Interest Income from Cooperative Banks Eligible for Deduction Under Section 80P(2)(d): ITAT Panaji

Tax Relief for Souharda Societies: ITAT Reaffirms Section 80P Eligibility

In a significant ruling for cooperative credit societies, the Income Tax Appellate Tribunal (ITAT), Panaji Bench, has clarified the scope of tax deductions under Section 80P of the Income Tax Act . The tribunal held that interest income earned by a cooperative society—registered under the Karnataka Souharda Sahakari Act—from investments in cooperative banks is eligible for deduction under Section 80P(2)(d) .

Case Background

The appellant, Shri Brahmanath Credit Souhard Sahakari Sangh Niyamit , a credit society, filed its income tax return for the Assessment Year 2017-18, claiming a deduction under Section 80P(2)(a)(i) . The Assessing Officer (AO) denied the deduction, arguing that the society was not a cooperative society within the meaning of the Income Tax Act due to its registration under state-specific laws. Furthermore, the interest income earned by the society from its deposits in cooperative banks was rejected for deduction under Section 80P(2)(d) . The CIT(A) upheld the AO's decision, leading the society to appeal to the tribunal.

Arguments Presented

The appellant’s counsel argued that the society, being a "Souharda" society, functions as a cooperative society and is covered under Section 2(19) of the Income Tax Act , citing multiple precedents. They emphasized that interest earned on surplus funds parked in cooperative banks constitutes income from investments in another cooperative society, satisfying the conditions of Section 80P(2)(d) .

The Revenue , conversely, relied on the orders of the lower authorities, reiterating that the classification of "Souharda" societies under the state act did not automatically entitle them to federal tax benefits under the Income Tax Act, and that interest income from banks is not strictly attributable to credit activities.

Legal Analysis & Precedents

The tribunal analyzed the intersection of state cooperative laws and federal tax provisions. Citing the jurisdictional High Court decision in Sri Matha Vivododdesha Pathina Souharda Sahakari Niyamitha vs. Union of India and the Tribunal’s own guidance from Akshaya Co-Op Credit Society , the Bench established that "Souharda" societies qualify as cooperative societies under Section 2(19).

Regarding the interest income, the tribunal referenced the landmark logic in M/s Solitaire CHS Ltd. vs. Pr.CIT , affirming that the insertion of Section 80P(4) did not strip cooperating societies of their right to claim deductions on interest earned from investments in other cooperative entities.

Key Observations

The tribunal provided crucial clarity on the legislative intent:

• On the definition of cooperative societies: "Their lordships’ have settled the law therein that a 'Souharda' cooperative society registered under the state cooperative law(s) very well forms 'a cooperative society' u/sec.2(19) of the Act."
• On the eligibility of interest income: "As long as it is proved that the interest income is being derived by a cooperative society from its investments made with any other cooperative society, the claim of deduction under the aforesaid statutory provision, viz. Sec. 80P(2)(d) would be duly available."
• On the status of Cooperative Banks: "Though the cooperative banks... would no more be entitled for claim of deduction under Sec. 80P(4)... a cooperative bank continues to be a cooperative society... therefore, the interest income derived by a cooperative society from its investments held with a cooperative bank would be entitled for claim of deduction."

Court's Decision

The ITAT allowed the appeal, setting aside the orders of the CIT(A) . The Assessing Officer has been directed to grant the deduction under Section 80P(2)(d) of the Act regarding the interest income earned from cooperative banks, restricted to the total gross income. This decision provides much-needed relief to similar credit societies and cements the legal position that investments between cooperative entities remain tax-advantaged, regardless of the specific banking functions such entities may perform.