Ahmedabad ITAT Allows Section 80P Deduction on Cooperative Bank Interest

Background of the case

The assessee was a cooperative credit society formed for staff members of the Reserve Bank of India working in Ahmedabad. Its principal activity was providing credit facilities to its members.

For Assessment Year 2020-21, it claimed a deduction under Section 80P on interest earned from fixed deposits placed with Ahmedabad District Cooperative Bank. The Assessing Officer and the Commissioner of Income Tax (Appeals) denied the deduction.

The lower authorities treated the fixed-deposit interest as income from other sources and considered Section 80P(4) as a bar. They also disallowed expenses and depreciation and applied a flat tax rate of 30%.

Main issue before the Tribunal

The principal issue was whether interest of Rs 12,61,508 earned by a cooperative society from fixed deposits with a cooperative bank qualified for deduction under Section 80P(2)(d).

Section 80P(2)(d) permits deduction of interest or dividend income derived by a cooperative society from investments with another cooperative society.

The dispute therefore required the Tribunal to distinguish between a cooperative bank claiming a deduction for its own income and a cooperative society claiming deduction on income earned from an investment with a cooperative bank.

Why Section 80P(4) did not defeat the claim

Section 80P(4) generally withdraws the benefit of Section 80P from cooperative banks, except specified agricultural credit institutions. The provision was introduced to place cooperative banks broadly on the same tax footing as other banks.

The Tribunal held that this restriction cannot be expanded to deny a deduction otherwise available to a cooperative society under Section 80P(2)(d) merely because the payer of interest is a cooperative bank.

The relevant claimant was the RBI staff cooperative credit society, not the cooperative bank. The character and eligibility of the claimant therefore remained central to the deduction.

Earlier decisions followed by ITAT

The Tribunal followed the Gujarat High Court ruling in State Bank of India v. Commissioner of Income Tax, which recognised deduction under Section 80P(2)(d) for interest earned by a cooperative society from investments with a cooperative bank.

It also relied on the Ahmedabad Tribunal decision in ACIT v. Sardar Patel Cooperative Credit Society Ltd., where interest on surplus funds kept with cooperative banks was held eligible for deduction.

The Supreme Court decision concerning interest on surplus funds in Totgars Cooperative Sale Society Ltd. did not justify denial of the separate deduction available under Section 80P(2)(d) on the facts considered by the Tribunal.

Section 80P deduction allowed

The Tribunal accepted the cooperative society claim and directed deletion of the disallowance of Rs 12,61,508.

The decision confirms that the source of the interest and the exact clause under which deduction is claimed must be examined carefully. A conclusion under Section 80P(2)(a)(i) cannot automatically determine a claim made under Section 80P(2)(d).

Treatment of administrative expenses

The assessee had also claimed administrative and member-related expenses. The lower authorities disallowed the full amount on the reasoning that the expenses lacked a direct connection with the fixed-deposit interest assessed under the head income from other sources.

The Tribunal observed that common administrative expenses such as audit fees and employee-related expenditure may be necessary for the functioning of an organisation and can qualify under Section 57 where they are incurred wholly and exclusively for earning the relevant income.

However, expenditure of Rs 2,86,000 on gifts to retiring members and a Covid-19 donation of Rs 31,000 was not allowed. The balance disallowance was deleted.

Depreciation claim remained disallowed

The cooperative society claimed depreciation of Rs 22,692 on computers and furniture. The Tribunal noted that depreciation under the provisions governing income from other sources is available only in the situations specified by law.

As the assessee case did not fall within those specified categories, the depreciation disallowance was sustained.

Flat 30% tax rate was incorrect

The Assessing Officer had applied a flat tax rate of 30% and had selected an incorrect status. The Tribunal held that a cooperative society is entitled to the slab rates prescribed for that status under the applicable Finance Act.

It therefore directed the tax authorities to apply the appropriate cooperative society slab rates to the finally determined income.

Key takeaways for cooperative societies

• Interest from an investment with a cooperative bank may qualify under Section 80P(2)(d) when the claimant is an eligible cooperative society.
• Section 80P(4) restricts claims by cooperative banks but does not automatically remove every deduction connected with a cooperative bank.
• The precise clause of Section 80P and the legal status of both the investor and the institution receiving the deposit should be verified.
• Fixed-deposit certificates, interest statements, bank registration details and the society registration documents should be preserved.
• Administrative expenses must satisfy the conditions of Section 57 when income is assessed under the head income from other sources.
• Depreciation cannot be claimed under Section 57 unless the income and asset fall within the statutory categories.
• A cooperative society should be taxed using the rates prescribed for its correct legal status, not an arbitrary flat rate.

Conclusion

Ahmedabad ITAT allowed the RBI staff cooperative credit society deduction of Rs 12.61 lakh under Section 80P(2)(d) for interest earned from fixed deposits with a cooperative bank. It clarified that Section 80P(4) cannot be used to deny the deduction merely because the investment was made with a cooperative bank.

The appeal was partly allowed because the Tribunal separately examined the expense, depreciation and tax-rate issues. The ruling is useful for cooperative credit societies and housing societies maintaining deposits with cooperative banks, although eligibility must be tested against the facts and the applicable jurisdictional precedents.