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Facts
The assessee, a cooperative society, claimed deduction under Section 80P(2)(d) for interest and dividend income earned from the Ahmedabad District Cooperative Bank Ltd. The Assessing Officer (AO) disallowed this claim.
Held
The Tribunal, following the jurisdictional High Court's decision, held that the interest and dividend income earned by the assessee from the cooperative bank is eligible for deduction under Section 80P(2)(d) as the bank is a cooperative society registered under the Gujarat State Cooperative Societies Act.
Key Issues
Whether interest and dividend income earned by a cooperative society from a cooperative bank is eligible for deduction under Section 80P(2)(d) of the Income Tax Act.
Sections Cited
80P, 194A, 263
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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2017-18) The Bavla Group Seva Sahakar Vs. Income Tax Officer, Mandali Ltd., Ward-3(2)(5), 10-Grain Market Yard, Bavla, Ahmedabad Ahmedabad-382220 [PAN No.AAAAT4553C] (Appellant) .. (Respondent) Appellant by : Shri P D Shah, A.R. Respondent by: Shri Ravindra, Sr. DR 17.02.2025 Date of Hearing Date of Pronouncement 20.02.2025 O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), ADDL/JCIT (A)-3, Bengaluru vide order dated 25.11.2024 passed for A.Y. 2017-18.
The assessee has taken the following grounds of appeal:-
“1. That the Ld. ADDL/JCIT (A)-3 Bengaluru, has erred in law and facts by confirming the disallowance of claim the deduction of Rs. 4,01,607/- under section 80P of the Act and therefore you Honors are requested to direct the Ld. AO to allow full deductions under section 80P of the Act.
2. That the Ld. ADDL/JCIT (A)-3 Bengaluru has erred in law and facts by not allowing expenses to earn the interest income from the bank and therefore your Honors are requested to direct the Ld. AO to allow the said expense while computing income from other sources and accordingly deduction u/s 80P is to be allowed.
That your appellant craves liberty to add, amend, alter and delete any grounds of appeal before the final hearing.”
The Bavla Group Seva Sahakar Mandali Ltd. vs. ITO Asst.Year –2017-18 - 2– 3. The brief and limited issue for consideration is the disallowance of claim of deduction for a sum of Rs. 4,01,607/- on interest income earned by the assessee on funds parked with and dividend income earned from the Ahmedabad District Cooperative Bank Ltd. under Section 80P(2)(d) of the Act.
In appeal, Ld. CIT(A) held that interest income and dividend income earned by the assessee from Ahmedabad District Cooperative Bank Ltd. is not eligible for deduction under Section 80P(2)(d) of the Act. While passing the order Ld. CIT(A) made the following observations:
“5.2.37 The issue has been settled by the Coordinate Bench of the Bangalore Tribunal on similar facts and circumstances of the case in the following decisions:- (a) M/s. Vasavamba Co-operative Society Ltd. v. PCIT, dated 13.8.2021. (b) M/s. Manjunatheshwara Credit Co-op. Society Ltd. v. ITO, dated 4.10.2021. (c) Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd. v Pr.CIT, ITA No. 514/Bang/2021 dated 08.02.2022. (d) M/s Jyothi Pattin Souhard Sahkari Niyamit, APMC, Gadag vs Pr.CIT, ITA No. 650/Bang/2020 dated 13.08.2021 5.2.38 Further, the amendment of section 194A(3)(v) of the Act excluding the Cooperative Banks from the definition of "Co- operative Society" by Finance Act, 2015 and requiring them to deduct income tax "at source under section 194A of the Act also makes the legislative intent clear that the Co-operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of section 80P of the Act. 5.2.39 The Ahmedabad District Co-op Bank Ltd. functions at par with Commercial Banks, allowing the benefit of deduction Section 80P(2)(d) to "Interest earned on Deposits with Cooperative Banks" would in fact divert the resources of the Cooperative sector to the Mainstream Banking Sector. The very purpose of section 80P(2)(d) was retaining and circulation of funds within the Cooperative Movement. It was to encourage the Cooperative societies with surplus fund to lend/ invest to/with other Cooperative Societies, which are not Cooperative Banks, in need of funds.
The Bavla Group Seva Sahakar Mandali Ltd. vs. ITO Asst.Year –2017-18 - 3– 5.2.40 In view of the above, interest income from the funds parked with and dividend income from The Ahmedabad District Co-op Bank Ltd. is not eligible for deduction u/s 80P(2)(d). Accordingly, the appeal is filed on this ground is dismissed.” 5. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(A).
We observe that the issue is now settled in favour of the assessee by the Jurisdictional High Court in the case of Principal Commissioner of Income- tax vs. Shree Madhi Vighag Khand Udyog Sahakari Mandli Ltd. [2025] 171 taxmann.com 22 (Gujarat)[24.12.2024], the High Court held that where assessee, a cooperative society, earned interest on investment made with a cooperative bank and claimed deduction under Section 80P(2)(d), since cooperative bank was a cooperative society registered under Gujarat State Cooperative Societies Act, assessee was to be allowed to claim deduction under Section 80P(2)(d) of the Act. While passing the order, the jurisdictional High Court made the following observations:
Learned Senior Standing Counsel Mr. Karan Sanghani appearing for the appellant- Revenue candidly submitted that issue involved in this appeal is already decided by this Court in favourof the assesee in case of Principal Commissioner of Income Tax v. Ashwinkumar Arban Cooperative Society Limited reported in [2024] 168 taxmann.com 314 (Gujarat) wherein this Court held as under: "28. Having heard learned advocates for the respective parties and considering the controversy arising in these tax appeals, we are of the opinion that the controversy sought to be canvassed with regard to deduction under section 80P(2)(d) of the Act is no more res integra in view of the decision of this Court in case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. as well as in case of State Bank of India (supra) wherein it was held that the deduction of under section 80P(2)(d) of the Act is available to the cooperative societies on the income earned as interest on the investment made with the cooperative bank which in turn, is a cooperative society itself. 29. Reliance placed by the learned advocate for the revenue on decisions of the Hon'ble Karnataka High Court and Hon'ble Supreme Court in case of Totgars' Cooperative Sale Society Ltd, the Hon'ble Karnataka High Court appears to have taken into consideration the amendment in section 194A(3)(v) of the Act wherein the cooperative bank is excluded from the applicability of tax to be deducted at source. However, it appears that the interpretation made by the Hon'ble Karnataka High Court to the effect that the cooperative banks have been excluded from the definition of the cooperative societies by Finance Act,2015 by amending section 194A(3)(v) of the Act is concerned, on perusal of section 194A (3) of the Act, it appears that it provides for exemption from deducting Tax Deducted at Source ['TDS' for short] from the income on interest other than interest on securities as the cooperative societies other than cooperative banks meaning thereby that the cooperative banks are liable to deduct TDS from the interest other than interest on securities. Therefore it cannot be said that cooperative banks are excluded from the definition of cooperative societies by such an amendment.
Moreover, as reliance placed on the aforesaid decision for applicability of section 80P(4) of the Act in the facts of the case is also not possible to accept as section 80P(4) of the Act would be applicable to the cooperative bank when the cooperative bank is liable to pay tax under the provisions of the Act and in such eventuality, the provision of section 80P would not be applicable as per the amendment of sub-section (4) of section 80P of the Act. Therefore, the exclusion of applicability of section 80P to cooperative banks by section 80P (4) of the Act would not disentitle the respondent- assessee from claiming deduction under section 80P(2)(d) of the Act in absence of any amendment in the said section and that would not be sufficient to deny the claim of the respondent-assessee for deduction of interest earned from investment made in a cooperative bank which is also a cooperative society from the total income.
The Hon'ble Apex Court in case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer (supra) while considering various provisions of the Banking Regulation Act read with provisions of the Income Tax Act has held that the provision of section 80P(4) of the Act would not be applicable to a cooperative bank which is not a bank as per the provisions of the BR Act,1949, as under: "5. Interpretation.— In this Act, unless there is anything repugnant in the subject or context, X X X (b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise; (c) "banking company" means any company which transacts the business of banking in India. Explanation.—Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;"
After considering the above interpretation of various provisions and the Case laws, the Hon'ble Apex Court has analyzed the provisions as under: "14.1. In Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd., it was categorically held that under Section 56 of the BR Act, 1949 only three co-operative banks have been defined, namely, state cooperative bank, central co-operative bank and primary co-operative bank which are covered under Section 56 (cci) read with (ccvii) read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence under the BR Act, 1949 to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, 1981, it would not be a co-operative bank within the meaning of Section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act. It was further stated that if a bank has to be a state co- operative bank, there has to be a declaration made by the State Government in terms of Section 2(u) of NABARD Act, 1981. Hence, it is necessary to go into the question as to, whether, the appellant herein has been so declared as a state cooperative bank. This question would need not detain us for long as the Kerala High Court in A.P. Varghese had categorically stated that the "Kerala State Co- operative Bank" is a "state co-operative bank" as defined under the NABARD Act, 1981. Therefore, the appellant bank has not been declared as a state co- operative bank under the provisions of NABARD Act, 1981. Further, in the case of Mavilayi Service Co-operative Bank, this Court observed that a co-operative bank would engage in banking business on obtaining a licence under Section 22(1b) of the BR Act, 1949. In the instant case, the appellant herein is not a co- operative bank having regard to the aforesaid conspectus of the provisions so as to require a licence under the aforesaid provision for carrying on banking business. In the circumstances, the question could still arise as to whether the appellant herein is entitled to benefit of deduction under Section 80P of the Act. 14.2. In Mavilayi Service Co-operative Bank, it has been observed that Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee. That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub- section (2) of Section 80P must be given by way of deduction vide Citizen Cooperative Society. This is because sub-section (4) of Section 80P is in the nature of a proviso to the main provision contained in sub- sections (1) and (2) of Section 80P. The proviso excludes co-operative banks, which are co-operative societies which must possess a licence from the Reserve Bank of India to do banking business. In other words, if an entity does not require a licence to do banking business within the definition of banking under Section5(b) of the BR Act, 1949, then it would not fall within the scope of sub- section (4) of Section 80P. 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 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."
In view of the above dictum of law as well as the provisions of the Act which are considered we are of the opinion that the provisions of section 80P(2)(d) would be applicable in the facts of the case and the PCIT was not justified in invoking revisional powers under section 263 of the Act which is rightly reversed by the Tribunal holding that the cooperative bank is a cooperative society registered under the Gujarat State Cooperative Societies Act and in view of the various decisions of the Court, the Tribunal after following the same has come to the conclusion that the assessment was not erroneous allowing deduction of section 80P(2)(d) of the Act which is in consonance with the various decisions of the Court as a twin condition invoking section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled.
In view of the foregoing reasons we answer the question in favour of the assessee and against the Revenue. Tax Appeals are being devoid of any merit accordingly dismissed. No order as to costs."
In view of the above dictum of law as well as the provisions of the Act which are considered in the said judgment, no question of law much-less any substantial question of law arises from the impugned order of the Tribunal. Tax Appeal being devoid of any merit is accordingly dismissed. No order as to costs.
In view of the above judicial precedents rendered by the Jurisdictional High Court, the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed. This Order is pronounced in the Open Court on 20/02/2025 Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 20/02/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. संबंिधत आयकर आयु� / Concerned CIT 3. 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,