ITAT Surat: Interest Income from Co-operative Banks Eligible for Deduction u/s 80P(2)(d) for Co-operative Societies

Tax Relief for Co-ops: ITAT Surat Affirms Deductibility of Interest Income from Co-operative Banks

In a significant relief for the co-operative sector, the Income Tax Appellate Tribunal (ITAT) Surat Bench has reaffirmed that co-operative societies are entitled to claim deductions under Section 80P(2)(d) of the Income-tax Act, 1961, on interest and dividend income earned from investments held in co-operative banks. The bench, comprising Ms. Suchitra Raghunath Kamble and Shri Bijayananda Pruseth, dismissed the Revenue’s appeals, holding that co-operative banks registered under the state co-operative acts remain "co-operative societies" for the purpose of the Act.

The Dispute: Decades-Long Debate on Section 80P

The legal battle centered on whether interest earned by Bardoli Vibhag Gram Vikas Co-op Credit Society Ltd. from its deposits in The Surat District Co-operative Bank Ltd. qualifies for the deduction provided under Section 80P(2)(d).

The Revenue, represented by the Department of Income Tax, argued that the deduction should be disallowed based on precedents like Totgars’ Co-operative Sale Society Ltd. vs. ITO . The Assessing Officer had contended that co-operative banks are "economically different" from primary co-operative societies and are excluded by the provisos introduced in Section 80P(4). However, the taxpayer maintained that the bank remains a co-operative society—a legal status that cannot be stripped simply because it functions as a bank.

Legal Reasoning and Precedents

The ITAT Bench leaned heavily on the recent interpretative trend set by the Gujarat High Court. The tribunal highlighted that the controversy is no longer res integra (a matter not yet decided) due to clear directives from the jurisdictional High Court in cases such as Ashwinkumar Arban Co-operative Society Ltd. and Kutch District Co-operative Milk Producers Union Ltd.

The Tribunal emphasized that these high-court rulings clearly established that the income earned as interest on investments made with a co-operative bank—which is itself a co-operative society—qualifies for the deduction. The distinction sought by the Revenue, attempting to apply the Totgars decision to this specific factual matrix, was deemed inapplicable by the Tribunal.

Key Observations from the Tribunal

The order articulates the core rationale for the decision:

• On the status of the Bank: “It is an admitted fact that The Surat District Co-operative Bank Ltd. is a co-operative society, duly registered under the Gujarat Co-operative Societies Act, 1961.”
• On the availability of the deduction: “The Hon’ble jurisdictional High Court held that deduction u/s 80P(2)(d) is available to co-operative societies on income earned as interest on investment made with co-operative bank, which in turn is a co-operative society.”
• On Consistency: “The Surat Tribunal in assessee’s own case (supra) has allowed similar deduction claimed u/s 80P(2)(d) of the Act.”

Final Decision and Future Implications

The ITAT Surat ruled in favor of the assessee, effectively dismissing the Revenue’s appeals for the assessment years 2017-18, 2018-19, 2020-21, and 2022-23.

For the co-operative sector, this verdict serves as a crucial clarification, reinforcing the legislative intent behind Section 80P(2)(d) to support the financial viability of credit societies. By cementing the interpretation that co-operative banks are, by law, co-operative societies, the tribunal has provided much-needed certainty for other societies navigating similar tax disputes. This ruling signals a clear path forward for entities looking to justify their tax positions amid conflicting previous interpretations of the Finance Act amendments.