THE KANYAKUMARI DISTRICT COOPERATIVE MILK PRODUCERS UNION LTD NO 2946,NAGERCOIL vs. ASSESSING OFFICER, TIRUNELVELI

The brief facts of the case are that the assessee, an AOP, filed its return of income for the impugned assessment year on 30.09.2018 declaring a total income of Rs.1,94,69,080/- after claiming deduction under Chapter VI-A amounting to Rs.32,66,683/-. The return was selected for scrutiny and assessment was completed u/s.143(3) of the Act vide order dated 09.03.2021 accepting the income returned by the assessee.

Subsequently, the Learned Principal Commissioner of Income Tax–1, Madurai ("Ld. PCIT"), in exercise of powers conferred u/s.263 of the Act, examined the assessment records and observed that the assessee had earned interest income of Rs.31,66,863/- on investments made with co-operative banks as well as non-co-operative banks and had claimed deduction u/s.80P(2)(d) of the Act on the entire amount. According to the Ld.PCIT, deduction u/s.80P(2)(d) of the Act was allowable only in respect of interest income derived from investments made with co-operative societies, including co-operative banks, and not in respect of interest earned from deposits maintained with other banks. The Ld. PCIT further noticed that the assessee had claimed deduction u/s.80P(2)(c)(i) of the Act to the extent of Rs.1,00,000/-, whereas the eligible deduction was only Rs.50,000/-. According to the Ld. PCIT, the AO had failed to conduct adequate enquiries on the aforesaid issues while framing the assessment u/s.143(3) of the Act and, therefore, the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue. Consequently, the Ld. PCIT passed an order u/s.263 of the Act dated 25.03.2023 with, inter alia, the following directions to the AO:

Aggrieved by the disallowance of deduction u/s.80P(2)(d) of the Act in respect of interest income earned from deposits maintained with M/s. Kanyakumari District Central Co-operative Bank, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A), vide the impugned appellate order dated 09.02.2026, dismissed the appeal and confirmed the disallowance made by the AO.

Being aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before this Tribunal.

The Ld.AR, appearing on behalf of the assessee submitted that the authorities below have erred in disallowing the deduction claimed by the assessee u/s.80P(2)(d) of the Act in respect of interest income of Rs.29,12,424/- earned from deposits maintained with M/s. Kanyakumari District Central Co-operative Bank.

The Ld. AR contended that the assessee had invested its surplus funds with a co-operative bank, which is admittedly registered under the provisions of the Co-operative Societies Act and, therefore, continues to be a co-operative

The Ld. AR further submitted that, while exercising revisionary jurisdiction u/s.263 of the Act, the Ld. PCIT had categorically observed that interest derived from co-operative banks is eligible for deduction u/s.80P(2)(d) of the Act and had accordingly directed the AO to allow deduction to the extent of interest earned from co-operative societies, including co-operative banks. However, the AO, while passing the consequential order u/s.143(3) r.w.s 263 of the Act, acted contrary to the specific directions contained in the order passed u/s.263 of the Act and disallowed the entire claim of deduction, which is impermissible in law.

The Ld. AR submitted that the AO, in proceedings giving effect to an order passed u/s.263 of the Act, cannot travel beyond or act in derogation of the express directions issued by the revisional authority. Therefore, the consequential assessment order, insofar as it disallows the interest income earned from deposits with co-operative banks, is liable to be set aside.

The Ld. AR further contended that the Ld.CIT(A) erred in confirming the action of the AO without appreciating that the issue stood concluded by the directions issued by the Ld. PCIT in the order passed u/s.263 of the Act. It was thus prayed that the deduction claimed u/s.80P(2)(d) in respect of interest income of Rs.29,12,424/- earned from M/s. Kanyakumari District Central Co- operative Bank be allowed and the addition sustained by the lower authorities be deleted.

Per contra, the Ld.DR, supported the orders of the authorities below.

It is an undisputed fact that the Ld.PCIT, while exercising revisional jurisdiction u/s.263 of the Act, had categorically observed that all co-operative banks are co-operative societies and that interest derived from investments made with such co-operative banks is eligible for deduction u/s.80P(2)(d) of the Act. The Ld. PCIT, after considering the submissions of the assessee, had specifically directed the AO to examine the relevant records and allow deduction u/s.80P(2)(d) of the Act to the extent of interest derived from co-operative societies, including co-operative banks. Therefore, the scope of proceedings before the AO while giving effect to the order passed u/s.263 of the Act stood circumscribed by the explicit directions contained therein.

In our considered opinion, the AO, while framing an assessment in consequence to an order passed u/s.263 of the Act, cannot assume a jurisdiction wider than that conferred upon him by the revisional authority nor can he sit in appeal over the findings recorded by the Ld.PCIT. The AO is duty bound to carry out the directions contained in the revisional order in their letter and spirit and cannot travel beyond, disregard or act contrary to such directions. In the present case, despite the categorical finding recorded by the Ld. PCIT that interest earned from co-operative banks would qualify for deduction u/s.80P(2)(d) of the Act, the AO proceeded to disallow the entire deduction on the premise that interest earned from co-operative banks is not eligible for deduction under the said provision. Such an approach, in our view, is clearly

Even otherwise, section 80P(2)(d) of the Act grants deduction in respect of the whole of any income by way of interest or dividends derived by a co- operative society from its investments with any other co-operative society. The undisputed factual position before us is that the interest income in question has been earned from deposits maintained with M/s. Kanyakumari District Central Co-operative Bank, which continues to retain its character as a co-operative society registered under the relevant Co-operative Societies Act notwithstanding the fact that it carries on banking business. Once the recipient of the investment is a co-operative society, the requirements contemplated u/s.80P(2)(d) of the Act stand satisfied and the assessee cannot be denied the benefit of deduction provided under the statute.

The Ld. CIT(A), in our considered view, erred in affirming the action of the AO without appreciating that the issue had already attained finality inasmuch as the revisional authority itself had recognized the eligibility of interest earned from co-operative banks for deduction u/s.80P(2)(d) of the Act and had issued a clear direction to grant such deduction. The appellate authority ought to have appreciated that the consequential assessment proceedings could not have been utilized as a forum for taking a view diametrically opposite to that adopted by the Ld. PCIT in the order passed u/s.263 of the Act.

Accordingly, considering the totality of the facts and circumstances of the case and considering the binding directions issued by the Ld.PCIT in the order passed u/s.263 of the Act, we hold that the assessee is entitled to deduction u/s.80P(2)(d) of the Act in respect of interest income amounting to Rs.29,12,424/- earned from deposits maintained with M/s. Kanyakumari District Central Co-operative Bank. The disallowance made by the AO and sustained by the Ld.CIT(A) is directed to be deleted. Thus, the grounds raised by the assessee are allowed.

In the result, the appeal of the assessee stands allowed. Order pronounced in the court on 08th July, 2026 at Chennai.