ITO-41(2)(2) MUMBAI, MUMBAI vs. JAI BHOLENATH CO OP CREDIT SOCIETY LTD, MUMBAI

Aggrieved the assessee filed further appeal before the CIT(A). With regard to deduction claimed under section 80P, the CIT(A) held that the interest income arising out of deposits with Co-operative Banks is eligible for deduction under section 80P(2)(d) by placing reliance on the various decisions of the coordinate bench. The CIT(A) further held that the contentions on the allowability of deduction under section 80P(2)(a)(i) have become academic in view of his decision on the allowability of deduction under section 80P(2)(d). With reference to the allowability of deduction claimed towards provision of expense the CIT(A) held that the said provision is made towards the business operations of the assessee and as per regulatory requirements. Therefore, the CIT(A) held that these provisions cannot be considered as uncertain liability and should be allowed as a deduction. The CIT(A) further held that even otherwise the disallowance if made would lead to increase in the business income which will result in higher claim of deduction under section 80P(2)(a)(i) of the Act. The Revenue is in appeal before the Tribunal against the order of the CIT(A).

The ld. Authorized Representative (AR) submitted that in the earlier years the Revenue has been allowing the deduction under section 80P to the assessee. The ld. AR further submitted that in assessee's own case for AY 2018-19 the PCIT has initiated revision proceedings under section 263 against the assessment order allowing the deduction under section 80P and the Co-ordinate Bench has quashed the order under section 263 of the Act. The ld. AR further submitted that the income of the assessee is arising out its business operations of providing banking and credit services to its members and the surplus funds are invested in Co- operative Bank. The ld. AR also submitted that the interest income arising there from is attributable to the business of the assessee and therefore, the assessee had claimed deduction under section 80P(2)(a)(i) towards the entire profit arising from the business. The ld. AR argued that even otherwise the deduction claimed should be allowed under section 80P(2)(d) since it is a settled position that the interest income arising out of investments with Co-operative Bank are eligible for deduction under section 80P(2)(d) of the Act. With regard to CIT(A) allowing the provision towards various expenses. The ld. AR drew our attention to the break up of the said expenses as extracted below and submitted that the provision is towards regulatory requirements and therefore, is very much incurred towards the business of the assessee.

The ld. Departmental Representative (DR) on the other hand submitted that the interest income from investments with cooperative banks cannot be allowed as a deduction against the business income of the assessee under section 80P(2)(a)(i) since as per the decision of the Hon'ble Supreme Court in the Totgar's (supra) interest income should be taxed under the head "Income from Other Sources". The ld. DR also argued that the CIT(A) is not correct in allowing the deduction under section 80P(2)(d) against the interest income earned by the assessee from Co- operative Banks. With regard to the provision made towards expenses, the ld. DR submitted that these are unascertained liabilities and therefore, cannot be allowed as a deduction. Accordingly, the ld. DR supported the order of the AO.

We heard the parties and perused the material available on record. The income of the assessee for year under consideration included interest on loans given to members to the tune of Rs. 4,17,66,433/- and interest on investments with Co-operative Banks to the tune of Rs. 2,48,79,057/-. After deduction of expenses the net income of the assessee was arrived at Rs. 31,59,088/- which the assessee has claimed as a deduction under section 80P(2)(a)(i) of the Act. The AO disallowed the claim stating that the amount is attributable to the interest income earned by the assessee on investments with Co-operative Banks and therefore, cannot be treated as the business income of the assessee eligible for deduction under section 80P(2)(a)(i) of the Act. The AO did not allow the deduction under section 80P(2)(d) also stating that the interest income from cooperative banks are not eligible for such deduction. The CIT(A) held that the interest on investments with Co-operative Banks is eligible for deduction under section 80P(2)(d) of the Act. From the perusal of records we notice that it is an undisputed fact that the assessee is not having any business activities with non-members. The AO has denied the benefit under section 80P(2)(a)(i) only for the reason that the net income is attributable to interest income from cooperative banks which according to AO is not eligible for deduction under section 80P(2)(d). Therefore, the limited issue before us is whether the interest from investments with cooperative banks is eligible for deduction under section 80P(2)(d) of the Act. We notice that the Co- ordinate Bench has been consistently holding that interest income on investments with Co-operative Banks is eligible for deduction under section 80P(2)(d). The relevant observations of the Co-ordinate Bench in the case of Pathare Prabhu Co– operative Housing Society Ltd. Vs ITO [2023] 153 taxmann.com 714 (Mumbai - Trib.) where it is held that – 8. We have considered the submissions of both sides and perused the material available on record. The only dispute raised by the assessee is against the disallowance of deduction under section 80P(2)(d) of the Act in respect of interest income received from the Co-operative Banks. The assessee is a registered Co- operative Housing Society and during the assessment year 2018- 19 earned interest income of Rs. 50,39,861 from the investments made in various Co-operative Banks.

Before proceeding further, it is relevant to note the provisions of section 80P of the Act under which the assessee has claimed the deduction in the present case. As per the provisions of section 80P(1) of the Act, the income referred to in sub-section (2) to section 80P shall be allowed as a deduction to an assessee being a Co- operative Society. Further, section 80P(2)(d) of the Act, reads as under: "80P. Deduction in respect of income of co-operative societies. (1) ** ** ** (2) The sums referred to in sub-section (1) shall be the following, namely:- (a) to (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, for the purpose of provisions of section 80P(2)(d) of the Act, two conditions are required to be cumulatively satisfied- (i) income by way of interest or dividend is earned by the Co-operative Society from the investments, and (ii) such investments should be with any other Co-operative Society. Further, the term „co- operative society? is defined under section 2(19) of the Act as under: "(19) "co-operative society" means a co-operative 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 co-operative societies ;"

In the present case, there is no dispute that the assessee is a Co-Operative Housing Society. Thus, if any income as referred to in sub-section (2) to section 80P of the Act is included in the gross total income of the assessee, the same shall be allowed as a deduction. It is pertinent to note that since the assessee is registered under the Maharashtra Co-operative Societies Act, 1960, it is required to invest or deposit its funds in one of the modes provided in section 70 of the aforesaid Act, which includes investment or deposit of funds in the District Central Cooperative Bank or the State Co-operative Bank. Accordingly, the assessee kept the deposits in Co-operative Banks registered under the Maharashtra Co-operative Societies Act and earned interest, which was claimed as a deduction under section 80P(2)(d) of the Act. The AO denied the deduction under section 80P(2)(d) of the Act on the basis that the Co-operative Bank is covered under the provisions of section 80P(4) of the Act. We find that the Hon?ble Supreme Court in Mavilayi Service Co- operative Bank Ltd. v. CIT [2021] 123 taxmann.com 161/279 Taxman 75/431 ITR 1 while analysing the provisions of section 80P(4) of the Act held that section 80P(4) is a proviso to the main provision contained in section 80P(1) and (2) and excludes only Co-operative Banks, which are Co-operative Societies and also possesses a licence from RBI to do banking business. The Hon'ble Supreme Court further held 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, we are of the considered view that section 80P(4) of the Act is of relevance only in a case where the assessee, who is a Co-operative Bank, claims a deduction under section 80P of the Act which is not the facts of the present case. Therefore, we find no merits in the aforesaid reasoning adopted by the AO and upheld by the learned CIT(A) in denying deduction under section 80P(2)(d) of the Act to the assessee.

As regards the claim of deduction under section 80P(2)(d) of the Act, it is also pertinent to note that all Co-operative Banks are Co-operative Societies but vice versa is not true. We find that the coordinate benches of the Tribunal have consistently taken a view in favour of the assessee and held that even the interest earned from the Co-operative Banks is allowable as a deduction under section 80P(2)(d) of the Act. In Kaliandas Udyag Bhavan Premises Co-op Society Ltd. v. ITO [2018] 94 taxmann.com 15 (Mum.)/[ITA No. 6547/Mum./2017, dated 25-4- 2018], while dealing with the provisions of section 80P(2)(d) vis-à-vis section 80P(4) of the Act, the coordinate bench of the Tribunal observed as under: "7. ……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 co- operative 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 1-4- 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 co- operative societies;' NEETU 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 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 co-operative societies, therefore, the interest income derived by a co-operative society from its investments held with a cooperative bank, would be entitled for claim of deduction under sec.80P(2)(d) of the Act."

We find that the learned CIT(A) has placed reliance upon the decision of the Hon'ble Karnataka High Court in Pr. CIT v. Totagars Co-operative Sales Society [2017] 83 taxmann.com 140/395 ITR 611, wherein it was held that interest earned by the assessee, a Co-operative Society, from surplus deposits kept with a Co- operative Bank, was not eligible for deduction under section 80P(2)(d) of the Act. We find that in an earlier decision the Hon'ble Karnataka High Court in Pr. CIT v. Totagars Co-operative Sale Society [2017] 78 taxmann.com 169/392 ITR 74 held that according to section 80P(2)(d) of the Act, the amount of interest earned from a Co-operative Society Bank would be deductable from the gross income of the Co- operative Society in order to assess its total income. Thus, there are divergent views of the same Hon'ble High Court on the issue of eligibility of deduction under section 80P(2)(d) of the Act in respect of interest earned from Co-operative Bank. No decision of the Hon'ble jurisdictional High Court was brought to our notice on this aspect. We have to, with our highest respect to both the views of the Hon'ble High Court, adopt an objective criterion for deciding as to which decision of the Hon'ble High Court should be followed by us. We find guidance from the judgment of the Hon'ble Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. In the aforesaid decision, the Hon'ble Supreme Court has laid down a principle that "if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted".

Therefore, in view of the above, we uphold the plea of the assessee and direct the AO to grant the deduction under section 80P(2)(d) of the Act to the assessee in respect of interest income earned from investment with Co-operative Banks. Accordingly, we set aside the impugned order passed by the learned CIT(A) for the assessment year 2018-19. As a result, grounds raised by the assessee are allowed.

Respectfully following the above decision of the Co-ordinate Bench, we hold that on the interest on investments with Co-operative Banks, the assessee is entitled for deduction under section 80P(2)(d). Accordingly, we hold that the disallowance made by the AO is not sustainable and therefore, we see no reason to interfere with the decision of the CIT(A).

On the issue of provision, we notice that the provisions the breakup of which is extracted in the earlier part of this order are made on requirements of bye-laws of the Society and as per the Maharashtra Co-operative Societies Act, 1960. During the course of hearing, the ld. AR made a detailed written submission with regard to each line of the provision item and on perusal of the same we see merit in the submission of the ld. AR that the provisions are not towards uncertain liabilities or to meet contingencies. Further we notice that the AO did not dispute the fact that the deduction claimed pertains to the business of the assessee but made the disallowance for the reason that it is towards uncertain liabilities. Therefore, there is merit in the finding of the CIT(A) that even otherwise the disallowance would result in increased claim of deduction under section 80P(2)(a)(i) of the Act. Accordingly, we see no infirmity in the decision of the CIT(A) in allowing the provision of expenses claimed by the assessee.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 06-09-2024. Sd/- Sd/- (KAVITHA RAJAGOPAL) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,