UncategorizedCo-operative Societies Entitled to Deduction on Interest Income from Co-operative Banks under Section 80P(2)(d)

The Hon’ble Income Tax Appellate Tribunal, Mumbai Bench, in Laburnum Mahindra Gardens Co-Operative Housing Ltd. v. Income Tax Officer, ITA No. 3657/Mum/2024, dated 11.09.2024, delivered a landmark judgment and clarified the meaning of Section 80P(2)(d) of the Income Tax Act, 1961. The Tribunal held conclusively that interest income accrued to a co-operative housing society on investments with co-operative banks is deductible under Section 80P(2)(d) even though Section 80P(4) was introduced in the Income Tax Act.

FACTS

Laburnum Mahindra Gardens Co-operative Housing Society (hereinafter referred to as “the Appellant”) at Goregaon (West), Mumbai, validly registered under the Maharashtra State Co-operative Societies Act submitted its income tax return for the assessment year 2020–21 showing total income of ₹Nil. The gross income of the appellant comprised ₹28,86,264, which was fully claimed as deduction under Section 80P, out of which ₹28,73,630 was particularly claimed under Section 80P(2)(d) being interest earned on fixed deposits and savings bank account balances with different co-operative banks like Saraswat Co-operative Bank, Shamrao Vitthal Co-operative Bank, and the Maharashtra State Co-operative Bank.

The return was brought under scrutiny under the Computer Aided Scrutiny Selection (hereinafter referred to as “CASS”) system to check authenticity of deduction availed under Chapter VI-A. During the assessment proceedings, the Assessing Officer (hereinafter referred to as “the Respondent”) asked for particulars of the deduction under Section 80P(2)(d). On examination, the Respondent held that the co-operative banks from which interest income had been received were not “co-operative societies” as defined under Section 80P(2)(d), due to the bar made by Section 80P(4). The Respondent thus disallowed the entire claim of ₹28,73,630 and added it back to the income of the Appellant under the order dated 19 September 2022, passed under Section 143(3) read with Section 144B.

Thus, aggrieved by this, the Appellant filed an appeal before the Hon’ble Tribunal.

ISSUES BEFORE THE HON’BLE TRIBUNAL

• Whether interest income earned by a co-operative housing society from fixed deposits and savings accounts in co-operative banks qualifies for deduction under Section 80P(2)(d) of the Income Tax Act, 1961?
• Whether co-operative banks, though excluded from claiming deduction under Section 80P by virtue of sub-section (4), can still be treated as “co-operative societies” for the purpose of Section 80P(2)(d)?

CONTENTIONS OF THE PARTIES

The Appellant complained about the order of assessment and went to the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre, Delhi. The appeal, though, was rejected, and the appellate authority agreed with the Respondent’s interpretation of Section 80P(4). The Appellant subsequently appealed before the Income Tax Appellate Tribunal against the legality of the disallowance.

The main argument was whether interest accruing on investments in co-operative banks, which are statutorily defined as co-operative societies under Section 2(19), could be disallowed simply on the ground that such banks are debarred from claiming deductions under Section 80P by virtue of sub-section (4).

DECISION AND FINDINGS

Section 80P(2)(d) provides a deduction for the interest or dividends a co-operative society earns from its investments in another co-operative society.

The Tribunal elucidated that in the context of this provision, two conditions have to be met:

1. The income should be in the form of dividend or interest; and
2. It must be obtained from investments with another co-operative society.

The statutory definition in Section 2(19) of the Act is definite that co-operative banks fall under the category of co-operative societies. Therefore, so long as the interest receipts arise from investments with an entity that is a co-operative society, the deduction under Section 80P(2)(d) has to be granted.

The Tribunal also considered the extent and impact of Section 80P(4), brought in by the Finance Act, 2006. Although this sub-section denies co-operative banks deductions from Section 80P, it does not change the legal nature of co-operative banks as co-operative societies within the meaning of Section 80P(2)(d). It only excludes those claiming deductions in their own rights and not income earned from them by other qualifying co-operative societies.

To support its conclusion, the Tribunal relied on the decision of the Mumbai Bench of the Income Tax Appellate Tribunal in Pathare Prabhu Co-operative Housing Society v. ITO [(2023) 202 ITD 464 (Mum)], wherein it had ruled over a similar issue. There also, a co-operative housing society had invested excess funds in co-operative banks in terms of state co-operative laws and was considered eligible for deduction under Section 80P(2)(d). The Tribunal underlined that investment in co-operative banks is not just allowed but frequently statutorily required by state co-operative law like Section 70 of the Maharashtra Co-operative Societies Act, 1960.

Additionally, the Tribunal cited Kaliandas Udyog Bhavan Premises Co-op Society Ltd. v. ITO [ITA No. 6547/Mum./2017], in which it was settled that notwithstanding insertion of Section 80P(4), interest accrued by co-operative societies on co-operative banks still remains deductible under Section 80P(2)(d).

The Tribunal also acknowledged the contrary rulings of the Hon’ble Karnataka High Court, such as in the case of Totagars Co-operative Sales Society, 395 ITR 611. However, invoking the principle laid down by the Supreme Court in CIT v. Vegetable Products Ltd. [(1973) 88 ITR 192 (SC)], it preferred the interpretation that favoured the assessee, especially in situations where more than one reasonable view was possible.

Having considered the statutory provisions and binding precedents, the Tribunal held that the interest income received by Laburnum Mahindra Gardens Co-operative Housing Society on fixed deposits and savings accounts held with co-operative banks is liable for deduction under Section 80P(2)(d). The AO was instructed to grant the deduction accordingly, and the order of the CIT(A) was reversed.

On the question of interest leviable under Section 234B, the Tribunal ruled that it was consequential and need not be separately adjudicated. On initiation of penalty under Section 270A, the Tribunal considered the ground premature and refused to entertain it at this stage.

Therefore, the appeal was partly granted, relieving the Appellant on the principal issue of deduction.

AMLEGALS REMARKS

The decision in this case provides a necessary judicial reminder of the legal principle that co-operative banks, while brought within exclusion contained in Section 80P(4) for availing deductions in their own assessment, still maintain their nature as co-operative societies for purposes of investment made therein by other co-operative societies.

This ruling is very important for co-operative housing societies that are frequently required under state co-operative acts to invest surplus funds in co-operative banks. The Tribunal correctly recognized the policy rationale behind Section 80P(2)(d)—to enable co-operative entities not to bear the burden of tax when their profits arise from mutual investment within the co-operative framework.

Also, the Tribunal’s strictness to principles of beneficial interpretation, particularly in the face of conflicting opinions of various High Courts, upholds taxpayer confidence and maintains uniformity in judicial thought.

From a compliance standpoint, the order makes it clear that co-operative societies can still avail themselves of the deduction of interest income accruing from investments made in co-operative banks if such banks are properly registered under applicable Co-operative Societies Acts. However, the societies should keep proper records and ensure that such investments are under the state regulatory conditions.

Co-operative house-building societies will scrutinize their investment portfolios and legal categorizations of counterparties on claiming deductions under Section 80P(2)(d). This judgment is a strong defence in litigation and reiterates the grant of deductions in interest cases from co-operative banks.

Finally, the Income Tax Appellate Tribunal has aptly interpreted the harmonious meaning of the beneficial provisions under the Income Tax Act, upholding the fiscal independence of co-operative societies and affirming judicial clarity on this much-litigated topic.

~Team AMLEGALS (Assisted by Abhijeet Patra)

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