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Facts
The assessee, a Cooperative Society, earned interest income from deposits with cooperative banks and claimed deduction under Section 80P. The Assessing Officer (AO) allowed the deduction. The PCIT initiated revision proceedings under Section 263, holding that the AO's order was erroneous and prejudicial to revenue, directing disallowance of the interest income.
Held
The Tribunal held that the PCIT's order under Section 263 was not justified. The Tribunal found that the AO had considered the issue of deduction and the order was not erroneous or prejudicial to the revenue. The Tribunal also noted that the issue of deduction under Section 80P for cooperative societies earning interest income from cooperative banks is well-settled in favour of the assessee.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order allowing deduction under Section 80P on interest income earned by a cooperative society from cooperative banks. Whether cooperative banks are to be treated as cooperative societies for the purpose of Section 80P deduction.
Sections Cited
263, 143(3), 144B, 80P, 80P(2)(a)(i), 80P(2)(d), 56, 194A(3)(v)
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Before: Ms. KAVITHA RAJAGOPAL & SHRI PRABHASH SHANKAR
PER PRABHASH SHANKAR [A.M.] :- The present appeal filed by the assessee Cooperative Society, emanates from the Revision order passed u/s 263 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 27.03.2025 by the Learned Commissioner of Income-tax, PCIT, Thane - 1 [hereinafter referred to ‘PCIT’] pertaining to assessment order passed u/s. 143(3) r.w.s. 144B of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 02.09.2022 for the Assessment Year [A.Y.] 2020-21. P a g e | 2 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan 2. The grounds of appeal are as under:
On the facts and in the circumstances of the case and in law the Ld. Principal Commissioner of Income Tax (PCIT), Thane-1 was not justified to set aside the assessment order passed by the Assessment Unit, Income Tax Department as the order passed u/s 143(3) of the Act is neither erroneous nor prejudicial to the interest of revenue and further directing the Assessing Officer to disallow the entire amount of interest received on investment with Co-operative Banks.
On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer after conducting proper enquiry and after due verification of records, and thereafter come to the conclusion that the interest on investment is eligible for deduction u/s 80P(2)(a)(i) of the Act. Therefore, order passed by the Assessing Officer is not erroneous in so far as prejudicial to the interest of revenue. However, the Ld. Principal Commissioner of Income Tax-1, Thane has taken different view while passing the order u/s 263 of the Act and therefore, order passed by the PCIT is without juri iction and same is bad in law.
The Ld. PCIT while passing the orders has wrongly observed that the Society has invested idle funds and on this presumption, he has relied on the Hon’ble Supreme Court decision in the case of Totgar Co-op. Sales Society Ltd. and latest Hon’ble Karnataka High Court decision in the case of PCIT, Hubli v/s. Totgar Co-op. Sales Society 392 ITR 74 (ITA No- 100069/2016). However, the said judgments are not applicable in Appellant’s case as the facts, circumstances and nature of business activities and statutory provisions with regard to investment are different between Appellant Society and Totgar Society.
On the facts and in the circumstances of the case and in law, the Ld. PCIT-1, Thane has deprived the Appellant Society’s the right of natural justice by giving directions to the Assessing Officer to directly disallow the entire amount of Rs. 77,43,997/- claimed by the Appellant Society u/s 80P(2) of the Act and tax the same u/s 56 of the Act under the head “Income from Other Sources”.
Brief facts of the case are that the assessee, a Cooperative Society filed its return of income for the declaring income of Rs. NIL. Subsequently, the case was selected for scrutiny and assessment was completed u/s. 143(3) r.w.s. 144B of the Act accepting the returned
P a g e | 3 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan income. On verification of case records, it was noticed by the ld.PCIT that the assessee had earned interest income of Rs. 921,61,194/- out of normal banking business of providing credit facilities to the members. It credited interest income out of deposits/investments with various banks at Rs. 77,43,997/-. Further, it claimed an amount of Rs. 77,43,997/- as deduction u/s.80P of the Act. After taking into account written submission by the assessee in response to a show cause notice u/s 263 of the Act, he observed that the purpose of granting deduction u/s. 80P was to encourage the credit facilities in rural areas where the banks were not willing or were not able to function. The object of the society to serve its members by offering the credit facilities is the purpose for which the deduction is available. It is for this purpose 80P(2)(d) of the Act has been inserted in the Act to ensure that any surplus of one society may be utilized by other Society to serve their Members. The interest on deposits made with the banks has not been made eligible for deduction u/s. 80P because of lack of mutuality criteria. Also, vide Finance Act 2006, deduction from income of Co-operative Banks as per the provisions of Section 80P of the Act, has been withdrawn by way of insertion of Section 80P(4) w.e.f. 01.04.2007 which differentiates a co- operative bank in comparison to co-operative society. It is thus clear that a co-operative bank is a commercial bank and does not fall under the P a g e | 4 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan purview of a Co-operative Society and interest income is not eligible for deduction u/s. 80P(2)(d) of the Act. In this connection, reliance was placed on the decision of the Supreme Court in the case of Totgar Co-op. Sale Society Vs. ITO, Karnataka 322 ITR 283 (SC/2010) in CA No. 1622/2010 dated 08.02.2010. Further, a co-operative bank even though registered as a co-operative society is not a co-operative society eligible for receiving the benefits of exemption or 100% deduction u/s. 80P of the Act as its banking business is governed by the provisions of a special law “Banking Regulation Act, 1949”. In addition, the amendment of section 194A(3)(v) of the Act by Finance Act, 2015 w.e.f. 01.06.2015 excluding the co-operative banks from the genus categories of cooperative societies and making it liable to deduct Income tax at source on the interest paid by it to other persons, further indicates that the legislative intent is to exclude co-operative banks from the beneficiary category of co-operative societies entitled to exemption or 100% deduction of its income u/s. 80P of the Act.
1 According to him, the order passed by the AO is erroneous and prejudicial to the interests of the Revenue under Section 263 of the Act as the AO perfunctorily accepted the details available with him without any application of mind or detailed enquiry regarding pertinence of various case laws on this issue and went on to accept the P a g e | 5 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan returned income. No efforts were made to verify the legalities of provisions of 80P of the Act and its applicability in the present case. Therefore, instead of allowing the deduction claimed u/s 80P(2) of the Act, the AO should have disallowed the entire amount of Rs. 77,43,997/- claimed u/s. 80P(2) of the Act and taxed the same under section 56 of the Act under the head “Income from other sources”. Accordingly, the assessment order u/s 143(3) r.w.s. 144B of the Act was set aside by him u/s 263 of the Act to the file of AO with a direction to disallow the entire amount of Rs. 77,43,997/- claimed by the assessee u/s 80P(2) of the Act and tax the same under section 56 of the Act under the head “Income from other sources” and pass the assessment order afresh after giving a reasonable opportunity of being heard to the assessee.
Before us, the ld.CIT(DR) has relied on the revision order while the ld.AR has vehemently agitated the action of the ld.PCIT inter alia claiming that the assessment order was neither erroneous nor prejudicial to the interest of the revenue in as much as the ld.AO while passing the order has duly considered the issue The ld.AR has made oral as well as written submission on the issues. A paper book has also been submitted. It is claimed that the AO allowed the claim of deduction u/s 80P(2)(a)(i) of the Act only after due verification of records and P a g e | 6 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan conducting enquiry. He also placed reliance on the decisions of hon’ble Supreme Court on PCIT vs Shreeji Prints P.Ltd wherein the court has upheld the decisions of hon’ble Gujarat High Court in ITA No.396/Del/2021on the issue of section 263 where the AO had made detailed enquiries and the order could not be considered as erroneous and prejudicial .It is also claimed that written submissions made by the assessee on 20.03.2025 was not considered by the ld.PCIT. On merits, reliance is also placed on a recent decision of hon’ble Supreme Court in the case of Annasaheb Patil Mathadi Kamgar Sahkari Pathpedi Limd in Civil appeal no.8719/2022 in which it is laid down that cooperative societies are not cooperative banks and entire income thereof is eligible for deduction u/s 80P(2)(a)(i) of the Act. Further, reliance is also placed on several decisions of coordinate benches of ITAT Mumbai involving invocation of section 263 of the Act on this issue wherein it has been held that the assessee cooperative societies were eligible for deduction u/s 80P(2) of the Act. Revision orders have been set aside and assessment order restored in ITA No.1970/Mum/2023 in Pravara Gramin Bigar Sethi Sahkari Patsanstha, ITA No.1356/Mum/2023 in Shree Jyotirling Sahakari Patsanstha and ITA No.726/Mum/2022 in Sahayadri Nagari Sahkari.
P a g e | 7 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan
1 It is further submitted that the assessee has made entire investment in fixed deposits with cooperative banks which are first registered as cooperative society and then licenced as cooperative banks by RBI. This facts has been accepted by many ITAT/High Courts. Moreover, interest income is attributable to providing credit facilities and the same is operational income as its core business is of accepting deposits from members and advancing loans to them and making investment. It is prayed to quash the impugned revision order.
We have duly considered all the relevant facts of the case. We find that the issue regarding deduction u/s 80P(d)(2) is no more res integra as most of the judicial rulings are in favour of the assessee. Moreover, even w.r.t. application of section 263, there are umpteen number of such decisions wherein revision orders have been set aside. In this regard, we place reliance on an order passed by the coordinate bench of ITAT, Mumbai which has dealt with both the issues at length in deciding them in favour of the assessee. Relevant extracts of ITA No. 2539/Mum/2019 in M/s Vadasinor Pragati Samaj Co-operative Credit Society Ltd. are reproduced as below:
“5. ...............The ld. AR for the assessee further submits that after considering the explanation of the assessee, the Assessing Officer allowed the deduction of interest from investment with other Co-operative Society namely Maharashtra State Co- operative Bank and Mumbai District Co-operative Bank. Both the Banks/Institutions
P a g e | 8 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan governed by Maharashtra Co-operative Societies Act and accordingly, the assessee is entitled for deduction under section 80P.
The ld. AR of the assessee fairly submits that though there is no discussion in the assessment order about the deduction allowed in favour of assessee, however, the order was passed after due application of mind and that the order is neither erroneous nor prejudicial to the interest of revenue. The ld. AR of the assessee submits that in a number of decisions including Special Bench of Ahmedabad Tribunal in ACIT vs. People's Co-operative Credit Society held that a Co-operative Society providing credit facility to its member cannot be said to be carrying of banking business and therefore, cannot be denied benefit under section 80P(2)(a)(i) by invoking the provision of section 80P(4). In support of his submission, the ld. AR of the assessee relied upon the following decisions: Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83(SC), CIT vs. Max India Ltd. [2007] 295 ITR 282 (SC), Quepem Urban Co-operative Credit Society Ltd. vs. ACIT [2015] 377 ITR 272 (Bom. HC). PCIT vs. Goa PWD Staff Co-operative Credit Society Ltd. [2016] 242 Taxman 0422 (Bom. HC.) CIT vs. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.) CIT vs. Jafari Momin Vikash Co-op. Credit Society Ltd. [2014] 362 ITR 331 (Guj. HC. ACIT vs. Metrocity Criminal Courts employees Mutually Aided co- op. Credit Society Ltd. [2015] 39 ITR (Trib.) Hyderabad. In Lady Ratan Tower Cooperative Housing Society Ltd. ACIT vs. People's Co-operative Credit Society Ltd. [2019] 180 DTR (Ahd) (SB) (Trib.) 444. 7. On the other hand, the ld. DR for the revenue supported the order of ld. PCIT. The ld. DR for the revenue invited our attention on the contents of assessment order and would submit that there is no reference or consideration about the issue raised by ld. PCIT, about show-cause notice on the issue of allowability of claim under section 80P. Further, the assessment order is silent about the allowance of deduction under section 80P. The reliance of ld. AR of the assessee on the alleged explanation furnished in the query raised by Assessing Officer. The ld DR for the revenue submits that perusal of copy of the alleged which is available at page no. 14 & 15 of the Paper ITR 375) that Assessing Officer is not only adjudicator but also an investigator, cannot remain passive in the face of a return which is apparently in order but calls for further inquiry in the facts and circumstances of the case, the word "erroneous" prescribed in section 263 includes the failure to make such an enquiry by Assessing Officer. The Assessing Officer has not applied his mind on factual aspect of the P a g e | 9 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan record and allowed the deduction without enquiry and the assessment order is not only erroneous and prejudicial to the interest of revenue. The ld. DR submits that the twin condition as enunciated by celebrated case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83) are clearly made out in the present case. The ld. CIT-DR prayed for dismissal of appeal.
In the rejoinder submission, the ld. AR of the assessee submits that ld. PCIT while issuing show-cause notice under section 263 dated 05.02.2019 has clearly written in its show-cause notice that the Assessing Officer erroneously allowed the deduction. Thus, the language of show-cause notice itself suggests that the issue of deduction under section 80P was considered by Assessing Officer while passing the assessment order. Now, the question is if the deduction under section 80P is allowed without examining the issue or allowed erroneously.
The ld. AR of the assessee further submits that the Hon'ble Juri ictional High Tax Officer, who passed the order, unless the decision is held to be erroneous. It was further held that when the ITO examined the accounts, make enquiry applied his mind to the fact and determined the income either by accepting the accounts or by making some estimation himself. And the Commissioner on perusal is of opinion that the estimation made by Officer is on the lower side and left to the Commissioner, he would have estimated the figure on higher side, the order of Assessing Officer cannot be substituted by Commissioner. The ld. AR of the assessee further submits that on merit/deduction under section 80P this case is clearly covered by the decision of Tribunal. PCIT vs. Goa PWD Staff Co-operative Credit Society Ltd. [2016] 242 Taxman 0422 (Bom. HC.) CIT vs. Jafari Momin Vikash Co-op. Credit Society Ltd. [2014] 362 ITR 331 (Guj. HC. ACIT vs. Metrocity Criminal Courts employees Mutually Aided co- op. Credit Society Ltd. [2015] 39 ITR (Trib.) Hyderabad. ACIT vs. People's Co-operative Credit Society Ltd. [2019] 180 DTR (Ahd) (SB) (Trib.) 444. 10. We have considered the submission of the learned representative of the parties and have gone through the orders of authorities below. In the return of income, the assessee claimed interest income under the head Income from Other Sources of Rs. 12,87,629/- and after setting up of loss of Rs. 2,87,471/-, the assessee claimed deduction under Chapter- VA of Rs. 10,00,158/-. The income under the head 'Income from other Sources' the assessee claimed it as deductable under section 80P as interest income from Cooperative Societies. The Assessing Officer while passing the assessment order accepted the return of income. Admittedly, no discussion on the disallowance under Chapter-VA, including the deduction under section 80P in the P a g e | 10 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan assessment order. The ld. PCIT issued show-cause notice under section 263 for proposed revision of assessment order vide notice dated 05.02.2019. In the show- cause notice apart from the other contents, the ld. PCIT has mentioned that Assessing Officer has 'erroneously' allowed the deduction under section 80P(2)(d) on interest received from Vadasinor Pragati Samaj Co-operative Credit Society Ltd. Samaj Co- operative Credit Society Ltd. (supra). The assessee filed its detailed reply vide reply dated 12.02.2019, summary of which is already correctly recorded by ld. PCIT as we have referred above in para-14. 11. The Hon'ble juri ictional High Court in Quepem Urban Co-operative Credit Society Ltd. vs. ACIT (377 ITR 272) held that Co-operative Society could not be regarded as a Co-operative Bank, mere fact that insignificant proportion of revenue was coming from non-members and was entitled for deduction under section 80P(2)((a)(i).
Further, the coordinate Bench of Mumbai Tribunal in Lady Ratan Tower C- operative Housing Society Ltd Vs ITO (supra), while following the decision of coordinate bench in M/s Vadasinor Pragati Samaj Co-operative Credit Society Ltd. op. Society Ltd. (ITA No. 6547/Mum/2017 dated 25.04.2018) held that income by way of interest derived by assessee from its investment held that other Co-operative Society shall be deducted in computing the total income. We have further noted in Kaliandas Udyog Bhavan Premises Co-op. Society Ltd.(supra) the decision was rendered by making reliance upon the decision of Hon'ble Karnataka in PCIT & Anr vs. Totagars Coperative Sale Society (392 ITR 74) and Hon'ble Gujarat High Court in SBI vs. CIT (389 ITR 578 (Guj.) also held that interest income earned by assessee on investment held that a Co-operative Bank would be eligible for claim of deduction under section 80P(2)(d).
Considering the aforesaid legal preposition, we are of the view that assessee is entitled for deduction on interest earned from Co-operative Bank which are primarily a Co-operative Society, thus, in our view, the deduction allowed by Assessing Officer are in accordance with various judicial pronouncement, which cannot be branded as erroneous. The juri ictional High court in Gabriel India Ltd. (supra) held that power of suo-moto revision under section 263 of the Act, is in the nature of supervisory juri iction and can be exercised, if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise the power of revision under this sub-section viz. (i) The order should be erroneous; and (ii) by virtue of the order being erroneous and prejudicial must have been caused to the interest of revenue. Further, the order cannot be termed as erroneous unless it is not in accordance with law, if the Assessing Officer acting in accordance with law make certain assessment, the same cannot be branded as erroneous by Commissioner simply because, according to him, he order should have been written more elaborately.
As we have noted above, the order passed by Assessing Officer, though not speaking, however, is in accordance with law, so far as deduction under section 80P is concerned. Therefore, in our consider view, the twin condition as enunciated under section 263 are not furnished in the present case. Therefore, the ld. PCIT was P a g e | 11 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan not justified in treating the assessment order for revising it by exercising power under section 263. 15. So far as objection/statement of CIT-DR is concerned that the Assessing Officer has not made proper enquiry or the order is silent about the deduction claimed and allowed to the assessee under section 80P. As we have noted earlier that ld. PCIT while issuing show-cause notice himself has recorded in the show- cause notice itself that Assessing Officer has erroneously allowed the deduction under section 80P(2)(d) on interest received from a Credit Co-operative Society. Hence, we are not convinced with the submission that issue was not examined by Assessing Officer as the language of show-cause notice itself suggest that Assessing Officer erroneously allowed the deduction. Hence, the grounds of appeal raised by assessee are allowed, resultantly, the revision order passed by ld. PCIT is quashed.”
1 The hon'ble Karnataka High Court in Totagars Cooperative Sales Society (supra) held that for the purpose of section 80(P)(2)(d) a Co-operative Bank should be considered by a Co-operative Society and interest earned by Co-operative Society from Cooperative Bank would necessarily be deductible under section 80P(1) of the Act. Further, the hon'ble Gujarat High Court in Surat Vankar Sahakari Sangh Ltd. held that assessee co-operative society is eligible for deduction under section 80(P)(2)(d) in respect of gross interest received from co-operative bank without adjusting interest paid to said bank. Further, the Hon'ble Gujarat High Court in the case of CIT vs. Sabarmantha District Co- Op. Milk Producers Union Ltd. in Tax Appeal No. 473 of 2014 held as follows:
“4. 0. Now, so far as proposed question no. B i.e. whether the Appellate Tribunal has substantially erred in upholding the order of the CIT(A) in deleting the disallowances of Rs.1,42,19,515/-under Section 80(P)(2)(d) of the Act is concerned, it is required to be noted that the assessee claimed deduction
P a g e | 12 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan under Section 80(P)(2)(d) of the Act on the interest earned on the fixed deposit with Cooperative Bank and the Societies and it has been found that as such the income was received from the investment in Cooperative Societies and Cooperative Bank. Considering Section 80(P)(2)(d) of the Act when the only requirement was that the income should be received from investment in Cooperative Societies and the Cooperative Bank which in the present case has been fulfilled, it cannot be said that the learned Tribunal has committed any error in deleting disallowance of Rs. 1,42,19,515/- under Section 80(P)(2)(d) of the Act. We are in complete agreement with the view taken by the learned Tribunal. Under the circumstances, undefined proposed question B is also answered against the revenue.”
2 In so far as the judgement in the case of hon'ble Supreme Court in the case of Totagars Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283 is concerned, in our considered view, the case is distinguishable on facts and therefore not be applied in the instant case of the assessee. In that case the society was also marketing the agricultural produce of its members and hence was engaged in carrying on the business of marketing agricultural produce of the members of the assessee. However, in the present case, the interest income earned by the assessee from deposits made with the Co-operative Banks form an integral part of its business.
We have heard the rival contentions, perused the materials on record and duly considered facts of the case in the light of applicable legal position and decisions relied upon. In view of the above discussion and respectfully following the decisions referred and relied in the P a g e | 13 A.Y. 2020-21 Veej Company Sevakanchi Sahakari Path Sanstha Ltd., Kalyan preceding paras, we do not find any merit in the impugned revision order which is hereby quashed, thus allowing the grounds of appeal.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 18.07.2025. KAVITHA RAJAGOPAL PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: म ुंबई/Mumbai ददनाुंक /Date 18.07.2025 Lubhna Shaikh / Steno
आदेश की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant प्रत्यर्थी / The Respondent. 2. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.