Income Tax Appellate Tribunal Upholds Eligibility of Cooperative Housing Societies for Section 80P(2)(d) Deductions on Interest from Cooperative Banks

Introduction

The case of Mystique Rose Cooperative Housing Society Ltd., Mumbai v. ITO -22(2)(3), Mumbai adjudicated by the Income Tax Appellate Tribunal (ITA) on March 30, 2022, addresses the eligibility of cooperative housing societies to claim deductions under Section 80P(2)(d) of the Income Tax Act, 1961. The appellant, Mystique Rose Cooperative Housing Society Ltd. (hereinafter referred to as the Appellant), challenged the decision of the Income Tax Officer (ITO) and the Commissioner of Income Tax Appeals (CIT(A)) to disallow a portion of their claimed deductions related to interest income earned from cooperative banks.

Summary of the Judgment

The Appellant, a cooperative housing society, earned interest income totaling INR 3,80,214 during the assessment year 2014-15 from various sources, including cooperative banks and a savings account. The ITO disallowed the deduction under Section 80P(2)(d), contending that recent amendments (Section 80P(4)) and the nature of the income excluded eligibility for the deduction. The CIT(A) upheld this decision. However, upon appeal, the ITA reversed the lower authorities' decisions, allowing the Appellant to claim a partial deduction of INR 3,38,768 under Section 80P(2)(d) related to interest from cooperative banks, while disallowing the deduction for savings account interest.

Analysis

Precedents Cited

Totgar's Cooperative Sale Society Ltd. v. ITO (2010) - The Supreme Court held that interest income from cooperative banks does not qualify for deduction under Section 80P(2)(a)(i) as it falls under 'income from other sources' rather than 'profits and gains of business'.
Peroorkada Service Co-operative Bank Ltd. (ITA No. 323 of 2019) - Supported the eligibility for deductions under Section 80P(2)(d).
Kaliandas Udyog Bhavan Premises Co-operative Society Ltd. (ITA No. 6574/Mum/2017) - Affirmed deductions under Section 80P(2)(d) for interest earned from cooperative banks.
State Bank Of India Vs. CIT (2016) - Gujarat High Court held that interest from investments in cooperative societies is deductible under Section 80P(2)(d).
Pr. CIT Vs. Totagars Co-operative Sale Society (2017) - Karnataka High Court delineated the applicability of deductions under Section 80P for cooperative societies.
Land's End Co-operative Housing Society Limited Vs. ITO (2014) - Mumbai Bench allowed deductions under Section 80P(2)(d).

Legal Reasoning

The Tribunal meticulously differentiated between the provisions of Section 80P(2)(a) and Section 80P(2)(d). While Section 80P(2)(a) pertains to 'profits and gains of business,' Section 80P(2)(d) specifically addresses 'any income by way of interest or dividends' derived from investments in other cooperative societies.

Despite the insertion of Section 80P(4) via the Finance Act, 2006, which excluded cooperative banks (except primary agricultural credit societies and primary cooperative agricultural and rural development banks) from claiming deductions under Section 80P, the Tribunal opined that this exclusion did not extend to the interest income received by a cooperative society from its investments in these banks.

The Hon'ble Supreme Court's decision in Totgar's was deemed inapplicable as it dealt with Section 80P(2)(a), not Section 80P(2)(d). The Tribunal emphasized that the eligibility under Section 80P(2)(d) hinges on the income being derived from investments in other cooperative societies, regardless of whether the income is categorized under 'profits and gains of business' or 'income from other sources.'

Impact

This judgment clarifies the scope of deductions under Section 80P for cooperative societies. It establishes that:

Cooperative societies can claim deductions under Section 80P(2)(d) for interest income earned from investments in other cooperative societies, including cooperative banks.
The exclusion of cooperative banks from claiming deductions under Section 80P(4) does not impede cooperative societies from deriving eligible deductions under Section 80P(2)(d) from such banks.
The categorization of income as 'profits and gains of business' or 'income from other sources' does not affect the eligibility for deductions under Section 80P(2)(d), provided the income is derived from investments in cooperative societies.

Future cases involving cooperative societies and their eligibility for deductions under Section 80P will reference this judgment to delineate the boundaries and applications of the relevant sections.

Complex Concepts Simplified

Section 80P of the Income Tax Act

Section 80P(2)(a): Relates to deductions for cooperative societies on 'profits and gains of business.' It excludes interest income from cooperative banks unless the bank qualifies under specific criteria.

Section 80P(2)(d): Provides deductions for 'any income by way of interest or dividends' derived by a cooperative society from its investments in other cooperative societies.

Section 80P(4): Introduced via the Finance Act, 2006, excluding certain cooperative banks from claiming deductions under Section 80P.

The Tribunal's interpretation ensures that while cooperative banks themselves may be excluded from claiming certain deductions, the cooperative societies that invest in these banks can still benefit from specific deductions under Section 80P(2)(d).

Conclusion

The ITA's decision in favor of Mystique Rose Cooperative Housing Society Ltd. reaffirms the eligibility of cooperative societies to claim deductions under Section 80P(2)(d) for interest income earned from investments in other cooperative societies, including cooperative banks. This judgment delineates the boundaries between different subsections of Section 80P, ensuring clarity in the application of tax benefits for cooperative entities. It underscores the importance of contextual interpretation of tax provisions, especially in distinguishing between various categories of income and their applicability under specific sections.

For cooperative societies, this decision serves as a pivotal reference point, providing assurance that their investments in cooperative banks can still yield tax benefits, thereby fostering a conducive environment for collaborative financial growth within the cooperative sector.