Deduction Under Section 80P Upheld for Regional Rural Bank: ITAT Confirms Co-operative Society Status Under RRB Act [Read Order]

Pandyan Grama Bank (assessee), a Regional Rural Bank, filed its income tax return for the Assessment Year 2016-17 on 30.09.2016, declaring “NIL” income after claiming a deduction of Rs. 67.65 crore under Section 80P(2)(a)(i) of the Act.

The Assessing Officer (AO) reopened the case by issuing a notice under Section 148, denying the deduction and assessing the income at Rs. 67.65 crore. The AO treated the assessee as a scheduled bank rather than a co-operative society.

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Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) allowed the deduction, relying on prior Tribunal decisions in the assessee’s own case for earlier assessment years, which confirmed its co-operative society status under the RRB Act.

Aggrieved by the CIT(A)’s order, the Revenue filed an appeal before the ITAT. The Counsel for Revenue argued that the assessee, governed by the Banking Regulation Act, functioned as a commercial bank and should be treated as a corporate entity.

The Revenue further cited CBDT Circular No. 6/2010, which stated that Regional Rural Banks (RRBs) are corporate entities ineligible for Section 80P deductions from Assessment Year 2007-08.

The assessee filed a cross-objection contesting the validity of the reassessment proceedings under Section 147 and claiming that interest on income tax refunds should also qualify for the Section 80P deduction.

The assessee argued that Section 22 of the RRB Act explicitly deems RRBs as co-operative societies for income tax purposes, and Section 32 overrides any conflicting laws. The assessee also relied on prior Tribunal orders for Assessment Years 2007-08 to 2014-15, which consistently upheld its co-operative society status.

The two-member bench, comprising Viswanethra Ravi (Judicial Member) and S. R. Raghunatha (Accountant Member) observed that Section 22 of the RRB Act clearly designates RRBs as co-operative societies for the purposes of the Income Tax Act.

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The bench further noted the Rajasthan High Court’s decision in PCIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. which affirmed RRBs’ co-operative society status under the RRB Act.

The Tribunal also addressed the assessee’s cross-objection regarding interest on income tax refunds, citing the Punjab & Haryana High Court’s ruling in CIT v. Punjab State Co-op Bank Ltd which held that such interest is compensatory and partakes the character of business income and it was eligible for deduction under Section 80P.

The Tribunal directed the AO to recompute interest under Section 244A from the date of TDS remittance to the date of refund credit. The appeal of the Revenue was dismissed, and the assessee’s cross-objection was partly allowed.

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