2022 (10) TMI 1161 - AT - Income Tax

Deduction u/s 80P - AO assessed the interest earned by the assessee from such investments in District Cooperative Bank and Treasury deposits under the head Income from Other Sources and resultantly disallowing the claim of deduction u/s 80P - HELD THAT - As decided in M/S. THE KIZHATHADIYOOR SERVICE CO-OPERATIVE BANK LTD case 2016 (7) TMI 1405 - ITAT COCHIN the assessee is a cooperative Bank. The investment in treasury/banks and earning interest on the same is part of the banking activity of the assessee s cooperative bank. Therefore, the said income is eligible for deduction u/s 80P(2)(a)(i) of the Act. Therefore, the Income Tax Authorities were not justified in treating interest income received by the assessee as income from other source and denying the benefit of section 80P(2). The lower authorities have no benefit of judgement of Hon ble Apex Court in the case of The Mavilayi Service Co-operative Bank Ltd. Ors. 2021 (1) TMI 488 - SUPREME COURT we are of the view that in the interest of justice and equity the issue of deduction u/s 80P(2)(a)(i) of the Act needs to be examined de novo in the light of the judgement of the Hon ble Apex Court, referred supra. Therefore, the issue raised on merits is restored to the files of the AO.Appeals filed by the assessee are partly allowed for statistical purposes.

Summary

Issues Involved:
1. Eligibility of the appellant, a co-operative society, for deduction under section 80P of the Income Tax Act, 1961.
2. Classification of interest income earned from investments in District Co-operative Bank and Treasury deposits.
3. Applicability of the Supreme Court judgment in the case of Mavilayil Service Co-op Bank on the interest earned from deposits with co-operative banks.
4. Determination of whether investments made by co-operative societies with co-operative banks form part of banking activities and are eligible for deduction under section 80P(2)(a)(i).

Detailed Analysis:

1. Eligibility for Deduction under Section 80P:
The appellant, a primary Co-operative Society, claimed a deduction under section 80P of the Income Tax Act, 1961, amounting to Rs. 68,62,829/- for the assessment year 2016-17. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed this deduction, interpreting Explanation (b) to sub-section (4) of section 80P to mean that the appellant, despite being a co-operative society, was not eligible for the deduction.

2. Classification of Interest Income:
The AO observed that the appellant earned interest income of Rs. 45,73,933/- from District Cooperative Bank and Rs. 4,27,103/- from Treasury deposits, totaling Rs. 50,01,036/-. The AO classified this income under "Income from Other Sources" instead of "Business Income," thereby disallowing the deduction under section 80P. The appellant contended that this interest income should be classified as "Business Income" and be eligible for deduction under section 80P.

3. Applicability of Supreme Court Judgment:
The Tribunal referred to the case of The Kizhathadiyoor Service Coop Bank Ltd. Vs. ITO, where it was held that interest income received from other co-operative societies is eligible for deduction under section 80P(2)(d) and should not be assessed as "Income from Other Sources." The Tribunal also cited the Cochin Bench's decision in Muttom Service Cooperative Bank Ltd, which distinguished the Supreme Court's judgment in Totgar's Cooperative Sale Society Ltd, stating that the judgment was not applicable to co-operative societies engaged in banking.

4. Investments and Banking Activities:
The Tribunal noted that the appellant is a co-operative bank, and investments in treasury/banks and the interest earned therefrom are part of its banking activities. Therefore, such income is eligible for deduction under section 80P(2)(a)(i). The Tribunal also cited the Hon'ble Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd. & Others Vs. CIT, which emphasized that section 80P should be read liberally in favor of the assessee and that co-operative banks specifically excluded under section 80P(4) are those possessing a license from the RBI.

Conclusion:
The Tribunal concluded that the lower authorities did not have the benefit of the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd. & Ors. vs. CIT. Therefore, the issue of deduction under section 80P(2)(a)(i) needs to be re-examined in light of the Supreme Court's judgment. The Tribunal restored the issue to the files of the AO for a fresh decision in accordance with the law, after providing a reasonable opportunity of hearing to the appellant.

Final Order:
Both appeals filed by the appellant were partly allowed for statistical purposes, and the AO was directed to re-examine the issue of deduction under section 80P(2)(a)(i) de novo, considering the Supreme Court's judgment. The order was pronounced in the open court on 26th October 2022.