Introduction

Section 80P came into force from April 01,1968. It replaced section 81 under which the income of the categories mentioned were included in the total income of the Co-operative Society but a rebate of income tax and super tax were given to the society. The Finance Act,1965 abolished the levy of Super tax. Therefore, from the assessment year 1965 -66, only a rebate of income tax was available to the society. From the assessment year 1968-69 onwards the relief is given by way of a straight deduction to a co- operative society.

Co-operative Society.

Section 2(19) of the Income -tax Act 1961, defines a co-operative society. Co-operative Society means “ a co-operative society registered under the Co-operative Societies Act ,1912 or under the Co-operative Act, 1912 or under any other law for the time being in force in any state for the registration of co-operative societies.”

Deduction in respect of income of co- operative societies.

A co-operative society can claim deduction against its gross total income under section 80P of the Act, which reads as under:

1. Where, in the case of an assessee being a co- operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub- section (2), in computing the total income of the assessee.</em >
2. The sums referred to in sub- section (1) shall be the following, namely:-</em >
   1. —————–
   2. —————
   3. ——————-
   4. in respect of any income by way of interest or dividends derived by the co- operative society from its investments with any other cooperative society, the whole of such income;</em >
3. ————–
4. The provisions of this section shall not apply in relation to any co-operative bank other than A primary agricultural credit society or a primary co-operative agricultural and rural development bank.</em >

Explanation.—For the purposes of this sub-section,—

1. “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);</em >
2. “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.”</em >

Accordingly, a co-operative society can claim deduction under section 80P(2)(d) against any interest or dividend income earned on its investments in shares of or deposits with any other co-operative society.

Clarification by CBDT

The CBDT has explained the purpose and necessity to include sub-section (4) of section 80P vide circular no. 14/2006 dated December 28,2006 which reads as under;

“Section 80P, inter-alia provides for a deduction from the total income of co-operative societies engaged in the business of banking or providing credit facilities to its member, or business of cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, to the agricultural produce of its members, etc.</em >

The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore section 80P has been amended and a new sub section (4) has been inserted to provide that the provision of said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary agriculture credit society or a primary agricultural and rural development bank. The expressions “co- operative bank”, primary agricultural credit society” and : primary co-operative agricultural and rural development bank” have also been defined to land clarity to them.</em >

Further, a new sub section (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co- operative society with its members shall be included in the definition of “income”.”</em >

Despite, the above circular, which is binding on the Assessing Officers under section 119(1) of the Act, they are disallowing deduction under section 80P(2)(d) of the Act, in respect of interest or dividends derived by the co-operative society from its investments with any other co-operative society including co-operative banks. However, Tribunals are allowing deduction under section 80P(2)(d) of the Act.

Objects of Section 80P of the Act, 1961.

In Mavilayi Service Co-op Bank Ltd v. CIT (2021)431 ITR 1 (SC) the Supreme Court has culled out following proposition from the judgement of the Supreme Court in Citizen Co- operative Society Ltd. v. ACIT (2017) 397 ITR 1 (SC) (Affirmed in Citizen Co-operative Society Ltd </em >v. ACIT (2018) 252 Taxman 374 (SC))

1. That section 80P of the Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative society generally in the economic life of the country and must, therefore be read liberally and in favour of the assessee.
2. That once the assessee is entitled to avail of the deduction, the entire amount of profits and gains of the business that are attributable to any one or more activities mentioned in sub section (2) of section 80P must be given by way of deduction;
3. That the Supreme Court in Kerala State Co-Operative Marketing Federation Ltd v CIT(.1998 ) [231 ITR 814 (SC)] has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied.
4. This is for the reason that where the legislature wanted to restrict the deduction to a particular type of co- operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies the legislature expressly says so – which is not the case with section 80P(a) (i);
5. That section 80P(4) is in the nature of a proviso to main provision contained in section 80P(1) and (2). This proviso specifically excluded only co-operative banks, which are co-operative societies who must posses a licence from the Reserve Bank of India to do the business.

From the above propositions, the Supreme Court held that proper interpretation of section 80P of the Act is as under:

1. The marginal note to section 80P which reads “deduction in respect of income of co-“operative societies” is important.
2. The purpose of eligibility for deduction, is that the assessee must be a “Co-operative Society”. A co-operative society is as defined in section 2(19) of the Act. For the purposes of eligibility it is unnecessary to provide any further classification whether the co-operative society is classified as X or Y.
3. The gross total income must include the income i.e. referred to in sub section (2) of section 80P of the Act,
4. Sub clause (d) of sub section (2) of section 80P also points in the same direction, in that a co-operative society is entitled to

deduct the whole of interest or dividend income derived by it from investment with other co-operative societies (including co-operative banks) , the object of provision being furtherance of the co- operative movement as a whole.

Conclusion

In Mumbai the Tax Department is not allowing the deduction u/s 80P(2)(a)(d) of the Act in respect of interests from Co-Operative Banks. All Co-Operative Societies have no option than to file an appeal before the CIT(A). Some of the CIT(A) are also not allowing the deduction. ITAT Mumbai Benches are allowing the deduction (Maker Tower A& B Co-Operative Housing Society Ltd v. ACIT (2022) 99 ITR 73 (SN)(Mum)(Trib). Considering the judgement of the Supreme Court in Mavilayi Services co- operative Bank Ltd (supra) being a law of land under Article 141 of the Constitute of India, the CBDT should issue a circular to the Income tax Authorities to follow the above judgement strictly to avoid the litigation and in all the pending appeals before the CIT(Appeals). The AIFTP may consider making an representation to the CBDT as the issue is affecting all Co- Operative Housing Societies across the Country.