No Section 80P(2)(d) deduction on interest from co-operative bank: Karnataka HC

Judicial Employees House Building Cooperative Society Limited Vs ITO (Karnataka High Court)

The case involves an appeal by the Judicial Employees House Building Cooperative Society Limited (the assessee) challenging the order of the Income Tax Appellate Tribunal (ITAT), Bengaluru, concerning the assessment year 2017-18. The appeal was filed under Section 260A of the Income Tax Act, 1961 (“the Act”), raising substantial questions of law regarding the eligibility of interest income from investments in a co-operative bank for deduction under Section 80P(2)(d) of the Act.

The assessee had claimed a deduction of ₹25,19,453 earned as interest from investments with the Mysore and Chamarajanagar District Co-operative Central Bank Ltd. under Section 80P(2)(d). The Assessing Officer (AO) rejected the claim, reasoning that the investment was in a co-operative bank rather than another co-operative society. On appeal, the Commissioner of Income Tax (Appeals) also denied the claim, and the assessee subsequently appealed before the ITAT. The ITAT, following the Karnataka High Court’s earlier decision in ACIT vs. Totagars Co-operative Sale Society ((2017) 83 COM 140), held that under Section 80P(4), investments in a co-operative bank do not qualify for deduction under Section 80P(2)(d).

The assessee argued that the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., though engaged in banking, is a co-operative society by registration and therefore eligible for deduction under Section 80P(2)(d). The assessee cited an earlier Karnataka High Court decision in PCIT vs. Totagars Co-operative Sale Society ((2017) 78 Taxmann 169), which had allowed such investments. The appellant contended that the ITAT wrongly relied on a subsequent judgment of the same court dated 16 June 2017, which denied the deduction.

The Revenue argued that while the bank is a co-operative society by registration, it is also a licensed co-operative bank under the Reserve Bank of India, carrying on banking activities. Section 80P(4) of the Act specifically bars deduction for income earned from a co-operative bank under Section 80P(2)(d). The second Totagars judgment, considered by the ITAT, had clarified that Section 80P(4) overrides Section 80P(2)(d) for such cases, and this interpretation was correctly applied by the Tribunal.

The Karnataka High Court examined the legal position, emphasizing that the character of a co-operative bank depends on its functional activities. Merely being registered as a co-operative society does not make income from a co-operative bank eligible for Section 80P(2)(d) deduction. Since the Mysore and Chamarajanagar District Co-operative Central Bank Ltd. held a banking license and carried out banking activities, it qualified as a co-operative bank, invoking the bar under Section 80P(4).

The Court held that the ITAT rightly followed the 16 June 2017 Totagars judgment and correctly denied the deduction claimed by the assessee. The Court noted that no new facts or legal distinctions justified a departure from the ITAT’s view. Consequently, the appeal was dismissed, and no substantial questions of law arose.

Judicial precedents:

1. ACIT vs. Totagars Co-operative Sale Society ((2017) 83 COM 140) – clarified that Section 80P(4) bars deduction for income from co-operative banks.

2. PCIT vs. Totagars Co-operative Sale Society ((2017) 78 Taxmann 169) – earlier judgment allowing deduction was distinguished, as it did not consider Section 80P(4).

The ruling reinforces that co-operative banks, even if registered as co-operative societies, are not eligible for deduction under Section 80P(2)(d) if they carry out banking activities licensed by the RBI. Section 80P(4) operates as a specific exclusion for such cases.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

Heard learned counsel Sri.Mohan.B.K., for the appellant/assessee and learned senior standing counsel Sri.E.I.Sanmathi for respondent/Revenue. Perused the entire appeal papers.

2. The assessee is in appeal under Section 260A of the Income Tax Act, 1961 (for short, ‘1961 Act’) challenging the order passed by the Income Tax Appellate Tribunal SMC ‘C’ Bench, Bengaluru (for short, ‘the Tribunal’) in ITA.No.108/BANG/2023 dated 11.04.2023 for the assessment year 2017-18.

3. The following substantial questions of law are raised for consideration of this Court:

“1. Whether on facts and circumstances of the case, the Tribunal was justified in coming to the conclusion that the interest derived by the Co-operative society from its investments was not with any other co-operative Society as required under Section 80P2(d)?

2. Whether for the purpose of Section 80P(2)(d) a Co-operative Bank should be considered as a Co-operative Society or not. For, if a Co-operative Bank is considered to be a Co-operative Society, then any interest earned by the Co-operative Society from a Co­operative Bank would necessarily be deductible under Section 80P(1)?”

4. The assessee filed return of income for the assessment year 2017-18 claiming interest income of Rs.25,19,453/- earned from investment with the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., under Section 80P(2)(d) of the Act. The Assessing Officer rejected the claim as the investment made was in Co-operative Bank.

5. The assessee carried the order of assessment in appeal before the Commissioner of Income Tax (Appeals) (for short, ‘CIT(A)’). The Appellate Commissioner by order dated 26.11.2021 rejected the appeal. Further, the assessee preferred appeal before the Tribunal. The Tribunal under impugned order following the judgment of this Court in ACIT VS. TOTAGARS CO-OPERATIVE SALE SOCIETY ((2017) 83 COM 140 (KARNATAKA) held that in view of Section 80P(4) of the Act, the assessee/appellant is not entitled to deduction under Section 80P(2)(d) of the Act.

6. Learned counsel Sri.Mohan.B.K., appearing for the appellant/assessee submits that the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., is a Co-operative Society, though engaged in banking activity. Hence, the investment made is eligible for deduction under Section 80P(2)(d) of the Act. Learned counsel further submits that this Court in PCIT VS. TOTAGARS CO-OPERATIVE SALE SOCIETY ((2017) 78 TAXMANN.COM 169 (KARNATAKA) has held that the investment in Co-operative Bank is eligible for deduction under Section 80P(2)(d) of the Act. It is submitted that in the case of TOTAGARS CO­OPERATIVE SALE SOCIETY (supra) another decision is rendered by this Court on 16.06.2017 denying the claim under Section 80P(2)(d) of the Act. The Tribunal instead of applying the earlier judgment dated 05.01.2017 incorrectly applied the judgment dated 16.06.2017. Learned counsel further submits that the second judgment in TOTAGARS CO-OPERATIVE SALE SOCIETY (supra) is pending in appeal before the Hon’ble Apex Court.

7. Per contra, Sri.E.I.Sanmathi, learned senior standing counsel appearing for the respondent/Revenue submits that undisputedly the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., is registered as a Co-operative Society and carrying banking business with license issued by the Reserve Bank of India. In view of the banking activity, the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., is a Co-operative Bank within the meaning of Section 80P of the Act. Learned counsel further submits that in view of a specific bar of application of Section 80P of the Act, in terms of Section 80P(4), the investment in the Co­operative Bank is not eligible for deduction under Section 80P(2)(d) of the Act. Further, learned counsel submits that in the first decision in TOTAGARS CO-OPERATIVE SALE SOCIETY (supra), the bar imposed under Section 80P(4) of the Act was not the subject matter for consideration. However, in the second TOTAGARS CO-OPERATIVE SALE SOCIETY (supra), this Court has considered the effect of Section 80P(4) of the Act and held that investment in Co-operative Bank is not eligible for deduction under Section 80P(2)(d) of the Act. It is submitted that the Tribunal by following the judgment of this Court in second TOTAGARS CO-OPERATIVE SALE SOCIETY (supra) has rightly denied the claim of deduction under Section 80P(2)(d) of the Act.

8. Having considered the submissions of the learned counsel for the parties, we note that the assessee has made investment and earned interest income from the Mysore and Chamarajanagar District Co-operative Central Bank Ltd. A Co-operative Bank is a Co-operative Society registered under the Co-operative Societies Act, whether the Co-operative Society assumes the character of the Co­operative Bank depends on the activities carried on by it.

9. It is undisputed that the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., has banking license issued by the Reserve Bank of India under the Banking Regulation Act and engaged in banking activities. Merely the Co-operative Bank is also a Co- operative Society, the investment in Co-operative Bank cannot be considered for deduction under Section 80P(2)(d) of the Act. In the light of the judgment in second TOTAGARS CO-OPERATIVE SALE SOCIETY (supra), dated 16.06.2017 followed by the Tribunal, we are of the view that in view of the banking license of the Mysore and Chamarajanagar District Co-operative Central Bank Ltd., the same is a Co-operative Bank. Once the investment is made in a Co-operative Bank, Sub-Section (4) of Section 80P steps in and operates as a bar for deduction under Section 80P(2)(d) of the Act.

10. The Tribunal rightly following the judgment of this Court in the second TOTAGARS CO-OPERATIVE SALE SOCIETY (supra) has held that the assessee is not entitled to claim deduction under Section 80P(2)(d) of the Act. We agree with the finding recorded by the Tribunal based on the judgment of this Court. Further, there are no distinguishable facts or law placed to take a different view. Accordingly, no substantial questions of law would arise.

11. In the light of the above, appeal fails and accordingly stands dismissed.