Income Tax Act | Non-Bank Co-Operative Society Can Claim Section 80P(2)(d) Deduction On Interest From Co-Operative Bank Investments: Sikkim High Court
Sanchayita Lahkar
The High Court of Sikkim Division Bench of Chief Justice Biswanath Somadder and Justice Meenakshi Madan Rai has allowed a tax appeal by a non-banking co-operative society, holding that interest income earned from investing surplus funds with co-operative banks qualifies for deduction under Section 80P(2)(d) of the Income Tax Act, 1961. The dispute was whether this deduction could be denied on the basis that co-operative banks are excluded by Section 80P(4). The Court held that Section 80P(4) restricts only co-operative banks from claiming the benefit on their own income and does not bar a non-bank co-operative society from claiming deduction on such interest. The order denying the benefit was set aside and the deduction was directed to be granted.
The dispute arose from the denial of deduction claimed on interest income earned by a cooperative society from investments made with cooperative banks. During the relevant assessment year, the assessee, a non-banking cooperative society registered under the Sikkim Cooperative Societies Act, 1978, earned interest from deposits placed with two cooperative banks, both registered under the same State legislation. The investments were made out of surplus funds and statutory reserves, in compliance with the provisions governing prudent management and investment of cooperative funds under the State law.
The assessee claimed deduction of such interest income under Section 80P(2)(d) of the Income Tax Act, 1961. The Assessing Officer disallowed the claim on the ground that interest earned from cooperative banks was hit by Section 80P(4). The appellate authority allowed the claim, holding that the income qualified for deduction. The Revenue carried the matter in appeal before the Income Tax Appellate Tribunal, which reversed the appellate order and upheld the disallowance by relying on judicial precedents concerning cooperative banks and interpretation of exemption provisions. The assessee challenged the Tribunal’s order before the High Court, raising questions on the interpretation of Sections 80P(2)(d) and 80P(4) of the Income Tax Act, 1961.
The Court examined the scope of Section 80P(4) and noted that “a plain reading of the above quoted provision of law reveals that the statute makes a clear distinction between a co-operative bank … and any other co-operative entity registered as a co-operative society.” It recorded that it was “nobody’s case that [the assessee] is a co-operative bank, functioning within the meaning assigned to it under Part V of the Banking Regulation Act, 1949.”
While referring to the nature of income, the Court stated that the assessee “received interest only from some co-operative banks, that too, based on investments made from the surplus funds and statutory reserves of the federation, as required under the relevant provisions of [the State Act].”
On Section 80P(2)(d), the Court reproduced the statutory language and observed that “it is a matter of record that [the assessee] earned interest from investments made in two co-operative banks … both registered as co-operative societies under the [State Act].” The Court found that the Tribunal had “misinterpreted the provision of section 80P(4) … and erroneously applied it … thereby disentitling [the assessee] from claiming benefit under section 80P.”
Addressing reliance on earlier precedents, the Court recorded that the decision in Totgars’ Cooperative Sale Society Ltd. was “not applicable in the facts of our case,” noting that the eligibility of deduction had to be examined under Section 80P(2)(d) and not under Section 80P(2)(a)(i). It further noted that the Karnataka High Court judgment relied upon by the Tribunal had been held to be distinguishable in similar factual circumstances.
The Court stated that “the impugned judgment and order dated 18th June, 2025, passed by the learned Income Tax Appellate Tribunal … is liable to be set aside and is accordingly set aside. In the facts of the instant case, the assessee is entitled to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961. Tax Appeal No. 02 of 2025 is accordingly allowed.”
Advocates Representing the Parties
For the Petitioners: Mr. Dhiraj Lakhotia, Advocate; Mr. Abhinav Kant Jha, Advocate; Ms. Radhika Agarwal, Advocate
For the Respondents: Ms. Sangita Pradhan, Deputy Solicitor General of India; Ms. Sittal Balmiki, Advocate
Case Title: Sikkim State Cooperative Supply and Marketing Federation Limited v. Deputy Commissioner of Income-tax
Case Number: Tax Appeal No. 02 of 2025
Bench: Chief Justice Biswanath Somadder; Justice Meenakshi Madan Rai
