Interest Income received from Co-operative Banks cannot be equated with interest received from Co-operative Society: ITAT not allowed deduction u/s 80P (2) (d) of Income Tax Act [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) disallowed deduction under Section 80P (2)(d) of the Income Tax Act, 1961, stating that interest income received from cooperative banks cannot be considered equivalent to interest received from a cooperative society.

A cooperative society, registered under the Karnataka Cooperative Societies Act, 1959, is involved in deposit-taking and providing credit to its members. It also earns rental income. For the Assessment Year 2017-18, it declared an income of Rs. 19,750 after claiming a deduction of Rs. 25, 54,125 under Section 80P of the Income Tax Act, 1961. The assessment was scrutinized, and a notice was issued under Section 143(2) of the Income Tax Act, 1961, on 10.08.2018. Despite explaining its entitlement to the deduction under Section 80P of the Income Tax Act, 1961, in a letter dated 11.12.2019, the explanation was rejected, and the assessment was concluded under section 143(3) of the Income Tax Act, 1961, on 27.12.2019

The assessing officer ( AO ) disallowed the deduction under Section 80P, citing non-compliance with mutuality principles, and referenced the judgment of the Supreme Court in the case of Citizen Cooperative Society Ltd. Further, the AO argued that the deduction claimed pertained to interest earned on deposits with cooperative banks, citing a judgment of the jurisdictional High Court in PCIT Vs. Totagars Cooperative Sale Society Ltd., concluding the assessee’s ineligibility for deductions under Sections 80P(2)(a)(i) or 80P(2)(d) of the Income Tax Act, 1961

The Commissioner of Income Tax ( Appeals ) [ CIT(A) ] partially favored the assessee, allowing deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The CIT(A) determined that according to the Karnataka State Cooperative Societies Act and relevant Rules, associate/nominal members qualify as “members” entitled to voting rights, thereby upholding the principle of mutuality.

The CIT(A) was justified in upholding the disallowance of deduction under Section 80P(2)(d) of the Act concerning interest earned from investments with cooperative banks. The jurisdictional High Court, in PCIT v. Totagars Cooperative Sale Society Ltd., definitively ruled that interest income from surplus funds should be taxed under “income from other sources” and ineligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. Additionally, it held that interest income from cooperative banks differs from that of cooperative societies and thus does not qualify for deduction under section 80P(2)(d) of the Income Tax Act, 1961

The CIT (A) relied on the Bangalore Tribunal’s decision in Vasavamba Cooperative Society Ltd. v. PCIT, which aligned with the High Court’s judgment in the Totagars case. Therefore, in accordance with the Totagars case,

The two member bench of the tribunal comprising George George k ( Vice President ) concluded that the assessee cannot claim deductions under Sections 80P(2)(a)(i) or 80P(2)(d) of the Income Tax Act, 1961 for interest income received from scheduled banks/cooperative banks.

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