MHATRE PALACE CHSL,BORIVALI WEST vs. INCOME TAX OFFICER 42 1 3 MUMBAI, MUMBAI

We have heard the rival submissions and perused the materials available on record. The only issue that requires adjudication is whether the assessee is entitled to claim deduction u/s. 80P(2)(d) of the Act on the interest income received out of fixed deposits made in co-operative banks viz. Shamrao Vitthal Co-op. Bank Ltd. and Citizen Credit Co Op. Bank Ltd.

The learned Authorised Representative ('ld. AR' for short) for the assessee contended that the assessee societies’s surplus is invested in fixed deposit in co-operative banks and the interest which are earned out of which are utilized for the future contingencies of repairs and replacement of old building of the society and the same are towards principle of mutuality. The ld. AR further stated that the decision in Totgars Co- operative Sale Society Ltd. (supra) is distinguishable on facts as there is no business income in the case of assessee. The ld. AR relied on a catena of decisions in support of the assessee’s contentions.

The learned Departmental Representative ('ld. DR' for short) for the revenue on the other hand controverted the said fact and stated that the co-operative banks are akin not to co-operative societies and the interest earned out of deposits from such co-operative banks are not entitled to deduction u/s. 80P(2)(d) of the Act. The ld. DR relied on the decision of the Hon'ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) and the order of the lower authorities.

On the above factual matrix of the case, it is observed that only those co-operative societies which are registered u/s. 22 of the Banking Regulation Act, 1949 would fall (A.Y. 2021-22) Mhatre Palace CHSL under the definition of the ‘banking company’ as defined u/s. 5(c) of the Banking Regulation Act, 1949 and only the interest received from parking the surplus funds in such co-operative banks would not be eligible for claiming deduction u/s. 80P(2)(d) of the Act.

In the present case in hand, there are no facts emanating from the order of the lower authorities that the two co-operative banks, where the assessee has received interest income out of the deposits would fall under the definition of banking company. In the absence of the said fact, it is evident that there are catena of decisions of the Hon'ble Apex Court and the Hon'ble High Courts as well as the Tribunal, where it was held that interest will come from co-operative banks are akin to the interest received from co- operative societies which are eligible for claiming deduction u/s. 80P(2)(d) of the Act. We would place our reliance on the decision of the Hon'ble High Court of Gujarat in the case of Principal Commissioner of Income-tax v. Ashwinkumar Arban Co Operative Society Ltd. [2024] 168 taxmann.com 314 (Gujarat), which has extensively dealt with the issue in hand and had considered various decisions of the Hon'ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) along with the decision of the Mavilayi Service Co-operative Bank vs. CIT, AIR 2021 Supreme Court 612. It is observed that the decision of the Hon'ble Karnataka High Court and the Hon'ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) was with regard to the amendment to Section 194A(3)(v) of the Act which had excluded co- operative societies from the applicability of the provisions of the tax to be deducted at source and not for co-operative banks which are liable to deduct TDS. It further held (A.Y. 2021-22) Mhatre Palace CHSL that mere exclusion of Section 80P to co-operative banks by Section 80P(4) of the Act on liability to pay tax does not prevent the assessee from claiming deduction u/s. 80P(2)(d) of the Act towards the interest income that has been received from a co- operative bank in the absence of a specific amendment to the said provision to that extent. It also held that as per the decision of the Hon'ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd v. Assessing Officer [2023] 154 taxmann.com 305, the provisions of the Banking Regulation Act is not applicable to co-operative banks which are not banks as per the said provisions except those banks viz. state co-operative bank, central co-operative bank and primary co-operative bank that are defined under the NABARD Act, 1981 are the only banks that would fall under the category of the co-operative bank as per Section 56 of the Banking Regulation Act. It further held that the Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank (supra) held that Section 80P is a beneficial provision which has to be read liberally in assessee’s favour for the purpose of the growth of co-operative sectors and when the assessee is eligible for deduction, then there can be no partial relief given to the assessee and rather entire amount of profit and gains pertaining to the activities of the assessee are eligible for claiming deduction u/s. 80P(2) of the Act. It had categorically distinguished those co-operative banks which require license from the RBI for carrying on banking business as per Section 5(b) of the Banking Regulation Act which are the only co-operative banks to be excluded from the scope of the Section 80P(4) of the Act. It had summarized the various requirements (A.Y. 2021-22) Mhatre Palace CHSL for claiming deduction u/s. 80P(2) of the Act which we deem it fit to extract herein under for ease of reference: “14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court: (i) Firstly, the marginal note to Section 80P which reads "Deduction in respect of income of co operative societies" is significant as it indicates the general "drift" of the provision. (ii) Secondly, for purposes of eligibility for deduction, the assessee must be a "co- operative society". (iii) Thirdly, the gross total income must include income that is referred to in sub- section (2). (iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being "engaged in", inter alia, carrying on the business of banking or providing credit facilities to its members. (v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. (vi) Sixthly, the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. (vii) Seventhly, under Section 80P(1) (c), the co-operative societies must be registered either under Cooperative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). (viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co operative society from investments with other cooperative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole. 14.4. In paragraph 42 of Mavilayi Service Co-operative Bank, this Court observed that the object and purpose of sub-section (4) of Section 80P is to exclude only co-operative banks that function on par with other commercial banks i.e. which lend money to members of the public. That on a reading of Section 3 read with Section 56 of the BR Act, 1949, the primary co-operative bank cannot be a primary agricultural credit society. As such co-operative (A.Y. 2021-22) Mhatre Palace CHSL bank must be engaged in the business of banking as defined by Section 5(b) of the BR Act, 1949, which means accepting, for the purpose of lending or investment, of deposits of money from the public. Also, under Section 22(1)(b) of the BR Act, 1949, no co- operative society can carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by Reserve Bank of India. It was pointed out that as opposed to the above, 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. 14.5. It was further observed in the said case that some primary agricultural credit societies had sought for banking licence from Reserve Bank of India but the same was turned down by observing that such a society was not carrying on the business of banking and that it did not come under the purview of Reserve Bank of India requiring a licence for its business. 14.6. Thereafter in paragraph 48 of the judgment, it was observed that a deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. That subsection (4) of Section 80P which is in the nature of a proviso 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 Reserve Bank of India.”

On perusal of the said observation, we deem it fit to hold that the assessee is entitled to claim deduction u/s. 80P(2)(d) of the Act from the interest received from co-operative banks which are akin to that of co-operative societies unless such co-operative banks requires license from the RBI as per the provisions of the Banking Regulation Act. As there is no specific finding from the lower authorities that the co-operative banks from whom the assessee has received interest income would fall under the preview of the co- operative banks as per the Banking Regulation Act, and by respectfully following the above decision, we deem it fit to allow the grounds of appeal raised by the assessee and thereby direct the ld. AO to delete the impugned addition/disallowance.