Interest on Investment in Co-operative Banks Tax-Free ; A Landmark Judgment of High Court

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Interest on Investment in Co-operative Banks Tax-Free ; A Landmark Judgment of High Court

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As Civil Cooperative Banks are registered under the Cooperative Act, the Madras High Court observed that first they are cooperative societies and then they are banks, and the Madras High Court has given a historic verdict that Civil Cooperative Banks should also be exempted from Section 80(P)(2) of the Income Tax Act. That has boosted the hopes of the urban cooperative banking sector.

Civil Cooperative Banks are licensed to carry on “banking” business by the Reserve Bank under the Banking Regulation Act. Earlier, the tax exemption under Section 80 (P) of the Income Tax Act, which was given to these banks, was cancelled by the Central Government with effect from 1st April, 2007, stating that civic banks carry on banking business like other commercial banks.

As per the provisions of Section 80 (p) (2) (d) of the Income Tax Act, interest earned on investment made by one co-operative society in another co-operative society is exempted from income tax. However, despite this exemption being a co-operative society, civic co-operative banks were denied by the Income Tax Department.

In a suit filed by two civil cooperative banks in the Madras High Court on the same issue, Justice Krishna ramaswamy explained that since civil cooperative banks are the first cooperative societies, they are entitled to get relief under Section 80 (P)(2)(d) of the Income Tax Act.

Regarding this decision, according to an expert in administration and banking of the State Co-operative Bank, the claims filed by the Maharashtra Urban Banks Federation, other state federations and some co-operative banks in the High Court of their respective states against the amendments made by the Central Government in the Banking Regulation Act in 2020 with regard to urban co-operative banks, as per the order of the Madras Supreme Court are currently being tried together before the High Court.

If the stand taken by the single bench of the Madras High Court is sustained in future, civil cooperative banks may be exempted from several oppressive amendments in the Banking Regulation Act. In the three-tier structure of the cooperative financial sector, the civil cooperative banks make their investment through the competent district cooperative banks or directly in the state cooperative bank, as required by the cooperative act of each state. In this background, if all the co-operative banks decide to invest in other competent co-operative banks, it will definitely benefit the strengthening of the co-operative sector in the state.

Shreyas Vange

(Source – Sakal)