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Facts
The assessee, a cooperative society, received interest income from cooperative banks. The Assessing Officer disallowed the deduction claimed under Section 80P(2)(d) of the Income Tax Act, which was upheld by the CIT(A) based on Section 80P(4).
Held
The Tribunal held that the interest income derived by a cooperative society from investments in other cooperative banks is eligible for deduction under Section 80P(2)(d), irrespective of Section 80P(4) which applies to cooperative banks functioning at par with commercial banks.
Key Issues
Whether interest income earned by a cooperative society from investments in cooperative banks is eligible for deduction under Section 80P(2)(d) of the Income Tax Act, even after the insertion of Section 80P(4)?
Sections Cited
80P(2)(d), 143(1), 80P(4), 56, 2(19), 2(24)(i), 80P(2)(a)(i), 80P(2)(a)(iii)
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Income Tax Appellate Tribunal, “J (SMC
order : 25.06.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
1. 1. The present appeal preferred by the Assessee is directed against the order dated 27/11/2024, passed by the Additional/Joint Commissioner of Income Tax (Appeal) [hereinafter referred to as the ‘CIT(A)’], whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Intimation Order, dated 30/09/2022, passed under Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the Assessment Year 2021-2022.
2. The Assessee has raised following grounds of appeal : “Disallowance of Rs.3,15,256/- u/s.80P(2)(d) of the Act being Interest Income derived from Cooperative Banks:
1. The Learned CIT(Appeals) erred in upholding that the intimation u/s.143(1) dated 30/09/2022 disallowing a Assessment Year 2021-2022 sum of Rs.3,15,256/- being Interest Income derived from Co-operative Banks without appreciating that Cooperative Banks registered under Maharashtra Cooperative Societies Act, 1960 are Cooperative Society and as such Interest/dividend Income derived by the Appellant is eligible for deduction U/s.80P(2)(d) of the Act and therefore disallowance ought to be deleted.
2. The ld. CIT(Appeals) while dismissing the appeal has placed reliance in order passed u/s.250 dated 27.11.2024 on the provision of section 80P(2)(d) of the Act and circular No.133/2007 dated 9.5.2007 issued by Central Board of Direct Taxes wherein it was clarified that deduction u/s.80P of the Act shall not allowable to any Cooperative Bank other than Agricultural Credit Society or Primary Co-operative Agricultural and Rural Development Bank. Further, as per the memorandum, explaining the provisions of the Finance Bill 2006 as per which co- operative banks shall not be held co-operative society, the same is reproduced below: The co-operative banks are functioning at par with the other commercial banks, which do not enjoy any tax benefit. It is, therefore proposed to amend section 80P by inserting a new sub Section (4) so as to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than primary co-operative and rural development bank.
3. The learned Asstt. Director of Income Tax CPC Bengaluru CPC vide intimation u/s.143(1) dated 30.09.2022 has erred is disallowing the deduction Rs.3,15,256/- claimed u/s.80P(2)(d) on income from investments with Co- operative banks without giving any reasons for this disallowance”
3. The relevant facts in brief are that while processing return of income for the Assessment Year 2021-2022, deduction claimed by the Assessee under Section 80P(2)(d) of the Act in respect of the interest income of INR 3,15,256/- received by the Assessee, a co-operative society, from co-operative banks (constituted as a co-operative society) was denied vide Intimation, dated 30/09/2022, issued under Section 143(1) of the Act. The CIT(A) confirmed the disallowance by placing reliance on the provisions contained in Section 80P(4) of the 2 Assessment Year 2021-2022 Act. Being aggrieved, the Assessee has now preferred the present appeal before the Tribunal challenging disallowance on the contending the Assessee was entitled to claim deduction of INR.3,15,256/- under Section 80P(2)(d) of the Act.
We have heard both the sides on the issue and have perused the material on record.
5. The appeal preferred by the Assessee is delayed by 101 days. In the application seeking condonation of delay it has been explained that the impugned order was neither received by the chairman on his email address stated in memorandum of appeal filed before the Ld. CIT(A) in Form 35 nor was the hard copy of the impugned order received by the Assessee. The Assessee is a co-operative society managed by the office bearers providing honorary services and did not have any supporting staff. Therefore, the order passed by the Ld. CIT(A) could not be tracked and the appeal was filed soon after getting knowledge of the impugned order having been passed. The delay in filing appeal was not deliberate and for reasons beyond control. We have no reasons to doubt the aforesaid explanation offered by the Assessee. In the case of Collector of Land Acquisition Vs. Mst. Katiji & others AIR 1987 1353 (SC) the Hon’ble Supreme Court has, while dealing with the issue of condonation of delay, emphasized that substantial justice should prevail over technical considerations. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. In the present the Appellant has provided sufficient explanation for delay in filing the appeal before the Tribunal. In our view, no benefit would have accrued to the Appellant by delaying filing of appeal. When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred.
3 Assessment Year 2021-2022 Therefore, delay of 101 days in filing the present appeal is condoned. Accordingly, we proceed to examine the grounds raised in the present appeal.
We have considered the rival submissions.
In the present case it is not disputed by the Revenue that the Assessee is a co-operative society and it has received interest income from co-operative banks. The Assessee has placed on record Annual Information Statement (AIS) according to which the Assessee had received aforesaid interest from the following 2 co-operative banks –
(a) SVC Co-Operative Bank Limited (INR.1,57,107/-) and (b) The Maharashtra State Co-Operative Bank Ltd. (INR.1,58,144/-). The Assessee has claimed that it is entitled to deduction under Section 80P(2)(d) of the Act in respect of the aforesaid interest income. The stand taken by the Revenue is that Assessee’s claim cannot be accepted since (a) interest income is not in the nature of ‘Profits & Gains of Business of Profession’ and (b) interest income has been received from a co-operative bank and therefore, the benefit of Section 80P cannot be granted to the Assessee as per the provisions contained in Section 80P(4) of the Act. Thus, on merits, the solitary issue that arises for consideration is whether in the facts and circumstances of the present case the Assessee in entitled to claim deduction under Section 80P(2)(d) of the Act in respect of interest/dividend income of INR.3,15,256/- received from co- operative banks.
In our view, the issue raised is no longer res-integra and has been examined in various cases. We note that the Hon’ble Supreme Court had, while interpreting the provisions of Section 80P(2)(a)(i) of the Act in the case of Totgars Cooperative Sale Society Ltd. vs. ITO
(2010) 322 ITR 283 (SC), taken note of the fact the expression ‘profits and gains of business’ has been used in Section 80P(2)(a)(i) of the Act and had made following observations:
4 Assessment Year 2021-2022 “10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is - whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of "Income from other sources", hence, such interest income would be taxable under section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The headnote to section 80P indicates that the said section deals with deductions in respect of income of co-operative Societies. Section 80P(1), inter alia, states that where the gross total income of a co-operative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in section 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under section 2(24)( i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in section 80P(2) of the Act. In the present case, as stated above, assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under section 80P(2)(a) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term 5 Assessment Year 2021-2022 deposits/securities. Such an amount, which was retained by the assessee-Society, was a liability and it was shown in the balance-sheet on the liability-side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Act or in section 80P(2)(a)( iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under section 56 of the Act.
11. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by section 56 of the Act, even then, the assessee-society is entitled to the benefit of section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission…….” (emphasis supplied)
9. The above judgment was rendered in the context of Section 80P(2)(a) of the Act. We note that unlike Section 80P(2)(a) of the Act wherein expression ‘profits and gains of business’ has been used, Section 80P(2)(d) of the Act uses the expression ‘any income by way of interest or dividend’. For the purpose of granting benefit of deduction under Section 80P(2)(d) of the Act what is relevant is that interest/dividend should have been derived by a co-operative society from investment in another co-operative society (which may be functioning as a co-operative bank). For the purpose of granting benefit of deduction under Section 80P(2)(d) of the Act that fact that interest/dividend income is in the nature of ‘profits and gains’ or ‘income from other sources’ is not relevant. In this regard, it would be pertinent to refer to the judgment of the Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj) wherein it has been held as under:
14. Thus, in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co- operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from 6 Assessment Year 2021-2022 investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act.
Similar view was taken by the Hon’ble Karnataka High Court in the case of Pr. CIT Vs. Totagars co-operative Sale Society [2017] 392 ITR 74 (Karnataka) wherein it was held as under: “10. Admittedly, the interest which the assessee respondent had earned was from a Co-operative Society Bank. Therefore, according to Sec. 80P(2)(d) of the I.T. Act, the said amount of interest earned from a Co-operative Society Bank would be deductible from the gross income of the Co-operative Society in order to assess its total income. Therefore, the Assessing Officer was not justified in denying the said deduction to the assessee respondent.
11. The learned counsel has relied on the case of Totgars Co- operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC). However, the said case dealt with the interpretation, and the deduction, which would be applicable under Section 80P(2)(a)(i) of the I.T. Act. For, in the present case the interpretation that is required is of Section 80P(2)(d) of the I.T. Act and not Section 80P(2)(a)(i) of the I.T. Act. Therefore, the said judgment is inapplicable to the present case. Thus, neither of the two substantial questions of law canvassed by the learned counsel for the Revenue even arise in the present case.”
We find that the Mumbai Bench of the Tribunal had, in the case of Kaliandas Udyog Bhavan Premises vs. ITO [ITA No.6547/Mum/2017, Dated 24/04/2018], after taking into consideration aforesaid judgments, concluded that interest/dividend income received by a co-operative society from investment made in another co-operative bank (which is constituted as a co-operative society) shall be eligible for deduction under Section 80P(2)(d) of the Act. The relevant extract of the decision of the Tribunal reads as under:
“7. We have deliberated at length on the issue under consideration and are unable to persuade ourselves to be in agreement with the view taken by the lower authorities. Before proceeding further we may herein reproduce the relevant extract of the said statutory provision, viz Sec. 80P(2)(d), as the same would have a strong bearing on the adjudication of the issue before us. “80P(2)(d) (1) Where in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in 7 Assessment Year 2021-2022 accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following namely:- (a)………………………………………………………………. (b)………………………………………………………………. (c)……………………………………………………………… (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income” Thus, from a perusal of the aforesaid Sec. 80P(2)(d) it can safely be gathered that income by way of interest income derived by an assessee cooperative society from its investments held with any other cooperative society, shall be deducted in computing the total income of the assessee. We may herein observe, that what is relevant for claim of deduction under Sec. 80P(2)(d) is that the interest income should have been derived from the investments made by the assessee co- operative society with any other cooperative society. We though are in agreement with the observations of the lower authorities that with the insertion of Sub-section (4) of Sec. 80P, vide the Finance Act, 2006, with effect from 01.04.2007, the provisions of Sec. 80P would no more be applicable in relation to any co- operative bank, other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, but however, are unable to subscribe to their view that the same shall also jeopardise the claim of deduction of a co-operative society under Sec. 80P(2)(d) in respect of the interest income on their investments parked with a co-operative bank. We have given a thoughtful consideration to the issue before us and are of the considered view that as long as it is proved that the interest income is being derived by a co-operative society from its investments made with any other co-operative society, the claim of deduction under the aforesaid statutory provision, viz. Sec. 80P(2)(d) would be duly available. We may herein observe that the term “co-operative society‟ had been defined under Sec. 2(19) of the Act, as under: “(19) “Co-operative society” means a cooperative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any state for the registration of cooperative societies;” We are of the considered view, that though the co-operative bank pursuant to the insertion of Sub-section (4) of Sec. 80P would no more be entitled for claim of deduction under Sec. 80P of the Act, but however, as a co-operative bank continues to be 8 Assessment Year 2021-2022 a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being enforced in any state for the registration of cooperative societies, therefore, the interest income derived by a co-operative society from its investments held with a co- operative bank, would be entitled for claim of deduction under Sec.80P(2)(d) of the Act.
8. We shall now advert to the judicial pronouncements that had been relied upon by the authorized representatives for both the parties and the lower authorities. We find that the issue that a co-operative society would be entitled for claim of deduction under Sec. 80P(2)(d) for the interest income derived from its investments held with a cooperative bank is covered in favour of the assessee in the following cases: (i) Land and Cooperative Housing Society Ltd. Vs. ITO (2017) 46 CCH 32 (Mum) (ii) M/s C. Green Cooperative Housing and Society Ltd. Vs. ITO21(3)(2), Mumbai (ITA No. 1343/Mum/2017, dated 31.03.2017 (iii) Marvwanjee Cama Park Cooperative Housing Society Ltd. Vs. ITORange-20(2)(2), Mumbai (ITA No. 6139/Mum/2014, dated 27.09.2017. We further find that the Hon'ble High Court of Karnataka in the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn) and Hon’ble High Court of Gujarat in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj), had also held that the interest income earned by the assessee on its investments held with a co-operative bank would be eligible for claim of deduction under Sec. 80P(2)(d) of the Act. Still further, we find that the CBDT Circular No. 14, dated 28.12.2006, as had been relied upon by the ld. A.R, also makes it clear beyond any scope of doubt, that the purpose behind enactment of sub-section (4) of Sec. 80P was to provide that the cooperative banks which are functioning at par with other banks would no more be entitled for claim of deduction under Sec. 80P(4) of the Act. We are of the considered view that the reliance placed by the CIT(A) on the judgment of the Hon’ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd. vs. ITO (2010) 322 ITR 283(S.C.) being distinguishable on facts, thus, had wrongly been relied upon by him. The adjudication by the Hon’ble Apex Court in the aforesaid case was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a co-operative society towards deduction under Sec. 80P(2)(d) on the interest income on the investments parked with a co-operative bank. We further find that the reliance place by the ld. D.R on the order of the ITAT “F” bench, Mumbai in the case of M/s Vaibhav Cooperative Credit Society Vs. ITO-15(3)(4) (ITA No. 5819/Mum/2014, dated 17.03.2017 is also distinguishable on facts. We find that the said order was passed 9 Assessment Year 2021-2022 by the Tribunal in context of adjudication of the entitlement of the assessee co-operative bank towards claim of deduction under Sec.80P(2)(a)(i) of the Act. We find that it was in the backdrop of the aforesaid facts that the Tribunal after carrying out a conjoint reading of Sec, 80P(2)(a)(i) r.w. Sec. 80P(4) had adjudicated the issue before them. We are afraid that the reliance placed by the ld. D.R on the aforesaid order of the Tribunal being distinguishable on facts, thus, would be of no assistance for adjudication of the issue before us. Still further, the reliance placed by the Ld. D.R on the order of the ITAT ‘SMC’ Bench, Mumbai in the case of Shri Sai Datta Co-operative Credit Society Ltd. Vs. ITO (ITA No. 2379/Mum/2015, dated 15.01.2016, would also not be of any assistance, for the reason that in the said matter the Tribunal had set aside the issue to the file of the assessing officer for fresh examination, That as regards the reliance placed by the ld. D.R on the judgment of the Hon'ble High Court of Karnataka in the case of Pr. CIT Vs. Totagars co-operative Sale Society (2017) 395 ITR 611 (Karn), the High Court had concluded that a co-operative society would not be entitled to claim of deduction under Section 80P(2)(d). We however find that as held by the Hon'ble High Court of Bombay in the case of K. Subramanian and Anr. Vs. Siemens India Ltd. and Anr (1985) 156 ITR 11 (Bom), where there is a conflict between the decisions of non- jurisdictional High Court’s, then a view which is in favour of the assessee is to be preferred as against that taken against him. Thus, taking support from the aforesaid judicial pronouncement of the Hon’ble High Court of jurisdiction, we respectfully follow the view taken by the Hon'ble High Court of Karnataka in the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn) and Hon’ble High Court of Gujarat in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj), wherein it was observed that the interest income earned by a co-operative society on its investments held with a co operative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act.
We thus in the backdrop of our aforesaid observations are unable to persuade ourselves to be in agreement with the view taken by the lower authorities that the assessee would not be entitled for claim of deduction under Sec. 80P(2)(d), in respect of the interest income on the investments made with the co-operative bank. We thus set aside the order of the lower authorities and conclude that the interest income of Rs.27,48,553/- earned by the assessee on the investments held with the co-operative bank would be entitled for claim of deduction under Sec. 80P(2)(d).” (Emphasis supplied) 12. Thus, it is clear that a co-operative society would be eligible to claim deduction under Section 80P(2)(d) of the Act in respect of interest/dividend income received from a co-operative bank (which is constituted as a co-operative society), and this position continues to hold good even after insertion of Section 80P(4) of the Act.
10 Assessment Year 2021-2022 13. In the case of Mavilayi Services Co-operative Bank Limited Vs. CIT, Calicut: [2021] 431 ITR 1 (SC) [12/01/2021], the Hon’ble Supreme Court has held that the limited object of Section 80P(4) of the Act was to exclude the co-operative banks that function at par with other commercial banks (i.e. which lend money to members of the public) from the scope of benefit extended by Section 80P of the Act; and that the provisions of Section 80P(4) of the Act would not be attracted in case of interest/dividend income received by a co- operative society provided such co-operative society receiving dividend/interest income is not holding a banking license issued by Reserve Bank of India to lend money to public. The relevant extract of the aforesaid judgment of the Hon’ble Supreme Court reads as under:
“20. We now come to the judgment of this Court in Citizen Cooperative Society Ltd. (supra). This judgment was concerned with an assessee who was established initially as a mutually aided cooperative credit society, having been registered under section 5 of the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995. As operations of the assessee began to spread over States outside the State of Andhra Pradesh, the assessee got registered under the Multi-State Cooperative Societies Act, 2002 as well. The question that the Court posed to itself was as to whether the appellant was barred from claiming deduction in view of Section 80P(4) of the Income-tax Act - see paragraph 5. After setting out the findings of fact in that case, and the income tax authorities concurrent holding that the society is carrying on banking business and for all practical purposes acts like a co-operative bank, this Court then held as follows: xx xx 21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment: (I) That section 80P of the IT Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; (II)That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any 11 Assessment Year 2021-2022 one or more activities mentioned in sub-section (2) of section 80P must be given by way of deduction; (III) That this Court in Kerala State Cooperative Marketing Federation Ltd. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so - which is not the case with section 80P(2)(a)(i); (V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4) xx xx 26. Applying the aforesaid decisions, it is clear that the ratio decidendi in Citizen Cooperative Society Ltd. (supra) would not depend upon the conclusion arrived at on facts in that case, the case being an authority for what it actually decides in law and not for what may seem to logically follow from it. Thus, the statement of the principles of law applicable to the legal problems disclosed by the facts alone is the binding ratio of the case, which as has been stated hereinabove, is contained in paragraphs 18 to 23 of the judgment. Paragraphs 24 to 26, being the judgment based on the combined effect of the statements of the principle of law applicable to the material facts of the case cannot be described as the ratio decidendi of the judgment. Nor can it be said that it would logically follow from the finding on facts that the assessing officer can go behind the registration of a society and arrive at a conclusion that the society in question is carrying on illegal activities. On this score alone, the Full Bench's understanding of this judgment has to be faulted and is set aside.
However, this does not conclude the issue in the present case. We now turn to the proper interpretation of section 80P of the Income-tax Act. Firstly, the marginal note to section 80P which reads "Deduction in respect of income of co-operative societies" is important, in that it indicates the general "drift" of the provision. This was so held by this Court in K.P. Varghese v. ITO [1981] 7 Taxman 13/131 ITR 597 as follows:
12 Assessment Year 2021-2022 "9. This interpretation of sub-section (2) is strongly supported by the marginal note to Section 52 which reads "Consideration for transfer in cases of understatement". It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins, M.R. in Bushel v. Hammond [1904] 2 KB 563 to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section (vide Bengal Immunity Company Limited v. State of Bihar [1955] 2 SCR 603])."
Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". A co-operative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.
Thirdly, the gross total income must include income that is referred to in sub-section (2).
Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being "engaged in" carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co- operative society must be "engaged in" the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression "engaged in", as has been held in CIT v. Ponni Sugars & Chemicals Ltd. [2008] 174 Taxman 87/306 ITR 392 (SC), would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars & Chemicals Ltd. (supra) held: "20. In order to earn exemption under section 80P(2) a cooperative society must prove that it had engaged itself in carrying on any of the several businesses referred to in sub-section (2). In that connection, it is important to note that under sub-section (2), in the context of cooperative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the Tribunal was required to examine the memorandum of association, the articles of association, the returns of income filed with the Department, the status of business indicated in such returns, etc. This exercise had not been undertaken at all." xx xx 13 Assessment Year 2021-2022 35. Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole.
Coming to the provisions of section 80P(4), it is important to advert to speech of the Finance Minister dated 28-2-2006, which reflects the need for introducing section 80P(4). Shri P. Chidambaram specifically stated: "166. Cooperative Banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income-tax Act. However, I propose to exclude all other cooperative banks from the scope of that section."
Likewise, a Circular dated 28-12-2006, containing explanatory notes on provisions contained in the Finance Act, 2006, is also important, and reads as follows: "Withdrawal of tax benefits available to certain cooperative banks ** ** ** 22.2 The cooperative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions 'co-operative bank', 'primary agricultural credit society' and 'primary co- operative agricultural and rural development bank' have also been defined to lend clarity to them."
A clarification by the CBDT, in a letter dated 9-5-2008, is also important, and states as follows: "Subject: Clarification regarding admissibility of deduction under section 80P of the Income-tax Act, 1961. ** ** ** 2. In this regard, I have been directed to state that sub-section (4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co- operative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949. 14 Assessment Year 2021-2022 3. In part V of the Banking Regulation Act, "Co-operative Bank" means a State Co-operative bank, a Central Co- operative Bank and a primary Co-operative bank.
4. Thus, if the Delhi Co-op Urban T & C Society Ltd. does not fall within the meaning of "Co-operative Bank" as defined in part V of the Banking Regulation Act, 1949, sub-section(4) of section 80P will not apply in this case.
5. Issued with the approval of Chairman, Central Board of Direct Taxes."
The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banks i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co- operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.
As a matter of fact, some primary agricultural credit societies applied for a banking licence to the RBI, as their bye-laws also contain as one of the objects of the Society the carrying on of the business of banking. This was turned down by the RBI in a letter dated 25-10-2013 as follows: "Application for license Please refer to your application dated April 10, 2013 requesting for a banking license. On a scrutiny of the application, we observe that you are registered as a Primary Agricultural Credit Society (PACS). In this connection, we have advised RCS vide letter dated UBD (T) No. 401/10.00/16A/2013-14 dated October 18, 2013 that in terms of Section 3 of the Banking Regulation Act, 1949 (AACS), PACS are not entitled for obtaining a banking license. Hence, your society does not come under the purview of Reserve Bank of India. RCS will issue the necessary guidelines in this regard xx xx 45. To sum up, therefore, the ratio decidendi of Citizen Co- operative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage 15 Assessment Year 2021-2022 and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word "agriculture" into section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co- operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm's way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.” (Emphasis Supplied)
In view of the above, it can be concluded that the impact of insertion of Section 80P(4) of the Act is that a co-operative bank would no more be entitled for claim of deduction under Sec. 80P of the Act, however, the interest income derived by a co-operative society from a co-operative bank would continue to be eligible for deduction under Sec.80P(2)(d) of the Act (as co-operative banks continue to be a co-operative society) and this would be the case irrespective of the fact that such interest income is in the nature of ‘profits and gains of business’ or ‘income from other sources’ as Section 80P(2)(d) uses the expression ‘any income’ and not ‘profits & gains of business.
Coming to the facts of the present case, it is admitted position that the Assessee, a co-operative society, has received interest income from co- operative banks (constituted as a co-operative society). It is has not been contended on behalf of the Revenue that the Assessee holds a banking license issued by RBI. Therefore, we hold that in the facts and circumstances of the present case the Assessee is entitled to claim deduction under Section 80P(2)(d) of the Act.
16 Assessment Year 2021-2022 16. We further note that in identical facts and circumstances deduction claimed under Section 80P(2)(d) of the Act was allowed to the Assessee for the Assessment Year 2014-2015. The relevant extract of the aforesaid decision of the Tribunal passed in dated 26/09/2023, read as under:
“4. Heard both the sides and perused the material on record. The assessee is a cooperative society formed with the object of maintaining and protecting the building occupied by its members. The AO has disallowed the claim of deduction stating that Co. op Banks are not cooperative societies. The observation of the AO is not correct as alter amendment in the Finance Act 2006, the Cooperative banks still continued to be a cooperative society but not entitled for claiming deduction u/s 80P(4) of the Act. However, the interest income derived by a cooperative Society from its investment with the cooperative bank is entitled for claim of deduction u/s 80P(2)(d) of the Act. On similar issues and identical facts the coordinate benches of the ITAT have held that interest derived by a cooperative society from its investment with a cooperative Bank is entitled for claim of deduction u/s 80P[2](d) of the Act. Some of the decision of the ITAT wherein the claim of deduction u/s 80P(2)(d) was allowed on the interest income earned from deposit with cooperative bank are as under: (i). Mitral Park Cooperative Housing Society Ltd. Vs. Asst. Director of Income Tax, Mum, W[125] [95) CPC. Bengaluru, (Ld. ADIT). (ii). Mittal Park Cooperative Housing Society Vs. ITO, Ward 25 (3)(1), Mumbai. (iii). Kaliandas Udyog Bhavan Premises Coop Society Ltd. Vs. ITO 21(1)(2). (iv). Aqua Cooperative Housing Society Limited Vs ITO 21(1)(2) (v) Sea Green Cooperative Housing Society Ltd Vs. (TO 21(3)(2) (vi) lands End Cooperative Housing Society Ltd. Vs. ITO 16(1)(3) (vii) The Nutan Laxmi Chs Ltd. Mumbai Vs. ITO 19(2)(4) (viii) M/s Palmera Cooperative Housing Society Ltd. Vs. ACIT, 17 Assessment Year 2021-2022 19(2) In the case of Kaliandas Udyog Bhavan Premises Coop. Society Lid Vs. ITO vide dated 25.04.2018 it is held that though the cooperative bank pursuant to the insertion of subsection (4) of Sec. 80P is no more be entitled for claim of deduction u/s 80P of the Act, but however, as a cooperative bank continued to be a cooperative society registered under the Cooperative Society Act, therefore, the interest income earned by a cooperative society from its investment held that cooperative bank would be entitled for claim of deduction u/s 80P(2)(d). In view of the above facts and findings therefore, we direct the AO to allow the claim of deduction to the assessee in respect of interest earned from investment made with the cooperative bank, Therefore, the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.”
In view of the above, the deduction of INR.3,15,256/- claimed by the Assessee under Section 80P(2)(d) of the Act is allowed. Thus, Ground No. 1, 2 and 3 raised by the Assessee is allowed.
In result, the present appeal preferred by the Assessee is allowed.