SRI. JAYACHAMARAJA CREDIT CO-OPERATIVE SOCIETY LIMITED ,BANGALORE vs. PR. CIT, BENGALURU-1, BANGALORE

The ld. PCIT has held that the interest income under question is not interest received from the members of the society for providing credit facilities to them and therefore the interest income is received from funds invested in co-operative banks and financial institutions other than the co-operative societies. The ld. PCIT referred to the provisions of section 80P and thereafter relying on the decision of Supreme Court in Totgars Co-op. Sale Society Ltd. (supra) held that AO ought to have taxed the interest income from co-operative banks and financial institutions other than co-operative societies u/s. 56 of the Act and consequently no deduction u/s. 80P(2)(a)(i) of the Act could have been allowed to the assessee. The ld. PCIT further referred to the decision of the coordinate Bench in the case of Alankar Primary Agricultural Co-op. Society v. ITO, 165 taxmnn.com 170 (Bang. Trib) wherein the deduction u/s. 80P(2)(a)(i) of the Act was also denied. The ld. PCIT further referred to the decision of the Hon’ble jurisdictional High Court in the case of PCIT v. Totagars Co-op. Sale Society, 83 taxman.com 140 stating that the deduction is not available to assessee u/s. 80P(2)(a)(i) as well as 80P(2)(d) of the Act. It was further held that the AO has passed the assessment order without verification of these aspects as per law laid down by the Hon’ble Supreme Court as well as Hon’ble jurisdictional High Court.

Assessee, aggrieved with the reversionary order is in appeal before us. The ld. AR submitted a paper book containing 133 pages on the facts of the case and further relied upon 19 judicial precedents in case law compilation assailing the order passed by the ld. PCIT u/s. 263 of the Act. The claim of assessee is that assessee is an approved co-operative society. It has claimed deduction u/s. 80P of the Act of Rs75,18,448 wherein the interest income received of Rs.59,61,831 was questioned by the AO by issuance of a show cause notice dated 8.3.2022. The AO in the above notice has categorically noted that assessee has received interest on investments from various investments in Apex Bank and shares is not allowable as deduction u/s. 80P(2)(a)(i) of the Act. In the show cause notice the ld. AO specifically referred to the decision of the Hon’ble Karnataka High Court and Hon’ble Apex Cort in Totagars Co-op. Sale Society. Based on this, the show cause notice clearly shows total income of assessee at Rs.59,61,835. Thus in the show cause notice the AO intended to disallow the claim of deduction of assessee of Rs.59,61,835. This show cause notice was replied by the assessee by letter dated 12.3.2022 wherein the assessee categorically referred to section 58 of the Karnataka Co-operative Societies [KCS] Act, 1959 with respect to investment of funds, Rule 23 of the KCS Rules about the object

It was further stated that the decision of Hon’ble Karnataka High Court in 58 taxmann.com 35 dated 25.3.2015 has not considered the decision of Tumkur Merchants Souharda Credit Co-op. Ltd. dated 28.10.2024. Both the decisions have considered the decision of the Hon’ble Supreme Court. Therefore the AO has considered one of the possible view and allowed the claim of assessee. He relied on the decision of Hon’ble Supreme Court in the case of CIT v. Max India Ltd., 295 ITR 282 and submitted that at that relevant point of time when the assessment order was passed, two views were possible and one of the view was accepted by the ld. AO and therefore it cannot be said that assessment order passed by the ld. AO is erroneous insofar as it is prejudicial to the interests of the revenue. He further submitted that the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., 243 ITR 83 also covers the issue in favour of assessee.

He further stated that now the issue is covered by the decision of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. and Citizen Co-op. Society in favour of assessee and therefore the order could not have been said to be erroneous and prejudicial to the interests of the revenue. He submitted that even if the order is held to be erroneous and prejudicial to the interests of the revenue, the issue is now squarely covered by the decision of Hon’ble Supreme Court in the assessee’s favour wherein it has been that assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act as the interest income is attributable to the business of the assessee.

He further submitted that clause (a) to Explanation 2 of section 263 does not apply to the facts of the case because the order is passed by the ld. AO after issuing a show cause notice and considering the explanation of the assessee after making due verification. The ld. PCIT did not show that what further enquiry the AO should have made. Therefore the above clause does not apply. With respect to clause (d), it was stated that the order has been passed in accordance with the decision of Hon’ble High Court considering the decision of Hon’ble Supreme Court by the ld. AO and allowing the claim of assessee, therefore clause (d) also does not apply. He submits that the AO was drawn the attention of the decision of Hon’ble jurisdictional High Court in the case of 55 taxman.com 447 which also considered the decision of Hon’ble Supreme Court in 322 ITR 283 and therefore the order passed by the ld. AO is in accordance with provisions of the law.

The ld. CIT(DR) vehemently supported the order of the ld. PCIT. He submitted that the Hon’ble Karnataka High Court in the case of 175 taxmann.com 405 has categorically held that where the AO had issued notices and after considering the reply has not made disallowance and has not examined the impugned transaction in detail, the order u/s. 263 of the Act is justified. He further relied upon the decision of the coordinate Bench in the case in for AY 2020-21 wherein the order u/s. 263 of the Act invoking Explanation 2 was upheld. He further submitted

We have considered the rival contentions and perused the order of the ld. lower authorities. We find that according to the provisions of section 263 of the Act, the ld. PCIT is empowered to revise the order which is prejudicial to the interests of the revenue. He can pass an order of enhancement or modifying the assessment or cancelling and directing to pass fresh assessment order. This is subject to the condition that he finds the impugned order being erroneous insofar as it is prejudicial to the interests of the revenue after giving an opportunity of hearing to the assessee. What is erroneous and prejudicial to the interests of the revenue is judicially tested by plethora of decisions. However, the scope was further extended by introduction of Explanation 2 w.e.f. 1.6.2015 wherein four types of situations were considered and deeming provision was inserted that if the 4 conditions are satisfied individually, the order is deemed to be erroneous and prejudicial to the interests of the revenue. Precisely in this case, the ld. PCIT has invoked clause (a) & (d) of the above Explanation to hold that the order is erroneous and prejudicial to the interests of the revenue.

The facts clearly show that in this case assessee is a cooperative society carrying on the business of borrowing and lending to its members. During this activity the assessee earns interest income from providing credit facilities to its members and further it also earns interest from deposits made with cooperative banks and scheduled banks where it has deposited statutorily mandated liquid resources as well as its reserve fund. The assessee claimed deduction u/s. 80P of the Act on both the interest income amounting to Rs.71,18,448 u/s. 80P(2)(a)(i) of the Act. The ld. AO during the course of assessment proceedings verified the details and found that assessee has received interest on investment of Rs.59,61,835 on which deduction u/s. 80P(2)(a)(i) of the Act is not allowable. The claim of the AO is that the above interest income has been earned from the investment in Apex Bank and shares which is not the activity of banking or providing credit facilities to its members. He was further of the view that interest earned from the banks is not attributable to carrying on business of banking. These funds are invested in bank over a fixed period of time and thereby interest income earned is not eligible for deduction u/s. 80P(2)(a)(i) of the Act. His view was on account of decision of Hon’ble Supreme Court in the case of Totagars Co-op. Sale Society relating to para 11 of that judgment. He further relied upon several other judicial precedents which are mentioned in para 4.3 of show cause notice dated 8.3.2022. Thereafter in para 5 the AO categorically issued a notice that interest income earned from the Banks should be treated as income from other sources u/s. 56 of the Act and to be added to the total income of the assessee. The assessee submitted a reply wherein the assessee submitted that it is eligible to claim deduction u/s. 80P

The ld. PCIT issued a show cause notice on 17.1.2025 stating that assessee has earned interest income with banks other than cooperative societies, such interest income is not allowable for deduction u/s. 80P(2)(a)(i) of the Act in view of the decision of the Hon’ble Supreme Court in the case of 188 Taxman 282. The ld. PCIT invoked clause (d) to Explanation 2 to section

The ld. PCIT held that reliance on the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT is also not correct in view of the clear judgment of Hon’ble Supreme Court in 188 Taxman 282. The ld. PCIT further referred to the decision of Hon’ble Karnataka High Court in 83 taxman.com 140 of PCIT v. Totagars Co-op. Sale Society relying on para 12 to 17 held that the AO has passed an order without verification of this aspect as per law laid down by Hon’ble jurisdictional High Court Thus in para 14 he invoked clause (a) and (d) of Explanation 2 to s.

However, if we look today at the law laid down by the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. [ TS-12-SC- 2021 dated 12.1.2021] and Kerala State Agricultural & Rural Dev. Bank Ltd. [TS-SC-2023 dated 14.9.2023] and the decision of Citizen Co-op. Society [TS-SC- 326-2017 dated 10.8.2017] which are all rendered after the decision of Hon’ble Karnataka High Court in the case of PCIT v. Totagars Co-op. Sale Society (2017) 83 taxmann.com 140. On the reading of these 3 decisions of Hon’ble Supreme Court stated above, it clearly shows that assessee co-operative society must be engaged in providing credit facility to its members. This aspect has been discussed in para 30 to 31 by the Hon’ble Supreme Court and held that the statutory provision does not require the assessee to be primary agriculture credit society to claim deduction u/s. 80P(2)(a)(i) of the Act. Further in para 33 wherein it has drawn the distinction between the eligibility for deduction and attributability of amount of profits and gains to an activity. Further in para 34 it has been categorically held that provisions of section 80P that the interest or dividend income earned by a cooperative society from investment with other cooperative society are also entitled to deduct whole of such income the object of the provision being furtherance of the cooperative movement as a whole. It was held in para 35. Therefore it is now amply clear that whether income is derived as income from other sources or derived as business income, the assessee would be entitled to get full deduction on such interest income earned from cooperative society which are also cooperative banks. Therefore now it is crystal clear that assessee is entitled to such deduction under either of the provision i.e. u/s 80 P (2) (a)(i) or 80 P (2) (a) (d).

Further coming to the decision of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-op. Ltd. [2015] 55 taxmann.com 447 wherein the issue involved was whether the interest accrued of Rs.1,77,305 from the deposits made by the assessee in a national bank out of the amount which was used by the assessee for providing credit facilities to its members and therefore the said interest amount is attributable to the credit facilities provided by the assessee forms part of the profits & gains of the business and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. In that case interest was earned from Allahabad Bank of Rs.1,55,300 and on SB A/c with Axis Bank of Rs.22,005, totalling to Rs.1,77,305. The Hon’ble High Court was also shown the decision of Hon’ble Supreme Court in 322 ITR 283. The Hon’ble High Court in para 7 has considered whether such interest income is attributable to the business of cooperative society and in para 8 has held so allowing the assessee’s claim. In para 9 the Hon’ble High Court considered the decision of Hon’ble Supreme Court and in the last line, categorically held that the Hon’ble Supreme Court was not laying down any law. In para 10 it followed the decision of the Hon’ble Andhra Pradesh High Court.

When these decisions were shown to the AO, it was naturally a binding judicial precedent on him which was to be followed by him. Therefore, the ld. AO at the time of allowing the claim of assessee followed the binding judicial precedent of Hon’ble jurisdictional High Court. So, the decisions which were a binding judicial precedent, followed by the ld AO, such order could not be treated as erroneous.

Anyway, there were 2 decisions of Hon’ble Karnataka High Court dealing with the same issue, and the ld. AO has followed one of them. Therefore naturally there were 2 views possible and following one of the views does not make an order erroneous. Such is the mandate of the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. and Max India Ltd.

The ld. DR has specifically referred to the decision of Hon’ble Karnataka High Court in the case of PCIT v. TE Connectivity India P. Ltd. (175 taxmann.com 405). We have carefully perused that decision. The decision is dealing with the issue whether the assessee assessed by the ld. AO, found by the PCIT subsequently that the AO has not disallowed the commission payment to its agent since those were made without deducting tax at source and there was a similar disallowance made in AY 2013-14 and 2014-15, whereas the case before the PCIT was AY 2015-16. Thus the facts were that in the previous years, identical disallowance was made and in this assessment year no disallowance was made by the ld. AO. In that case, there was no finding in the assessment order what were the relevant consideration which made the mind of the AO to agree with the stand of the Respondent that the despite making disallowance in earlier year, no disallowance is to be made in this year. Further there was no finding on the transaction to show that the AO has examined the same and in absence of such express finding, it cannot be said that the view of the AO is plausible view. Further the Hon’ble Court was concerned that in absence of such discussion to say that AO has accepted the contention of the assessee cannot be accepted.

In the present case before us, para 4 of the assessment order and the notice which is supplied before us during the several assessment proceedings u/s. 143(3) dated 8.3.2022 clearly shows that the same decision of the Hon’ble Supreme Court was relied upon by the AO which was also cited by the PCIT in 263 show cause notice. Further in the assessment order in para 3 the AO has clearly mentioned this aspect of examination and then agreeing with the view of the deduction u/s. 80P(2)(a)(i) of the Act of Rs.75,18,448. Therefore in view of the distinct features, reliance on the decision of the Hon’ble High Court is misplaced.

Further in the present case, the decision of Hon’ble Supreme Court cited above clearly says that assessee is entitled to deduction u/s. 80P(2)(a)(i) or 80P(2)(d) of the Act on the whole of such income. Therefore the facts of TE Connectivity India P. Ltd. (supra) does not apply to this case.

The ld. DR further relied upon the decision of coordinate Bench in for AY 2020-21 dated 17.6.2025. On careful perusal of the facts of that decision, the issue was whether the provision of Rule 7B of the I.T. Rules were not at all enquired into because of the reason that assessee has not submitted the details as to how the coffee is grown and sold. The ld. AO in absence of any such details did not make a disallowance in terms of Rule 7B. Thus AO has accepted the claim of assessee even without conducting any independent enquiry and without referring to provisions of Rule 7B. Therefor the coordinate Bench upheld the provisions of section 263 sustaining the order of the ld. PCIT. The facts in the case before us are quite distinct as explained above. Therefore reliance on this decision of the coordinate Bench does not help the case of the revenue.

In view of the above facts and discussion, we hold that the order passed by the ld AO was based on binding judicial precedents could not be held to be erroneous and prejudicial to the interest of revenue and hence, order passed by the ld. PCIT u/s. 263 of the Act is not sustainable and hence quashed.

In the result, the appeal of the assessee is allowed.