SAR SENAPATI UMABAI DABHADE NAGARI SAHAKARI PATSANSTA MARYADIT,PUNE vs. PCIT-3, PUNE

Briefly stated, the facts of the case are that the assessee is a cooperative credit society engaged in providing credit facilities to its members and accepting deposits. For AY 2020-21, the assessee filed its return of income on 29.12.2020, declaring a total income of Rs. NIL after claiming deduction u/s 80P of the Income Tax Act, 1961 (the “Act”). The return was initially processed u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny under CASS under the E- assessment Scheme, 2019 for the reasons : (i) Low income in comparison to very high investments appearing in balance sheet; (ii) High liabilities as compare to low income/receipts; (iii) Large commission expenses and low net profit and (iv) Low income (including exempt income and agricultural income in comparison to high loans/advances/investment in shares appearing in balance sheet. Accordingly, statutory notice(s) u/s 143(2) and 142(1) of the Act were issued and served upon the assessee. In response thereto, the assessee furnished the requisite details/documents from time to time. The Ld. Assessing Officer (“AO”) after verification of the details/documents furnished by the assessee and perusal of the submissions made by the assessee, accepted the “Nil” income returned by the assessee thereby allowing the deduction u/s 80P of the Act vide his order dated 31.08.2022 passed u/s 143(3) r.w.s. 144B of the Act.

Assessment Proceedings & Allowance of Deduction u/s 80P: a) The Assessing Officer (AO) had examined the assessee's claim of deduction under Chapter VIA, particularly Section 80P, as part of the scrutiny assessment. b) The AO had verified the investments, interest income, and the eligibility of the deduction before passing the assessment order under Section 143(3). c) The deduction was allowed in line with the statutory provisions, and no adverse findings were recorded in the assessment order.

Alternate Claim under Section 57 of the Act: If the interest income is to be assessed under Income from Other Sources (Section 56), the proportionate expenses incurred for earning such income must be allowed as a deduction under Section 57. The Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. ruled that the net interest income after deducting relevant expenses should be considered for taxation.

Despite the above submission/contention(s) of the assessee, the Ld. PCIT held the order passed by the Ld. AO as erroneous in so far as it is prejudicial to the interest of revenue by invoking the provisions of section 263 of the Act, by observing as under : “7. I have carefully gone through the facts of the case, material placed on record and the written reply filed by the assessee. The main argument of the assessee is that the AO had verified the investments, interest income, and the eligibility of the deduction before passing the assessment order under Section 143(3) and therefore, there was no scope for the PCIT to exercise the revisionary jurisdiction u/s.263 of the Act. Further, the assessee has also placed reliance on the various decisions of the Pune Tribunal to argue that such interest is eligible for deduction u/s.80P(2)(d) of the Act. 7.1 In this context, it needs to be noted that Sec. 80P(2)(a) (i) provides for deduction to a cooperative society in respect of income derived by it from the business of banking or providing credit facilities to its members. Thus, what is sought to be given under the said provision is only the profit attributable to the core business of banking or providing credit facilities to its members. When the assessee gets deposits from its members and provides credit facilities again to its members, then what is left with it for investment is surely the surplus which is not required. Investing such surplus money, which is not immediately required for the business purposes and earning of interest on such investments cannot be said to be attributable to the core business of 'banking or providing credit facilities to its members'. The Hon'ble Supreme Court of India in the case of Totgars Co-operative Sales Society Ltd. Vs. ITO, (SC) (322 ITR 283) (2010) has held that the interest income which has been earned by investing surplus funds would come in the category of 'Income from other sources' taxable u/s 56 of the Act and would not qualify for deduction as business income u/s 80P(2)(a) of the Act. In the case, the Hon'ble Apex Court has stated inter-alia that – "The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee- Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest falls in the category of "other Income" which has been rightly taxed by the Department under section 56 of the Act.

As regards the claim of the assessee regarding admissibility of deduction w/s. 80P(2)(d) of the Act, it may be mentioned that a plain reading of the Sec. 8OP(2)(d) of the Act shows that interest income earned by a cooperative society will be eligible for deduction only from its investments with another cooperative society. In the present case, there is no dispute that the impugned interest has been earned on investments made with cooperative banks. When there is no ambiguity in the plain reading of the Sec. 8OP(2)(d) of the Act, there cannot be various interpretation. It is a settled principle of law that a plain and unambiguous meaning of legal provision is to be adopted for interpretation. This view has been expressed by the Hon'ble Supreme Court in the case of Prakash Nath Khanna Vs CIT (266[TR1) (SC)[2004] Therefore, the claim of the assessee to treat the Co-operative Bank as Co-operative Society cannot be accepted. Further, the Hon'ble Karnataka High Court again in the case of PCIT Vs. Totgars Co-operative Sales Society Ltd. (395 ITR 611) (2017) held that a co-operative society would not be eligible for deduction u/s 8OP(2)(d) on the interest income earned by it on account of deposit of its surplus funds in a co-operative bank. In the said case, it has also been held by the High Court that the banking business, even though run by a Co-operative bank is sought to be excluded from the beneficial provisions of exemption or deduction under section 80P of the Act, by bringing on the statute book sub-section (4) in section 80P_{2} ^ 0 The Court noted that the words used in section 80P(4) are significant which says that 'The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society...... The words 'in relation to can include within its ambit and scope even the interest income earned by the assessee, a co-operative society from a Co-operative Bank. This exclusion by section 80P(4) even though without any amendment in section 8OP(2)(d) is sufficient to deny the claim of the assessee for deduction under section 80P(2)(d). 8.1 Coming to the decisions cited by the assessee of the jurisdictional Tribunal on the issue, with due respect it may be mentioned that as pointed out hereinabove, both the Hon'ble Apex Court and the Hon'ble Karnataka High Court have decide the issue of eligibility of interest income on investments for deduction w / s * 0.8P(2)(a)(i) & 80P(2)(d) of the Act in favour of the Department. Further, adverse decision of the Hon'ble Jurisdictional Tribunal has been further challenged by the Revenue before the Hon'ble Bombay High Court, which is still pending.

Aggrieved, by such order of the Ld. PCIT, the assessee is in appeal before the Tribunal and all the grounds of appeal relate thereto.

The Ld. AR, at the outset, drew our attention to the order of the Ld. AO and submitted that the Ld. AO during the course of assessment proceedings u/s 143(3) of the Act had asked for various details on this issue, in response to which the assessee made elaborate submissions. He further submitted that the issue raised by the Ld. PCIT is covered in favour of the assessee by catena of decisions of the Co-ordinate Bench of the Tribunal. Referring to para 8.1 of the Ld. PCIT‟s revision order, the Ld. AR submitted that even otherwise also it is a highly debatable issue and the Ld. AO has taken a plausible view, therefore, the Ld. PCIT cannot invoke the jurisdiction u/s 263 of the Act on an issue which has already been examined by the Ld. AO and who has taken a plausible view. In support thereof, the Ld. AR submitted a legal compilation of the following decisions: i. Talegaon Nagari Sahakari Patsanstha Limited Vs. ITO, for AY 2020-21, dated 03.06.2024; ii. Shreenath Mhaskoba Credit Co-Operative Society Ltd. Vs. PCIT, for AY 2020-21, dated 17.06.2025; iii. PCIT Vs. Totagars Co-op Sale Society - 392 ITR 74 (Karnataka), dated 05-01-2017.

We have heard the Ld. Representatives of the parties, perused the material available on record and the paper book filed by the Ld. AR on behalf of the assessee. We have also considered the various decisions cited before us. We find the Ld. PCIT in the instant case assumed jurisdiction u/s 263 of the Act on the ground that the Ld. AO during the course of assessment proceedings, has not asked any specific question to the effect as to whether the interest income in question is business income or not.

It is thus clear that the Ld. AO had raised the query on this issue to which the assessee replied. We find that in the assessment order passed u/s 143(3) of the Act, the Ld. AO has accepted the Nil income returned by the assessee observing that “assessee has, vide submissions dated 01.03.2022, 03.03.2022 and 09.03.2022, stated that it is a Co-operative Society and engaged in the business of accepting deposits of various types i.e fixed deposits, recurring deposits, saving deposits, daily collection deposits etc. from its members. The assessee appoints agents on commission basis for collecting daily collection deposits from members, the assessee paid commission @3% on daily collection amount. It is seen that the assessee is eligible for deduction u/s 80P as the entire amount claimed at Rs. 1,35,74,459/- has been earned from credit facilities to its members. The assessee has submitted copies of some of the loan accounts, agent commission etc. The issues and reasons for which the case of the assessee was selected for scrutiny assessment have been perused and the requisite details/documents furnished by the assessee, have been perused and placed on record. As no adverse inference has been drawn in respect of the reason for selection, the assessment is completed u/s. 143(3) of the Act without making any modification to the total income of Rs. Nil reported by the assessee”. Hence, in our view, since the Ld. AO in the instant case has made enquiry on the issue and taken a plausible view, therefore, the same cannot be considered as erroneous although it may be prejudicial to the interest of the Revenue.

Further, according to Ld. PCIT the act of making deposits out of deposits received from the members cannot be considered to be attributable to the business of providing credit facilities by the assessee to its members and hence placing reliance on the decision of the Hon‟ble Supreme Court in the case of Totgar‟s Cooperative Sale Society Ltd. Vs. ITO (supra) and the Hon‟ble High Court of Karnataka in the case of Pr. CIT, Hubali Vs. Totgars Cooperative Sale Society (supra), the Ld. PCIT opined that the interest earned on deposits kept with scheduled banks/co- operative banks cannot be allowed as deduction u/s 80P of the Act and such interest to be brought to tax. Admittedly, the assessee has earned interest income from deposits made with cooperative bank(s) during the relevant AY under consideration. We find that the impugned issue in respect of which the Ld. PCIT has invoked the provisions of section 263 of the Act is covered in favour of the assessee by various decisions of the Co- ordinate Bench of the Tribunal including the Pune and Mumbai Tribunal as well as by the Hon‟ble High Courts wherein the Tribunals/ Courts have consistently taken a view that the interest income earned by a co-operative society on deposits made out of surplus fund with co-operative banks qualify for deduction under the provisions of section 80P(2)(a)(i)/80P(2)(d) of the Act. The case of the assessee also finds support from the decisions (supra) cited by the Ld. AR wherein revision order under section 263 has been set aside under the similar set pattern to that of the assessee in the present appeal.

The Co-ordinate Bench of the Tribunal in the case of Talegaon Nagari Sahakari Patsanstha Limited vs. ITO (supra) has held that the interest income earned by a co-operative society on deposits made out of surplus funds with co-operative banks as well as scheduled banks qualify for deduction both under the provisions of section 80P(2)(a)(i) and 80P(2)(d) of the Act. Since, the Ld. AO in the instant case after considering the submission of the assessee has taken a plausible view, therefore, the same in our opinion cannot be considered as erroneous although it may be prejudicial to the interest of the Revenue.

It is the settled position of law that for assuming the jurisdiction u/s 263 of the Act the twin conditions must be fulfilled simultaneously i.e. (i) the order of the Ld. AO is erroneous and (ii) the assessment order is prejudicial to the interest of the Revenue. Considering the factual matrix of the case and legal position set out above, in our view, the order passed by the Ld. AO u/s 143(3) of the Act may be prejudicial to the interest of the Revenue but it cannot said to be erroneous. The Ld. AO has allowed the assessee‟s claim of deduction u/s 80P of the Act after verifying the requisite details called from the assessee. Even otherwise also, it is a highly debatable issue and the Ld. AO has taken a plausible view, therefore, the Ld. PCIT cannot invoke the jurisdiction u/s 263 of the Act on an issue which has already been examined by the Ld. AO and who has taken a plausible view. Therefore, in the absence of fulfillment of both the twin conditions, in our considered view, the Ld. PCIT is not justified in invoking the provisions of section 263 of the Act. We, therefore, set aside the order of the Ld. PCIT. The grounds of appeal raised by the assessee are accordingly allowed.

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