2022 (10) TMI 834 - AT - Income Tax

Deduction allowable us 80P(2)(d) - deduction in respect of interest from Co-operative banks - As per AO interest income was earned from co-operative bank, which are not co-operative society - HELD THAT - The co-operative banks in which assessee had invested are registered as co-operative societies and therefore we are of the considered view that these banks are co-operative society as per the provisions of section 2(19) of the Act. If Revenue‟s plea is accepted then section 80P(2)(d) of the Act would be rendered completely otiose. We uphold the plea of the assessee and direct the AO to allow deduction under section 80P(2)(d) of the Act to the assessee in respect of interest income earned from investment with co-operative banks, which are registered as co-operative societies under the relevant statute. As a result, grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Denial of deduction under section 80P(2)(d) of the Income Tax Act, 1961 for interest income from co-operative banks.
2. Classification of interest income from co-operative banks as "Income from other sources" instead of business income.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80P(2)(d):

The primary issue in these appeals is the denial of deduction under section 80P(2)(d) of the Income Tax Act, 1961, for interest income received from co-operative banks. The assessee, a co-operative housing society, claimed a deduction for interest income earned from co-operative banks, which was disallowed by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].

The AO disallowed the deduction on the grounds that the co-operative banks from which the interest income was earned were not considered co-operative societies under section 80P of the Act. The AO held that these banks were neither members of the assessee nor co-operative societies, thus the income earned from them could not be allowed as a deduction under section 80P(2)(d).

The CIT(A) upheld the AO's decision, stating that the assessee failed to provide evidence proving that the co-operative banks were co-operative societies. The CIT(A) also relied on the Supreme Court decision in Totgar's Co-operative Sale Society Ltd vs ITO, which held that interest income not earned out of business operations is not eligible for deduction under section 80P.

2. Classification of Interest Income:

The CIT(A) and AO classified the interest income from co-operative banks as "Income from other sources" rather than business income. The CIT(A) cited the Supreme Court's decision in Totgar's Co-operative Sale Society Ltd, emphasizing that the income eligible for deduction under section 80P must constitute operational income and not other income.

Tribunal's Findings:

The Tribunal analyzed the provisions of section 80P(2)(d) and section 2(19) of the Income Tax Act. It concluded that for the purpose of section 80P(2)(d), two conditions must be satisfied: (i) the income by way of interest or dividend must be earned by a co-operative society from its investments, and (ii) such investments must be with another co-operative society.

The Tribunal found that the co-operative banks from which the assessee earned interest income were indeed registered as co-operative societies under the Multi-State Co-operative Societies Act, 2002. Therefore, the interest income earned from these banks qualifies for deduction under section 80P(2)(d).

The Tribunal also noted that the decision in Totgar's Co-operative Sale Society Ltd was not applicable in this case, as it dealt with section 80P(2)(a)(i) and not section 80P(2)(d). The Tribunal emphasized that the lower authorities' reliance on this decision was misplaced.

Furthermore, the Tribunal cited a coordinate bench decision in Kaliandas Udyog Bhavan Premises Co-op Society Ltd vs ITO, which supported the view that interest income derived from investments with co-operative banks qualifies for deduction under section 80P(2)(d).

Conclusion:

The Tribunal directed the AO to allow the deduction under section 80P(2)(d) for the interest income earned from investments with co-operative banks, which are registered as co-operative societies. Consequently, the appeals for the assessment years 2014-15, 2016-17, 2017-18, and 2018-19 were allowed.

Summary:

The Tribunal concluded that the interest income earned by the assessee from co-operative banks qualifies for deduction under section 80P(2)(d) of the Income Tax Act, 1961. The Tribunal directed the AO to allow the deduction, thereby allowing the appeals for all the assessment years in question. The Tribunal found that the lower authorities' reliance on the Supreme Court decision in Totgar's Co-operative Sale Society Ltd was misplaced, as it did not pertain to section 80P(2)(d).