of Section 80P(2)(d).
In that ruling, the Karnataka High Court held that “co-operative society” is a broader genus, while a “co-operative bank” represents a particular species within that genus. Consequently, interest earned by a co-operative society from a co-operative bank was held deductible under Section 80P(2)(d).
The Tribunal nevertheless acknowledged that a different Bench of the Karnataka High Court, in the decision reported in 395 ITR 611, subsequently took a contrary view and concluded that interest earned from a co-operative bank could not qualify under Section 80P(2)(d) read with Section 80P(4).
Thus, the ITAT recognised an apparent divergence in the Karnataka High Court precedents.
The Tribunal noted that the Gujarat High Court had considered the relevant precedents concerning Sections 80P(2)(d) and 80P(4) and accepted that interest earned by a co-operative society from a co-operative bank is covered by Section 80P(2)(d).
The Gujarat High Court had held that the controversy was no longer res integra and that deduction under Section 80P(2)(d) is available to co-operative societies on interest income earned from investments made with a co-operative bank, since a co-operative bank is itself a co-operative society.
The High Court had also rejected the argument that amendments relating to TDS under Section 194A effectively excluded co-operative banks from the definition of co-operative societies. It observed that the amendment did not justify treating co-operative banks as falling outside the concept of co-operative societies for the purpose in question.
Most importantly, the jurisdictional High Court had clarified the operation of Section 80P(4).
According to the ruling reproduced and relied upon by the ITAT, Section 80P(4) applies when the co-operative bank itself is liable to tax and seeks the benefit of Section 80P. The exclusion of co-operative banks from Section 80P through sub-section (4), however, does not disentitle another co-operative society from claiming deduction under Section 80P(2)(d) for interest earned from investments with that co-operative bank.
The Gujarat High Court specifically observed that, in the absence of any corresponding amendment to Section 80P(2)(d), Section 80P(4) was not sufficient to deny the deduction for interest earned from investments made with a co-operative bank.
The ITAT concluded that although there appeared to be a difference of opinion in the Karnataka High Court decisions concerning the applicability of the Totgars ruling, the Gujarat High Court had consistently taken a view in favour of the availability of the deduction.
The Tribunal accordingly held that interest earned from Baroda District Co-operative Central Bank was eligible for deduction under Section 80P(2)(d), and Section 80P(4) did not constitute a bar to the claim.
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