SURAT DUDH UTPADAK MANDAL,SURAT vs. PCIT-1, SURAT

IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT Before: Shri T. R. Senthil Kumar, Judicial Member & Shri Ratnesh Nandan Sahay, Accountant Member

ITA No: 430/SRT/2025 Assessment Year: 2020-21

Surat Dudh Utpadak Mandal Vs Pr.CIT-1, Ltd., Surat. Patel Nagar, A.K. Road, Surat-395008 (Gujarat) PAN: AAAAS 3443 A (Appellant) (Respondent)

Assessee Represented by : Shri Esmayeel Saherwala, C.A. Revenue Represented by : Shri Mukesh Jain, CIT-DR. Date of hearing : 04/05/2026 Date of pronouncement : 21/07/2026 आदेश/ORDER PER: RATNESH NANDAN SAHAY, AM: 1. This is an appeal filed by the assessee against the order of the Learned Principal Commissioner of Income Tax-1, Surat [In short, ‘the ld. Pr.CIT’] passed under Section 263 of the Income Tax Act, 1961 (in short, the Act) dated 13/02/2025 for the assessment year (AY) 2020-21 wherein the assessee has raised following grounds of appeal: "(1). On the facts and in the circumstances of the case and in law, the Ld. Pr.CIT-1, Surat has erred in considering that Investments in shares or

2 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT deposits from surplus in co-operative societies including Co. Op. Banks is an ancilliary activity and not considering that income from dividend and interest is part of Profits and gains from our business and is eligible for deduction under section 80P(2)(b)(i). (2) On the facts and in the circumstances of the case and in law, the Ld. Pr.CIT-1, Surat has erred in disallowing Rs.3210380/- U/s.80P(d) of the Act when entire deduction is allowed and included in assessment U/s. 80P(2)(b)(i) of the I.T. Act in course of assessment U/s.143(3) r.w.s.144B of the Act. (3) On the facts and in the circumstances of the case and in law, the Ld. Pr.CIT-1, Surat has erred in not considering our contention that alternatively we are also eligible for deduction U/s.80P(2)(d) of the Act. Assessee is a registered Co. Op. Society having interest/ dividend income of Rs.3210380/- from other Co. Op. Society and alternatively eligible for deduction U/s.80P(2)(d) of the I.T. Act. (4) On the facts and in the circumstances of the case and in law, the Ld. Pr.CIT-1, Surat has erred in not considering that our Co-operative society is wholly and solely established on concept of mutuality and to cater the needs of contributors from common pool of funds. We collect milk and food grains from members only being primary co. operative society. (5) The Appellant reserves the right to add, amend, replace or delete any grounds of Appeal on or before conclusion of the appeal. (6) The Appellant prays to set aside the order of Ld. Pr.CIT-1, Surat passed U/s 263 of the Act." 2. Facts of the case, in brief, are that the assessee-society is a Co- operative Society established in 1949, registered under the Cooperative Societies Act, is primarily engaged in the business of supplying milk and oilseeds to the Federal co-operative Society (SUMUL-Surat District Co-operative Milk producers Union Ltd.) by collecting it from its members. For the assessment year under consideration, the case was selected for limited scrutiny under CASS to examine (i) the source of investment in unlisted equities

3 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT and (ii) deduction from total income under Chapter VIA. After issuance of statutory notices under Section 143(2) and 142(1) of the Act, the appellant was asked to explain the source of investment in unlisted equities. The Assessing Officer after giving due consideration of the explanations given by the assessee and the information available on record, assessed the income at ₹ 81,090 under Section 143(3) of the Act. 3. The ld. Pr.CIT vide his order dated 13/02/2025 set aside the said order of the Assessing Officer with a direction to make a fresh assessment holding interest income and dividend from Surat District Cooperative Bank Limited ineligible for deduction under Section 80P(2)(d) of the Act on the ground that the Co-operative Banks are not Co-operative Societies. 4. Aggrieved by the order of the ld. Pr.CIT, the assessee has filed this appeal before this Tribunal. 5. During the appellate proceedings before us, the assessee filed a paper book alongwith detailed written submission dated 29/04/2026 and stated as under: "Deduction under Section 80P(2)(b)(i) of the Act  On the facts and in the circumstances of the case and in law, the Ld. PCIT erred in failing to consider that the Appellant Society is a primary co-operative society primarily engaged in

4 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT supplying milk and oilseeds. The investments in shares and fixed deposits made from operational surplus funds represent an ancillary and necessary activity linked to its core business activity. Consequently, the entire income, including dividend and interest, partakes the character of profits and gains of business and is fully eligible for deduction under Section 80P(2)(b)(i) of the Act.

III Eligibility under Section 80P(2)(b)(i) of the Act 10. Without prejudice to the absolute eligibility of the deduction under Section 80P(2)(d) as established above, the Appellant Society submits that the income in question is alternatively eligible for deduction under Section 80P(2)(b)(i) of the Act, a contention that the PCIT completely failed to address despite it being raised during the revisionary proceedings and expressly accepted and acknowledged in the assessment order. 11. Section 80P(2)(b)(i) provides a 100% deduction on the profits and gains of business for a primary society engaged in supplying milk raised by its members to a federal milk co- operative society. The Appellant Society's undisputed primary object is the collection of milk from its members and supplying it to SUMUL. The funds generated from this operational activity constitute the working capital and the legitimate operational surplus of the Appellant Society. 12. The parking of these operational funds in fixed deposits with a co-operative bank is not an independent investment activity distinct from its core business. It is a prudent, necessary, and inextricably linked business requirement to maintain liquidity, for paying members and covering operational expenses.

5 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT 13. The jurisprudence distinguishes between surplus funds parked permanently as mere investments, and operational funds parked for business. The investment of idle operational funds in banks is a prudent business activity, and the interest earned forms an integral part of the business income "attributable to" the core activity. 14. Consequently, the interest and dividend income earned by the Appellant Society retains its character as business income attributable to its primary object of supplying milk. Ld.AU in the proceedings U/s.143(3) of the Act has mentioned the facts expressly at the opening paragraph and para no.4 & 5 of his order dated 02/09/2022 and granted the deduction U/s.80P(2)(b)(i) of the Act. The PCIT's attempt to artificially compartmentalize the income and selectively disallow it under 80P(2)(d) while ignoring the operational reality under 80P(2)(b)(i) is arbitrary, contrary to commercial reality, and legally flawed.  The scrutiny proceedings U/s.143(2) of the Act are separate and independent from return processing U/s.143(1) of the Act  On the facts and in the circumstances of the case and in law, the Ld. Pr.CIT-1, Surat has erred in disallowing Rs.3210380/- U/s.80P(d) of the Act when entire deduction is allowed expressly at the opening paragraph and para no.4 & 5 of his order dated 02/09/2022 and included in assessment U/s. 80P(2)(b)(i) of the I.T. Act in course of assessment U/s.143(3) r.w.s.144B of the Act.  IV. The proceedings U/s.263 to revise order U/s.143(3) and not U/s.143(1) of the Act 15. The proceedings U/s.143(2) of the Act are separate and independent from intimation U/s.143(1) of the Act. The

6 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT proceedings U/s.263 to revise order U/s.143(3) has to evaluate the deduction U/s. 80P(2)(b)(i) which is subject matter of order U/s.143(3). It is submitted that the Ld. Pr.CIT conveniently ignored the relevant submission on Section 80P(2)(b)(i) of the Act and did not provide any reason as to why the assessee Society does not fulfill the conditions of Section 80P(2)(b)(i) and why the income from ancillary investments would not qualify. We strongly protest against the predetermined stance of Ld. Pr.CIT and the impugned order on this count is therefore arbitrary and unjust.  Substantive Eligibility of Deduction under Section 80P(2)(d) of the Act  On the facts and in the circumstances of the case and in law, the Ld. PCIT erred in concluding that interest and dividend income amounting to Rs.32,17,880 in the impugned order earned from investments and fixed deposits with the Surat District Co-operative Bank Ltd. is not eligible for deduction under Section 80P(2)(d) of the Act. The Ld. PCIT failed to appreciate the binding jurisprudence of the Hon'ble Gujarat High Court, specifically the recent definitive judgment in PCIT v. Ashwinkumar Arban Co operative Society Ltd. (2024) and the modified order in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (2024), which unequivocally hold that a co-operative bank retains its identity as a co-operative society, and interest earned therefrom by another co-operative society is fully deductible under Section 80P(2)(d).  V. Substantive Eligibility under Section 80P(2)(d): The Settled Law of the Jurisdictional High Court 16. Even assuming, for sake of argument, that the PCIT-1 possessed the jurisdiction to revise the order, the substantive

7 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT legal conclusion reached by the PCIT-1 is fundamentally incorrect. The PCIT-1's reliance on the Karnataka High Court's decision in Totagars is obsolete and legally irrelevant within the territorial jurisdiction of the Hon'ble Gujarat High Court. The jurisprudence on this specific issue whether a co- operative bank qualifies as a co-operative society for the purpose of Section 80P(2)(d)-has been conclusively and definitively settled in favor of the assessee by the Jurisdictional High Court in recent landmark judgments.  A. The Landmark Judgment in PCIT v. Ashwinkumar Arban Co-operative Society Ltd. (2024) 17. In 2024, the Hon'ble Gujarat High Court delivered a monumental, binding judgment in the case of Principal Commissioner of Income-tax-1 v. Ashwinkumar Arban Co- operative Society Ltd. 168 taxmann.com 314 (Gujarat). 18. The factual and legal matrix of Ashwinkumar Arban was identical to the present case. In that case, the PCIT had invoked Section 263, alleging that the AO erroneously allowed a deduction under Section 80P(2)(d) on interest earned by a cooperative society from investments made with a cooperative bank, arguing that Section 80P(4) rendered such banks ineligible. 19. The Hon'ble Gujarat High Court categorically rejected the Revenue's stance and upheld the ITAT's decision quashing the PCIT-1's order. The High Court decisively established that: i. A cooperative bank is fundamentally a cooperative society registered under the Gujarat State Cooperative Societies Act. ii. The exclusion carved out by Section 80P(4) is strictly limited to cooperative banks claiming the deduction on their

8 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT own income. It does not operate to deny the statutory deduction under Section 80P(2)(d) to a primary cooperative society that earns interest from investments made in such cooperative banks. iii. An assessment order allowing the deduction under Section 80P(2)(d) in such circumstances is neither erroneous nor prejudicial to the interests of the revenue. 20. This 2024 judgment acts as an absolute, binding precedent that obliterates the entire legal foundation upon which the PCIT-1 constructed the impugned Section 263 order in the present case. The PCIT-1's failure to recognize and apply this binding jurisdictional law, which was available prior to the issuance of the February 2025 impugned order. amounts to a serious breach of judicial discipline.  B. The Crucial Modification in Katlary Kariyana Merchant Sahkari Saraft Mandall Ltd. (April 2024) 21. The PCIT-1's SCN and order implicitly rely on older, superseded interpretations of the law. Historically, the Revenue relied heavily on the Gujarat High Court's initial decision in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. v. ACIT R/SCA no.20585 of 2019 (Guj.), which was pronounced on 04.01.2022 (Refer to Pg No.98 of Appeal Setj. In that initial order, the Court had made a finding (in Paragraph 19) that interest derived from surplus funds invested in FDRs with "other Cooperative Banks and Nationalized Bank" would not be entitled to deduction under Section 80P(2)(d). 22. However, a highly significant judicial correction occurred in 2024. Upon realizing that a typographical/conceptual error had crept into the judgment, a "Speaking to Minutes

9 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT application (R/SCA No. 20585 of 2019) was filed. On 26.04.2024, the Hon'ble Gujarat High Court passed an order modifying its earlier 04.01.2022 judgment. (Refer to Pg No.216-217 of Paperbook-I] 23. The High Court explicitly directed that the words "other cooperative Banks" be deleted/modified in Paragraph 19 of the original judgment. The amended reading of the Katlary Kariyana judgment now clearly holds that while interest from Nationalized Banks remains ineligible, interest derived from investments with Co-operative Banks is fully eligible for deduction under Section 80P(2)(d). 24. The Hon. ITAT Ahmedabad and Surat benches have consistently recognized and applied this crucial 2024 modification. Multiple ITAT orders throughout 2024 and 2025 have repeatedly struck down Section 263 revisions and regular assessment additions that relied on the pre- modification, erroneous interpretation of the Katlary Kariyana ruling. The PCIT-1 in the present case has turned a blind eye to this definitive judicial correction. Erroneous Interpretation of Section 80P(4) of the Act  On the facts and in the circumstances of the case and in law, the Ld. PCIT-1 erred in holding that the insertion of Section 80P(4) strips co-operative banks of their status as co-operative societies for the purpose of investments made by other societies. 25. The Ld. PCIT-1 failed to recognize that Section 80P(4) is a restrictive provision applicable only to co-operative banks seeking deductions for themselves on their own banking income, and it does not operate to deny the statutory

10 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT deduction under Section 80P(2)(d) to a primary co-operative society investing its operational funds in such banks.  VI. Recent Precedents of the Hon.ITAT Surat (2025-2026) 26. Following the clear mandates established by the Hon'ble Gujarat High Court in Ashwinkumar Arban (2024) and the modified Katlary Kariyana order (April 2024), the coordinate benches of the ITAT Surat have consistently and unequivocally delivered judgments in 2025 and 2026 allowing the Section 80P(2)(d) deduction for interest earned from co-operative banks, specifically naming the Surat District Co-operative Bank. The doctrine of stare decisis demands that these coordinate bench decisions be followed.  A. DCIT v. Bardoli Vibhag Gram Vikas Co-op. Society Ltd. (Pronounced: August 2025): In this consolidated batch of appeals, the Revenue challenged the allowance of deduction under Section 80P(2)(d) on interest earned from a co-operative bank, citing the Supreme Court's decision in Totgars and the exclusionary provision of Section 80P(4). The ITAT Surat comprehensively rejected the Revenue's arguments. holding that a co-operative bank legally and fundamentally remains a co-operative society registered under the relevant State Act. Therefore, interest income derived from it is fully deductible under the specific provisions of Section 80P(2)(d).  B. Avkar Urban Co-op. Credit Soc. Ltd. v. ACIT (Pronounced: 29.01.2026 & 02.12.2025): In these recent rulings, the ITAT Surat ruled squarely in favor of the assessee society regarding the allowability of deduction on interest and dividend received from a Co-operative Bank. The Tribunal explicitly followed the binding Jurisdictional High Court rulings, clarifying that the status of the payer entity as a

11 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT registered co-operative society is the only requisite condition under Section 80P(2)(d).  C. The Surat Vankar Sahkari Sangh Limited v. DCIT (Pronounced: 30.10.2025):  In this appeal, the Revenue raised specific grounds alleging that interest from cooperative banks lacks the degree of proximity required by the principle of mutuality, and explicitly relied on the Supreme Court's ruling in Totgars (322 ITR 283). The ITAT Surat dismissed the Revenue's appeal, affirming the deduction under Section 80P(2)(d) and reiterating that the jurisprudence of the Gujarat High Court overwhelmingly supports the assessee's claim.  Misapplication of the Doctrine of Mutuality  On the facts and in the circumstances of the case and in law, the Ld. PCIT erred in holding that the principle of mutuality is lost because the co-operative bank lends to non-members. The Ld. PCIT misunderstood the concept of common law mutuality and conflated it with the specific, independent statutory deduction provided under Section 80P(2)(d) of the Act, which merely requires the payer and the payee to be registered co- operative societies. 27. The Ld. Pr.CIT-1 has alleged in the impugned order that the Principle of Mutuality is lost since the Assessee Society has deposited its surplus with a Co-operative Bank which lends to non-members. This contention is factually incorrect and legally untenable. 28. The Assessee Society: (a) is wholly and solely established on the concept of mutuality for catering to the needs of its contributor-members from a common pool of funds; (b) collects milk and food grains from members only, being a primary co-

12 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT operative society; (c) has identified all its members with determinate shareholding; (d) maintains complete records of members and their shares; (e) is also a member of the co- operative banks/societies in which it holds shares and deposits-thereby maintaining the identity between contributors and participators; and (f) any surplus generated is ultimately for the benefit of the members. 29. The Ld. Pr.CIT did not provide any specific reasons as to how the Principle of Mutuality is violated in the facts and circumstances of the present case. The mere fact that the Assessee deposits its surplus with a Co-operative Bank (in which it is a member/shareholder) does not negate the Principle of Mutuality in respect of the Society's own operations."

13 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT bank. It was further brought to our notice that the Hon'ble Jurisdictional High Court in the case of the Pr.CIT-1 Vs Ashwinkumar Arban Co Operative Society Ltd. in R/Tax Appeal No. 538 of 2024, 221 of 2022 and 419 of 2023 judgment dated 24/09/2024 has already affirmed the order passed the Tribunal in the case of Ashwinkumar Arban Co Operative Society Ltd. Vs PCIT and held as under "33. In view of the above dictum of law as well as the provisions of the Act which are considered we are of the opinion that the provisions of section 80P(2)(d) would be applicable in the facts of the case and the PCIT was not justified in invoking revisional powers under Section 263 of the Act which is rightly reversed by the Tribunal holding that the cooperative bank is a cooperative society registered under the Gujarat State Cooperative Societies Act and in view of the various decisions of the Court, the Tribunal after following the same has come to the conclusion that the assessment was not erroneous allowing deduction of section 80P(2)(d) of the Act which is in consonance with the various decisions of the Court as a twin condition invoking section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled. 34. In view of the foregoing reasons, we answer the question in favour of the assessee and against the Revenue. Tax

14 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT Appeals are being devoid of any merit accordingly dismissed. No order as to costs." Since the issue has already been decided by the Hon'ble Jurisdictional High Court and the order of the Coordinate Bench of Surat Tribunal have been upheld by the Hon'ble High Court, we are also of the opinion that this issue is squarely covered by the decision of the Coordinate Bench of this Tribunal which was duly upheld by the Hon'ble Jurisdictional High Court in the case of Pr.CIT-1 Vs Ashwinkumar Arban Co Operative Society Ltd., therefore, we allow the appeal of the assessee and hold that the impugned order passed by the ld. Pr.CIT is erroneous and prejudicial to the interest of the revenue and therefore, the impugned order is quashed. 8. In the result, this appeal of the assessee is allowed. Order is pronounced under the provisions of Rule 34 of IT(AT) Rules, 1963 on 21/07/2026.

Sd/- Sd/- (T. R. SENTHIL KUMAR) (RATNESH NANDAN SAHAY) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat Dated 21/07/2026 *Ranjan आदेश�ȧĤǓ�ͧ �ͪ �\ Ē ȯͪ��/ Copy of Order Forwarded to:- 1. Assessee

15 ITA No. 430/Srt/2025 Surat Dudh Utpadak Mandal Ltd. Vs PCIT 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT 6. Guard file. By order/आदेशसे,

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