Recently, the Income Tax Appellate Tribunal ( ITAT ) of Mumbai held that Section 80P(4) of the Income Tax Act 1961 (ITA) only excludes Co-operative banks functioning as commercial banks.
The case, concerning the assessment year 2020-21, involved the appellant/assessee, Laburnum Mahindra Gardens Co. Op. Housing Limited, a cooperative housing society who claimed a deduction of Rs. 28.73 lakh on interest earned from Fixed Deposit Receipts (FDRs) and savings accounts maintained with co-operative banks.
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The assessee had initially filed its income tax return in January 2021, declaring a gross total income of Rs. 28.86 lakh, which was entirely claimed as a deduction under Section 80P of the tax statute. However, the return was selected for scrutiny by the Income Tax Department to verify the deduction claimed.
During the assessment, the Assessing Officer (AO) disallowed the deduction, citing Section 80P(4) of the tax legislature, which excludes co-operative banks from the benefits under Section 80P of ITA. The AO ruled that the interest income earned by the society from deposits with co-operative banks did not qualify for deduction, thereby adding the Rs. 28.73 lakh to the society’s taxable income.
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Aggrieved , the assessee approached the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO’s order.
Challenging the order, the assessee then took the matter to the ITAT.
Before the tribunal, The assessee-society’s legal representatives submitted that the interest income earned from deposits with co-operative banks should still qualify for deduction under Section 80P(2)(d) of ITA, which provides for a tax exemption on income derived from investments made in other co-operative societies, maintaining the same argument presented before the lower authorities.
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After examining the case in detail, the bench of Mr Sandeep Singh Karhail and Mr Prashant Maharshi considered the findings of a coordinate bench in a similar case—Pathare Prabhu Co-operative Housing Society v. ITO (2023). This case analyzed whether interest income from co-operative banks was eligible for deduction under section 80P(2)(d) of ITA. The Tribunal noted that while section 80P(4) of the tax statute excludes co-operative banks from the deduction provisions, the Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) had clarified that this exclusion applies only to co-operative banks functioning as commercial banks.
Since the appellant’s case did not involve a co-operative bank functioning as a commercial bank, but rather deposits with co-operative banks, the Tribunal found merit in the deduction claim.
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The tribunal further noted that while co-operative banks are not eligible for deductions themselves, they are still classified as co-operative societies under the income tax statute. As a result, the interest earned by a co-operative housing society from investments with such banks qualifies for tax exemption.
Thus in result, the ITAT directed the AO to allow the deduction of Rs. 28.73 lakh claimed by the assessee, setting aside the previous orders which denied the same.
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