2024 (11) TMI 850 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income from investments treated as 'Business Income' or 'Income from Other Sources ' - HELD THAT - After the decision of Hon'ble Apex Court in the case of the Mavilayi Service Cooperative Bank Ltd. Ors. 2021 (1) TMI 488 - SUPREME COURT AO's case does not stand, as inclined to agree with its claim that being primary agricultural credit cooperative society registered and operating under the provisions of the Kerala Co-operative Societies Act, 1969, it is eligible for deduction u/s 80P of the Act. Also decided in Peroorkada Service Co-Operative Bank Ltd. 2021 (12) TMI 1084 - KERALA HIGH COURT interest earned from investment of surplus funds to be assessable as 'income from other sources and not as 'profit and gains of business. Further, the Hon'ble court has held the interest earned from Co-operative banks to be eligible for deduction u/s 80P(2)(d) holding the co-operative banks to be co-operative societies for the purposes of section 80P(2)(d). However, Hon'ble courts has held interest earned from treasury/commercial banks to be not eligible for deduction under section 80P as it is neither covered under section 80P(2)(a)(i) nor under section 80P(2)(d). To sum up, even though such interest and dividends as received from entities registered with Cooperative Societies Act is income from other sources, it is eligible for deduction u/s 80P(2)(d) of the Act. DR vehemently quotes Totagars Cooperative Sales Society Ltd. 2010 (2) TMI 3 - SUPREME COURT ; CIT vs. Totagars Cooperative Sale Society 2017 (1) TMI 1100 - KARNATAKA HIGH COURT that the assessee s impugned interest income is not eligible for sec.80P(2)(d) deduction. He could hardly dispute that learned CIT(A)-NFAC has already considered the catena of case law (supra) whilst deciding the instant issue in assessee s favour. That being the case, we did not find any substance in the Revenue s instant sole substantive grievance - Decided in favour of assessee.

Summary

Issues Involved:

1. Allowability of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Classification of interest income from investments as 'Business Income' or 'Income from Other Sources' and its eligibility for deduction under Section 80P(2)(d).

Issue-wise Detailed Analysis:

1. Allowability of Deduction under Section 80P(2)(a)(i):

The primary issue in these appeals is whether the assessee, a cooperative society, is entitled to a deduction under Section 80P(2)(a)(i) of the Income Tax Act for the interest income earned from investments in cooperative banks. The CIT(A)-NFAC allowed the deduction, relying on the Supreme Court's decision in the case of Mavilayi Service Cooperative Bank Ltd., which emphasized that Section 80P is a benevolent provision meant to encourage the cooperative sector. The judgment highlighted that the provision should be read liberally and reasonably, favoring the assessee in case of ambiguity. The Supreme Court clarified that Section 80P(4) excludes only cooperative banks with an RBI license from the deduction, not cooperative societies. The Bombay High Court, in a similar case, followed this interpretation, affirming that providing credit facilities to members does not disqualify a society from claiming benefits under Section 80P, even if it accepts deposits from non-members. Consequently, the assessee, being a primary agricultural credit cooperative society, is eligible for the deduction under Section 80P(2)(a)(i).

2. Classification of Interest Income and Eligibility under Section 80P(2)(d):

The second issue concerns whether interest income from investments should be classified as 'Business Income' or 'Income from Other Sources' and whether it qualifies for deduction under Section 80P(2)(d). The Kerala High Court, in PCIT v. Peroorkada Service Co-Operative Bank Ltd., held that interest earned from surplus funds invested is assessable as 'Income from Other Sources' rather than 'Profits and Gains of Business.' However, interest from cooperative banks is eligible for deduction under Section 80P(2)(d), as cooperative banks are considered cooperative societies for this purpose. Interest from treasury/commercial banks does not qualify for deduction under Section 80P, as it is not covered by Section 80P(2)(a)(i) or Section 80P(2)(d). The Supreme Court in M/s. The Totgar's Co-operative Sale Society Limited distinguished between interest earned from members and non-members, concluding that interest from non-members is not eligible for deduction under Section 80P(2)(a)(i). The court emphasized that interest income from investments not immediately required for business purposes falls under Section 56 and is not attributable to the society's core activities. Therefore, interest income from cooperative societies is eligible for deduction under Section 80P(2)(d), provided the entities are registered under the Cooperative Societies Act.

Conclusion:

The Revenue's appeals were dismissed, affirming the CIT(A)-NFAC's decision to allow the deduction under Section 80P(2)(a)(i) for the assessee. The assessee's cross-objections were allowed for statistical purposes, directing the Assessing Officer to compute deductions on a netting basis, considering the Supreme Court's guidance in Totgar's Co-operative Sale Society Ltd. The order was pronounced in open court, with directions for the Assessing Officer to verify the eligibility of interest income for deduction under Section 80P(2)(d) based on the cooperative society's registration status.