India: Madras High Court Grants Historic Verdict, Boosts Hopes for Tax Exemption in Civil Cooperative Banks

Chennai, 16th November 2023: In a landmark decision, the Madras High Court has ruled that Civil Cooperative Banks, registered under the Maharashtra Co-Operative Societies Act I960, should be entitled to the exemption provided by Section 80(P)(2) of The Income-tax Act, 1961. This significant judgment brings renewed optimism to the urban cooperative banking sector, as interest in investments in cooperative banks is now deemed tax-free.

Civil Cooperative Banks, initially recognized as cooperative societies and subsequently as banks under the Co-operative Act, have received a significant boost from the Madras High Court’s historic decision. These banks are licensed by the Reserve Bank to conduct banking activities under the Banking Regulation Act.

Previously, the tax exemption granted to these banks under Section 80(P) of the Income Tax Act was revoked by the Central Government on April 1, 2007. The rationale behind this decision was the assertion that civic banks engage in banking activities similar to other commercial banks.

Section 80(P)(2)(d) of the Income Tax Act exempts the interest earned on investments made by one co-operative society in another. Despite this provision, civic cooperative banks were denied this exemption by the Income Tax Department.

The Madras High Court’s verdict, prompted by a case filed by two civil cooperative banks, underscores that since civic cooperative banks are the initial cooperative societies, they should be eligible for relief under Section 80(P)(2)(d) of the Income Tax Act.

Vidyadhar Anaskar, an expert in administration and banking at the Maharashtra State Co-operative Bank, commented on the decision, stating, “If the stand taken by the single bench of the Madras High Court is sustained in the future, civil cooperative banks may be exempted from several oppressive amendments in the Banking Regulation Act, 1949.”

This decision is particularly relevant in light of the ongoing legal proceedings challenging amendments to the Banking Regulation Act made by the Central Government in 2020. According to Anaskar, claims filed by various cooperative banking bodies and banks across different states are currently being heard collectively in the respective High Courts.