2025 (4) TMI 1483 - AT - Income Tax

Disallowance u/s 80P(2)(d) - interest income from Co-operative banks - HELD THAT - It is pertinent to note that only the Sabarkantha District Central Co-operative Bank Ltd. is a registered co-operative society and therefore the component which is an interest received on deposits are allowable as deduction u/s. 80P(2)(d). As regards the Dena Gujarat Gramin Bank AR could not point out whether this was registered cooperative society or not and after taking into account the submission of the AR. It is found that the said Dena Gujarat Gramin Bank is not co-operative society question of the interest received from the said Dena Gujarat Gramin Bank will not be eligible for deduction u/s. 80P(2)(d). Appeal of the assessee is partly allowed.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

1. Whether the disallowance of deduction claimed under section 80P(2)(d) of the Income Tax Act, 1961, in respect of interest income earned from certain cooperative banks, was justified and lawful.

2. Whether the assessment order passed under section 250 and the subsequent confirmation of disallowance by the National Faceless Appeal Centre (NFAC) complied with the principles of natural justice and the mandatory procedural requirements under section 144B read with the National Faceless Assessment Scheme.

3. Whether the interest income received from cooperative banks that are registered societies under the Cooperative Societies Act qualifies for deduction under section 80P(2)(d) of the Income Tax Act.

4. Whether the invocation of section 80P(4) by the Assessing Officer (AO) to disallow the deduction was justified when the cooperative banks from which interest income was received were themselves cooperative societies under the Act.

Issue-wise Detailed Analysis

Issue 1: Legality and validity of disallowance of deduction under section 80P(2)(d) in respect of interest income from cooperative banks

Relevant Legal Framework and Precedents: Section 80P(2)(d) of the Income Tax Act provides deduction to cooperative societies in respect of income by way of interest on deposits with other cooperative societies. The judicial precedents cited include the Supreme Court decisions in Totagarh Co-operative Sale Society Ltd. vs. ITO and Cooperative Sales Society vs. PCIT, which dealt with the scope of deduction under section 80P, particularly emphasizing the nature of the institution with which deposits are made.

Court's Interpretation and Reasoning: The Court examined whether the interest income received by the assessee from Dena Gujarat Gramin Bank and Sabarkantha District Central Cooperative Bank Ltd. qualified for deduction under section 80P(2)(d). It was noted that the Sabarkantha District Central Cooperative Bank Ltd. was a registered cooperative society under the Cooperative Societies Act, thereby qualifying for the deduction. However, the Dena Gujarat Gramin Bank was not established as a registered cooperative society, and hence the interest income from this bank did not qualify for deduction.

Key Evidence and Findings: The assessee provided registration details (SE 2501) indicating registration under the Cooperative Societies Act. Ledger accounts showing interest income from the two banks were submitted. The Tribunal relied on the registration status of the banks to determine eligibility for deduction.

Application of Law to Facts: The Court applied the statutory provision of section 80P(2)(d) and the definition of cooperative society under the Cooperative Societies Act to the facts. The deduction was allowed only in respect of interest income from Sabarkantha District Central Cooperative Bank Ltd., a registered cooperative society. The interest income from Dena Gujarat Gramin Bank was disallowed as it was not a registered cooperative society.

Treatment of Competing Arguments: The assessee argued that the disallowance was contrary to earlier orders and recent case laws, including a Tribunal decision in Saco Bank Staff Co-op. Credit Society Ltd. vs. ITO, allowing such deduction for interest income from Sabarkantha District Cooperative Bank. The Revenue relied on the assessment and CIT(A) orders confirming disallowance. The Court found merit in the assessee's argument with respect to Sabarkantha District Central Cooperative Bank but rejected it regarding Dena Gujarat Gramin Bank.

Conclusions: The Court partially allowed the appeal by permitting deduction under section 80P(2)(d) for interest income from Sabarkantha District Central Cooperative Bank Ltd. and disallowing deduction for interest income from Dena Gujarat Gramin Bank.

Issue 2: Compliance with principles of natural justice and procedural mandates under section 144B and National Faceless Assessment Scheme

Relevant Legal Framework: Section 144B and the National Faceless Assessment Scheme lay down mandatory procedures for assessment and appeal processes, ensuring transparency and adherence to principles of natural justice.

Court's Interpretation and Reasoning: The assessee contended that the order passed by the NFAC was "wholly illegal, unlawful and against the principles of natural justice" and that mandatory procedures were not followed. However, the Court did not find any substantive evidence or material to conclude that procedural lapses occurred or that the principles of natural justice were violated.

Key Evidence and Findings: The record indicated that notices under sections 148, 142(1), and 143(2) were duly issued, and the assessee submitted written submissions and returns in compliance. The NFAC considered the submissions and relevant case laws before confirming the disallowance.

Application of Law to Facts: The Court noted that the procedural requirements under the National Faceless Assessment Scheme were complied with, and the assessee was given adequate opportunity to present its case.

Treatment of Competing Arguments: The assessee's submissions alleging non-consideration of written submissions and past records were examined but found unsubstantiated. The Court upheld the NFAC's order on procedural grounds.

Conclusions: The Court rejected the contention of violation of natural justice and procedural irregularities, affirming the validity of the assessment and appeal orders.

Issue 3: Applicability of section 80P(4) invoked by the Assessing Officer

Relevant Legal Framework: Section 80P(4) provides conditions under which the deduction under section 80P may be disallowed, particularly when the cooperative society is not registered or does not carry out specified activities.

Court's Interpretation and Reasoning: The AO invoked section 80P(4) to disallow deduction on the ground that interest income was received from banks not qualifying as cooperative societies. The Court examined the registration status of the banks and found that Sabarkantha District Central Cooperative Bank Ltd. was registered, thus not attracting section 80P(4) disallowance for that portion of interest income. However, since Dena Gujarat Gramin Bank was not a registered cooperative society, the invocation of section 80P(4) was justified for the interest income received from it.

Key Evidence and Findings: Registration certificates and ledger accounts were key evidence. The Court relied on these to distinguish between the two banks.

Application of Law to Facts: The Court applied section 80P(4) only to the interest income from the non-registered cooperative bank.

Treatment of Competing Arguments: The assessee argued that both banks were cooperative societies and hence deduction should be allowed. The Court, however, found that only one bank was a registered cooperative society, partially accepting the assessee's argument.

Conclusions: Section 80P(4) was correctly invoked for the interest income from Dena Gujarat Gramin Bank but not for Sabarkantha District Central Cooperative Bank Ltd.

Significant Holdings

"It is pertinent to note that only the Sabarkantha District Central Co-operative Bank Ltd. is a registered co-operative society and therefore the component of Rs. 13,63,775/- which is an interest received on deposits are allowable as deduction u/s. 80P(2)(d) of the Act."

"As regards, the Dena Gujarat Gramin Bank, the ld. A.R. could not point out whether this was registered cooperative society or not and after taking into account the submission of the ld. A.R. it is found that the said Dena Gujarat Gramin Bank is not co-operative society, question of the interest of Rs. 3,07,707/- received from the said Dena Gujarat Gramin Bank will not be eligible for deduction u/s. 80P(2)(d) of the act."

The Court established the principle that for claiming deduction under section 80P(2)(d), the interest income must be received from a cooperative society registered under the relevant Cooperative Societies Act. Mere receipt of interest from an entity styled as a cooperative bank does not suffice unless it is registered as a cooperative society.

The final determination was to partly allow the appeal by deleting the disallowance of deduction in respect of interest income from Sabarkantha District Central Cooperative Bank Ltd. and upholding the disallowance for interest income from Dena Gujarat Gramin Bank.