Co-Op Banks Qualify as Co-Op Societies for Section 80P(2)(d) Deduction: ITAT Panaji

Belgaum Coal & Coke Consumer Co-Operative Association Ltd. Vs ITO (ITAT Panaji)

Income Tax Appellate Tribunal (ITAT) Panaji recently ruled on an appeal by Belgaum Coal & Coke Consumer Co-operative Association Ltd. against the Income Tax Officer (ITO). The case concerned tax deductions under Sections 80P(2)(d) and 80P(2)(e) of the Income Tax Act, 1961. The appeal was directed against an order issued by the Commissioner of Income Tax (Appeals), Belagavi, which upheld the Assessing Officer’s (AO) decision to disallow deductions claimed by the assessee for the assessment year 2010-11. The tribunal’s ruling provides clarity on the eligibility of cooperative societies for tax deductions on interest income from cooperative banks and rental income from leased industrial sheds.

The primary issue in the appeal was the AO’s disallowance of deductions under Section 80P(2)(d), which allows cooperative societies to claim deductions on interest income earned from investments with other cooperative societies. The AO, citing the 2007 amendment under Section 80P(4), held that cooperative banks do not qualify as cooperative societies for tax exemption purposes. However, the ITAT, relying on judicial precedent, ruled that cooperative banks fall within the definition of “cooperative society” under Section 2(19) of the Act. The tribunal cited the Mumbai ITAT ruling in M/s Solitaire CHS Ltd vs. PCIT (ITA No. 3155/Mum/2019), which upheld similar deductions, and concluded that the assessee was entitled to the deduction under Section 80P(2)(d).

Another key issue was the disallowance of deductions under Section 80P(2)(e), which applies to rental income derived from letting out godowns or warehouses for storage or marketing of commodities. The Pr. Commissioner of Income Tax (CIT) had ruled that the industrial sheds leased by the assessee did not meet the specific conditions required for deduction. The AO subsequently disallowed the deduction, arguing that the sheds were being used as workshops rather than for storage. However, the ITAT noted that the assessee had submitted confirmations from tenants stating that the premises were used as godowns. The tribunal found that the lower authorities had overlooked this evidence and directed the AO to reassess the deduction claim based on the submitted documentation.

The ITAT’s ruling resulted in a partial relief for the assessee. While the tribunal upheld the claim for deduction under Section 80P(2)(d), it restored the Section 80P(2)(e) deduction matter to the AO for reassessment. The case highlights the ongoing judicial interpretations of tax benefits available to cooperative societies and underscores the importance of documentary evidence in tax disputes. The ruling is expected to impact similar cases involving cooperative societies and their tax exemptions.

FULL TEXT OF THE ORDER OF ITAT PANAJI

The present appeal filed by the assessee is directed against the order passed by the CIT (Appeals), Belagavi, dated 23.01.2018, which in turn arises from the order passed by the A.O under Sec. 143(3) r.w.s 263 of the Income-tax Act, 1961 (for short ‘the Act’), dated 08.06.2015 for assessment year 2010-11. Before us the assessee has assailed the impugned order on the following grounds of appeal:

“1. The learned AO has erred in not allowing deduction u/s.80P(2)(d) of the Income Tax Act, 1961 without properly verifying the details of investee.

2. The learned AO has wrongly interpreted the provisions of section 80P(2)(d) by not treating investees i.e. Belgaum Industrial Co- operative Bank and Belgaum District central Co-operative Bank as cooperative societies.

3. The learned AO has wrongly interpreted the definition of cooperative society vide section 2(19) of the Income Tax Act, 1961 by treating those entities which are 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, are not being cooperative societies.

4. The learned AO has erred in not allowing deduction u/s.80P(2)(e) of the Income Tax Act, 1961 without properly verifying the lease deeds and without properly interpreting the purpose for which the godowns and sheds have been let out.

5. Any other grounds which may be raised during the appeal hearing. ”

2. Succinctly stated, the assessee which is a co-operative society engaged in the business of trading of coke and foundry raw materials had e-filed its return of income for the assessment year 2010-11 on 23.10.2010, declaring an income of Rs. 92,520/-. Original assessment was framed by the AO vide his order passed u/s. 143(3) of the Act, dated 29.10.2012 wherein the returned income of the assessee was accepted as such. After culmination of the assessment proceedings the Pr. CIT vide his order passed u/s.263 of the Act, dated 23.03.2015 held the assessment order passed by the Assessing Officer u/s. 143(3), dated 29.11.2012 as erroneous in so far it was prejudicial to the interest of the revenue and directed him to give effect to his order, inter alia, on two issues, viz. (i). disallow the assessee’s claim for deduction of Rs. 3,83,047/- raised u/s. 80P(2)(d) qua the interest income earned on its investments with the Co-operative banks; and (ii). re-adjudicate the assessee’s claim for deduction u/s 80P(2)(e) of Rs. 7,60,350/- on rent that was claimed to have been derived from the activity of letting out of industrial sheds.

3. The Assessing Officer, thereafter, vide his order passed u/s.143(3) r.w.s 263 of the Act, dated 08.06.2015 assessed the income of the assessee at Rs.12,85,920/- i.e, after inter alia making the following disallowances:

4. Aggrieved, the assessee carried the matter in appeal before the CIT (Appeals) but without any success in so far the aforesaid issues in question were concerned.

5. The assessee being aggrieved with the order of the CIT (Appeals) has carried the matter in appeal before us.

6. We have heard the Ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. Adverting to the disallowance of the assessee’s claim for deduction u/s. 80P(2)(d) of the Act, we find that the genesis of the controversy therein involved lies in a narrow compass e., declining by the AO of the assessee’s claim of deduction on the interest income that was received on its deposits with co-operative banks, as under :

a. Belgaum Industrial Co- Bank Ltd. Rs.3,80,035/-

b. Belgaum District Central Co Op Bank Rs.    3,012/-

7. Observing, that pursuant to the amendment to Section 80P(4) of the Act e w.e.f. 01.04.2007, the interest income received by the assessee society from co- operative banks would not be eligible for deduction u/s. 80P(2)(d) of the Act, the Assessing Officer had declined the assessee’s claim for deduction on the said count.

8. On appeal the CIT(A) sustained the disallowance of the assessee’s claim for deduction qua both the aforesaid two fold issues, viz. (i). claim for deduction of interest on investments with co-operative banks u/s 80P(2)(d : Rs. 3,83,047/- ; and (ii.) claim for deduction u/s 80P(2)(e) on rent that was claimed by the assessee to have been derived from the activity of letting out of industrial sheds :Rs. 7,60,350/-.

9. After having given a thoughtful consideration to the aforesaid issues in hand, we are unable to concur with the view taken by the lower authorities in so far the declining of the assessee’s society claim for deduction u/s 80P(2)(d) qua the interest received on its investments with co-operative In our considered view as a Co- operative bank falls within the realm of the definition of a “Co-operative Society” as contemplated in Section 2(19) of the Act, therefore, the view taken by the lower authorities that interest income received by the assessee from, viz. (i). Belgaum Industrial Co-Op Bank Ltd. : Rs. 3,80,035/-; and (ii). Belgaum District Central Co-Op Bank Ltd. : Rs. 3,012/-, i.e co-operative Banks, would not be eligible for deduction u/s. 80P(2)(d) cannot be sustained. Our aforesaid view is fortified by the order of the ITAT, Mumbai in the case of M/s Solitaire CHS Ltd Vs. Principal Commissioner of Income Tax-26, ITA No.3155/Mum/2019, dated 29.11.2019 (wherein one of us, i.e, the JM was a party) had after exhaustive deliberations held as under:

“6. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Our indulgence in the present appeal has been sought, for adjudicating, as to whether the claim of the assessee for deduction under section 80P(2)(d) in respect of interest income earned from the investments/deposits made with the co-operative banks is in order, or not. In our considered view, the issue involved in the present appeal revolves around the adjudication of the scope and gamut of sub-section (4) of Sec. 80P as had been made available on the statute, vide the Finance Act 2006, with effect from 01.04.2007. On a perusal of the order passed by the Pr. CIT under Sec. 263 of the Act, we find, that he was of the view that pursuant to insertion of sub-section (4) of Sec. 80P, the assessee would no more be entitled for claim of deduction under Sec. 80P(2)(d) in respect of the interest income that was earned on the amounts which were parked as investments/deposits with co-operative banks, other than a Primary Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank. Observing, that the co-operative banks from where the assessee was in receipt of interest income were not co-operative societies, the Pr. CIT was of the view that the interest income earned on such investments/deposits would not be eligible for deduction under Sec. 80P(2)(d) of the Act.

7.  After necessary deliberations, we are unable to persuade ourselves to be in agreement with the view taken by the Pr. CIT. Before proceeding any further, we may herein reproduce the relevant extract of the aforesaid statutory provision, viz. Sec. 80P(2)(d), as the same would have a strong bearing on the adjudication of the issue before us.

“80P(2)(d)

(1) Where in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely :-

(a)………………………………………………………………………………..

(b) ……………………………………………………………………………….

(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;”

On a perusal of Sec. 80P(2)(d), it can safely be gathered that interest income derived by an assessee co-operative society from its investments held with any other co-operative society shall be deducted in computing its total income. 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 co- operative society. We are in agreement with the view taken by the Pr. CIT, that with the insertion of sub-section (4) of Sec. 80P, vide the Finance Act, 2006, with effect from 01.04.2007, 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. However, at the same time, we are unable to subscribe to his view that the aforesaid amendment would jeopardise the claim of deduction of a co-operative society under Sec. 80P(2)(d) in respect of its interest income on investments/deposits parked with a co-operative bank. In our considered view, 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 find that the term „cooperative 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;”

We are of the considered view, that though the co-operative banks pursuant to the insertion of subsection (4) to Sec. 80P would no more be entitled for claim of deduction under Sec. 80P of the Act, but 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 in force 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 co-operative bank would be entitled for claim of deduction under Sec.80P(2)(d) of the Act.

8. We shall now advert to the judicial pronouncements that have been relied upon by the ld. A.R. We find that the issue that a co-operative society would be entitled for claim of deduction under 80P(2)(d) on the interest income derived from its investments held with a co-operative bank is covered in favour of the assessee in the following cases:

(i) Land and Cooperative Housing Society Vs. ITO (2017) 46 CCH 52 (Mum)

(ii) M/s C. Green Cooperative Housing and Society Ltd. Vs. ITO-21(3)(2), Mumbai (ITA No. 1343/Mum/2017, dated 31.03.2017

(iii) MarvwanjeeCama Park Cooperative Housing Society Vs. ITO-Range- 20(2)(2), Mumbai (ITA No. 6139/Mum/2014, dated 27.09.2017.

(iv). Kaliandas Udyog Bhavan Pemises Co-op. Society Ltd. Vs. ITO, 21(2)(1), Mumbai

We further find that the Hon’ble High Court of Karnataka in the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn) and Hon’ble High Court of Gujarat in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj), had held, that the interest income earned by the assessee on its investments with a co-operative bank would be eligible for claim of deduction under Sec. 80P(2)(d) of the Act. Still further, we find that the CBDT Circular No. 14, dated 28.12.2006, also makes it clear beyond any scope of doubt that the purpose behind enactment of sub-section (4) of Sec. 80P was that the co-operative banks which were functioning at par with other banks would no more be entitled for claim of deduction under Sec. 80P(4) of the Act. Insofar the reliance placed by the Pr. CIT on the judgment of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. vs. ITO (2010) 322 ITR 283 (SC) is concerned, we are of the considered view that the same being distinguishable on facts had wrongly been relied upon by him. The adjudication by the Hon‟ble Apex Court in the aforesaid case was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a co-operative society towards deduction under Sec. 80P(2)(d) on the interest income on the investments/deposits parked with a co- operative bank. Although, in all fairness, we may herein observe that the Hon’ble High Court of Karnataka in the case of Pr. CIT Vs. Totagars co-operative Sale Society (2017) 395 ITR 611 (Karn), had concluded that a co-operative society would not be entitled to claim of deduction under Sec. 80P(2)(d). At the same time, we find, that the Hon’ble High Court of Karnataka in the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn) and Hon’ble High Court of Gujarat in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj), had observed, that the interest income earned by a co-operative society on its investments held with a co- operative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. We find that as held by the Hon’ble High Court of Bombay in the case of K. Subramanian and Anr. Vs. Siemens India Ltd. and Anr (1985) 156 ITR 11 (Bom), where there is a conflict between the decisions of non-jurisdictional High Court‟s, then a view which is in favour of the assessee is to be preferred as against that taken against him. Accordingly, taking support from the aforesaid judicial pronouncement of the Hon‟ble High Court of jurisdiction, we respectfully follow the view taken by the Hon’ble High Court of Karnataka in the case of Pr. Commissioner of Income Tax and Anr. Vs. Totagars Cooperative Sale Society (2017) 392 ITR 74 (Karn) and Hon’ble High Court of Gujarat in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj), wherein it was observed that the interest income earned by a cooperative society on its investments held with a co- operative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act.

9. Be that as it may, in our considered view, as the A.O while framing the assessment had taken a possible view, and therein concluded that the assessee would be entitled for claim of deduction under Sec. 80P(2)(d) on the interest income earned on its investments/deposits with co-operative banks, therefore, the Pr. CIT was in error in exercising his revisional jurisdiction u/s 263 for dislodging the same. In fact, as observed by us hereinabove, the aforesaid view taken by the A.O at the time of framing of the assessment was clearly supported by the order of the jurisdictional Tribunal in the case of Land and Cooperative Housing Society Ltd. Vs. ITO (2017) 46 CCH 52 (Mum). Accordingly, finding no justification on the part of the Pr. CIT, who in exercise of his powers under Sec. 263, had dislodged the view that was taken by the A.O as regards the eligibility of the assessee towards claim of deduction under Sec. 80P(2)(d), we „set aside‟ his order and restore the order passed by the A.O under 143(3), date 14.09.2016.

10. Resultantly, the appeal filed by the assessee is allowed.”

Backed by our aforesaid observations, we not being able to persuade ourselves to subscribe to the view taken by the lower authorities, thus, vacate the disallowance of the assessee’s claim for deduction of Rs.3,83,047/- u/s.80P(2)(d) of the Act. The Grounds of appeal No.(s) 1, 2 & 3 are allowed in terms of our aforesaid observations.

10. We shall now advert to the contention of the ld. AR that the lower authorities had erred in declining the assessee’s claim for deduction u/s. 80P(2)(e) of the Act i.e., without properly verifying the “lease deeds” and wrongly construing the purpose for which the godowns and sheds had been let

11. On a perusal of the orders of the lower authorities, we find that the assessee had in its return of income claimed deduction of Rs. 7,60,350/- u/s 80P(2)(e) qua the rent that was received by it from letting out of industrial sheds. Observing, that the assessee society had after constructing industrial sheds let out the same to small industries which were running lathes, CNC Machines and other small workshops, the Assessing Officer while framing the original assessment had vide his order u/s.143(3), dated 11.2012 allowed its claim for deduction of the rental receipts in question u/s 80P(2)(e). However, the Pr. Commissioner of Income Tax was of the view that while for the deduction u/s. 80P(2)(e) of the Act was admissible to a co-operative society only qua its activities of letting out of godowns or warehouses for storage, processing or facilitating the marketing of commodities, but the assessee society in the present case had let out small industrial shops to industrial units for developing industries, thus, the Assessing Officer had wrongly allowed the assessee’s claim for deduction under Sec. 80P(2)(e) of the Act. Accordingly, the Pr. Commissioner of Income-tax on the aforesaid count holding the order passed by the Assessing Officer as erroneous in so far it was prejudicial to the interest of the revenue u/s 263 of the Act, therein, set-aside the assessment order to his file with a direction to re-adjudicate the said issue after due verification.

12. In the course of the set-aside assessment proceedings, the Assessing Officer taking note of the fact that the assessee had failed to establish that the industrial sheds which were let out by it were in the form of godowns and warehouses; and perhaps were being used as workshops and not for storage purpose etc., thus, declined its claim of deduction u/s 80P(2)(e) qua the rent received therefrom.

13. Before us the assesee has assailed the declining of its claim for deduction u/s. 80P(2)(e) of the Act. It was submitted by the Ld. Authorized Representative (for short ‘AR’) that the assessee’s claim for deduction u/s. 80P(2)(e) of the Act had been declined by the Assessing Officer in the course of set-aside proceedings, for the reason, that the assessee could not prove on the basis of supporting documentary evidence that the letting out of industrial sheds was for the purpose of using the same as godowns or warehouses for storage or processing and facilitating the marketing of commodities as envisaged u/s. 80P(2)(e) of the Act. Rebutting the aforesaid observations of the Assessing Officer, it was submitted by the Ld. AR that the assessee had placed on record confirmations of all the tenants wherein they had categorically stated that the respective properties had been taken on rent by them as godowns for storing and stocking of raw materials. In order to buttress his aforesaid claim the Ld. AR had drawn our attention to the respective confirmations of the tenants at Page 71 to 85 of the APB. Backed by the aforesaid facts, it was submitted by the Ld. AR that the lower authorities had drawn adverse inferences qua the assessee’s claim for deduction u/s. 80P(2)(e) of the Act by adopting a half-hearted approach i.e, without considering the documents which duly substantiated its claim for deduction.

14. We have given a thoughtful consideration to the aforesaid issue in hand and find substantial force in the claim of the Ld. AR. On a perusal of the confirmations of the aforementioned parties that have been filed by the assessee before the lower authorities, we find that it has specifically been stated by the respective parties that the premises in question were being used by them as godowns for storing/stocking various Backed by the aforesaid facts, we are of the considered view that the lower authorities had grossly erred in loosing sight of the aforesaid material documentary evidence while adjudicating the issue in hand. We, thus, in all fairness restore the issue to the file of the Assessing Officer with a direction to re-adjudicate the assessee’s claim for deduction u/s.80P(2)(e) after taking due cognizance of the documentary evidence i.e. confirmations of the respective tenants at Page 71 to 85 of the APB filed before us. Thus, the Ground of appeal No. 4 raised by the assesee is allowed for statistical purposes in terms of our aforesaid observations.

15. Ground of appeal 5 being general in nature is dismissed as not pressed.

16. The appeal of the assessee is partly allowed for statistical purposes in terms of our aforesaid observations.

Order pronounced in Open Court on 06th day of April, 2022.