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Facts
The assessee, a cooperative society, filed a return declaring Nil income after claiming a deduction u/s 80P(2)(a)(i). The PCIT initiated revision proceedings u/s 263, alleging that the deduction claimed on interest income from other cooperative banks was erroneous and prejudicial to revenue. The Assessing Officer had accepted this deduction without proper verification.
Held
The Tribunal held that for invoking Section 263, both conditions (order being erroneous and prejudicial to revenue) must be satisfied. While the order might be prejudicial to revenue, it was not erroneous as the Assessing Officer had taken a possible view based on the assessee's submissions and judicial pronouncements, and the issue was debatable.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order where the Assessing Officer allowed deduction u/s 80P on interest income from investments in co-operative banks, considering the issue to be debatable and the AO's view to be a possible one.
Sections Cited
263, 143(3), 80P(2)(a)(i), 143(2), 142(1), 144B, 80P(4), 80P
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 25.03.2025 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. PCIT, Pune-1, relating to assessment year 2020-21.
Although a number of grounds have been raised by the assessee, however, these all relate to the order of the Ld. PCIT in setting aside the order passed by the Assessing Officer u/s 143(3) of the Act by invoking the provisions of section 263 of the Act.
Facts of the case, in brief, are that the assesse is an AOP and filed its return of income on 29.12.2020 declaring Nil income. The case was selected for scrutiny under CASS. Accordingly statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee in response to which the assessee filed the requisite details from time to time. The Assessing Officer completed the assessment u/s 143(3) r.w.s. 144B of the Act on 30.08.2022 accepting the returned income.
4. Subsequently, the PCIT examined the record and noticed certain discrepancies in the assessment order which according to him appear to be erroneous and prejudicial to the interest of Revenue. He, therefore issued a show cause notice asking the assessee to explain as to why the order passed by the Assessing Officer should not be revised as the same being prejudicial to the interest of Revenue. The relevant contents of the said notice read as under: “Please refer to the order passed u/s 143(3) r.w.s. 144B of the IT Act for the A.Y 2020-21 dated 30/08/2022 in your case. 2. On subsequent review of the assessment and the case records, the following facts are observed: 3. It is seen that the assessee has offered gross total income of Rs.37,06,364/-. On this income, the assessee has claimed deduction u/s 80P(2)(a)(i) of the Act at Rs.37,06,364/-, and arrived at NIL income. On perusal of Balance Sheet as on 31/03/2020, it is noted that the assessee has made investment with other Co-op banks as follows: Sr No. Name of the Bank Amount(Rs.) 1 Ahmednagar DCC Bank Ltd 2,04,10,974/- 2 Shree Rukmini Sah Bank Ltd 3,83,05,000/- 3 Reserve Fund Investment 57,72,164/- On perusal of Profit & Loss account, it is noticed that the assessee has earned interest of Rs.30,98,819/- from such investment which also includes saving bank interest of Rs.1,092/-. The interest of Rs.30,98,819/- earned on investments with other Co-operative Banks and the assessee has claimed the entire interest and dividend received from Co-operative Banks as deduction u/s 80P(2)(a)(i) of the Act In the instant case, the 'Interest income' under question was not the interest received from the members of the assessee-society for providing credit facilities to them. An income which is attributable to any of the specified activities mentioned in section 80P(2) of the I.T. Act 1961 would be eligible for deduction. The assessee-society invested funds not immediately required for business purposes. Interest on such investments, therefore, will not fall within the meaning of the expression' profits and gains of business. It is clear that the above interest income earned by the assessee is from Co operative banks which are deemed not to be Co- operative societies as per provision of section 80P(4) of the I.T. Act 1961. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a) (i) of the I.T. Act 1961 and the interest derived by depositing surplus funds with the Co-operative banks not being attributable to the business cannot be deducted under section 80P(2)(a) of the I.T. Act 1961. Such interest and dividend income is not the 'operational income of assessee society from providing credit facilities to its members. Consequently, the interest income of Rs.30,98,819/- has to be treated as 'income from other sources' not eligible for deduction u/s 80P of the Act. However the FAO has allowed such deduction without considering the factual matrix of the case.
In view of the above, the order dated 30/08/2022 passed by the Faceless Assessing Officer(FAO), NeAC, Delhi under section 143(3)r.w.s 144B of the Income-tax Act, 1961 for the A.Y 2020-21 is erroneous and prejudicial to the interest of revenue within the meaning of Explanation 2 of sub-section 1 of section 263 of the Income-tax Act, 1961 and is proposed to be revised.
5. In this connection, you are given opportunity of being heard by the undersigned. You may therefore attend this office in person or through authorized representative on 03/10/2024 at 04.30 P.M. on the above mentioned address alongwith the information/documents on which you may rely upon."
The assessee submitted that the assessee is a co-operative society with the main objective of providing loans and accepting deposits from the members of the society. The assessee has shown profit of Rs.37,06,364/- and after claiming deduction u/s 80P(2)(a)(i) the income was declared as Nil. It was argued that the assessee is accepting deposits and giving loans to the members only. Relying on various decisions it was submitted that the 263 proceedings should be dropped.
However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee. He noted that the assessee has earned interest from the various co- operative banks, the details of which are as under:
Sr No. Name of the Bank Amount(Rs.) 1 Ahmednagar DCC Bank Ltd 2,04,10,974/- 2 Shree Rukmini Sah Bank Ltd 3,83,05,000/- 3 Reserve Fund Investment 57,72,164/-
He noted that as per the Profit & Loss Account the assessee has shown interest income of Rs.30,98,819/- during the year under consideration from the above investments. He noted that the assessee has claimed total deduction of Rs.37,06,364/- u/s 80P(2)(a)(i) which includes interest of Rs.30,98,819/-. According to the Ld. PCIT, the Assessing Officer prima facie found to have not verified since he has not conducted any specific enquiries regarding the assessee’s eligibility for deduction u/s 80P(2)(a)(i). Relying on various decisions and observing that the order of the Assessing Officer is prima facie erroneous as well as prejudicial to the interest of Revenue, he set aside the assessment order to the file of the Assessing Officer for proper verification of facts and to re-examine the issue.
Aggrieved with such order of the Ld. CIT(E), the assessee is in appeal before the Tribunal by raising the following grounds:
1. On the facts and in the prevailing case, circumstances of the respected PCIT, Pune-1 erred in passing the impugned Revision Order under section 263 without appreciating the fact that interest on the deposits made by a co-operative society with the co-operative Bank is eligible for deduction under section 80P of the Act. Hence, the impugned order under section 263 may please be squashed.
2. On the facts and in the prevailing the case, circumstances of respected PCIT, Pune-1 erred in passing the impugned Revision Order under section 263 without appreciating the fact that Chapter VI-A Deductions are allowed if Profit enhanced due to disallowances. Hence, the impugned order under section 263 may please be squashed.
3. On the facts and in the prevailing of the case, circumstances respected PCIT, Pune-1 erred in passing the impugned Revision Order under section 263 without appreciating the submission made by the assessee society and the judgments of Hon'ble Jurisdictional Pune ITAT. Hence, the impugned order under section 263 may please be squashed.
4. The Appellate craves the permission to add, amend, modify, alter, revise, substitute, delete any or all grounds of the appeal, if deemed necessary at the time of hearing of the appeal.
The Ld. Counsel for the assessee at the outset drew the attention of the Bench to the submissions of the assessee before the Assessing Officer dt 24.01.2022, the details of which are placed at pages 1 to 49 of the paper book. Referring to page 1 of the said reply, the Ld. Counsel for the assessee drew the attention of the Bench to para 5 of the same which reads as under: “5) We are cooperative society & hence we are eligible for deduction under section 80p 2 a(i) and our total income is deductible under this section. Our total income is deductible up to the interest received from members, which is our main source of income. So, our taxable income is always Nil. Section 80P(2)(a) in The Income Tax Act, 1995 (a) in the case of a co-operative society engaged in - (ii) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of the agricultural produce of its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members or) So as per the above section we have taken the deduction.”
Referring to the reply dated 28.02.2022 before the Assessing Officer, copy of which is placed at pages 50 to 54 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the same which reads as under: “To The Income Tax Department Sub.. Notice under sub-section (1) of Section 142 of the Income Tax Act, 1961 Ref: PAN: AAAAB5524F, Α.Υ. 2020-21 Respected Sir, This with reference to above mentioned notice wherein you have asked us explanation regarding certain points which is as follows: 1) By laws are attached herewith 2) Detailed note on Nature of Business, operations & objectives: We are Cooperative society engaged in the business of accepting deposits & advancing loans to our members. Bye Laws is attached herewith for your reference. 3) Making member of Co operative Society: at the time of making member he has to take shares of the co operative society, then he became the ordinary member of the society 4) Bank Account: detailed are attached herewith 5) Co operative society has made business with only members and non members are taken as guarantors only 6) There are two types of members one is ordinary members and others are nominal members. Nominal members are taken only as guarantors to loans and they do not have any voting rights, they has not any benefit about like dividend or any other benefit. Only members can get all the benefit like make fixed deposit, open account like saving account, current account and loans from society. Also enjoying the dividend and other benefit from society. 7) Income Bifurcation: As per Rules & Bye laws Cooperative society is doing business with its members only. SR NO SOURCE OF INCOME AMOUNT RS.
LOAN INTEREST ON MEMBERS 23141074.63 2. INVESTMENT INTEREST 3098819.00 3. OTHER COMMISSION 23643.00 4. DIVIDEND 450.00 TOTAL 26263986.63 8) Bifurcation of Income under different heads of income: BOP DEDUCTION 80P2A(1) DEDUCTION IS AVAILABLE ON INTEREST RECEIVED FROM MEMBERS, INTEREST ON INVESTMENT AND OTHER ANCILIARY SERVICES. ALL THE SERVICES PROVIDED BY THE CO OPERATIVE SOCIETY. We are cooperative society & hence we are eligible for deduction under section 80p 2 a(i) and our total income is deductible under this section. Our total income is deductible up to the interest received from members, which is our main source of income. So, our taxable income is always Nil, Section 80P(2)(a) in The Income-Tax Act, 1995 (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of the agricultural produce of its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members or] So as per the above section we have taken the deduction 9) Unsecured Loans:
As we are cooperative society we are engaged in the business of accepting deposits & advancing loans to our members. Hence we do not accept unsecured deposit. In ITR amount shown under unsecured deposit is shown mistakenly as there was no separate heading for such deposits, but actual it is deposits accepted from our members, which is in regular course of our business. Balance sheet for the same has been attached herewith. DETIALS 10) Documentary evidence of deposited and lenders- We are giving you sample basis document which we took for giving loans or accepting deposits. As we are in rural area and maximum people are agriculturist so aadhar card is taken from every body, 7/12 extract, as members are agriculturist so pan card is not available for most of the members but now we encourage our members to take pan card for their future transactions. 11) Short term loan:- 7,24,79,616/- We are attaching herewith the registration copy of our co operative society. 12) Bifurcation of income Already given in point no.7 13) High liabilities in comparison with low income: Our society is a co-operative society and its nature of business to accept deposits form its members and provide loan facility to them. Society has made all expenses which are already sanctioned in the Board of Directors meeting and Large expenses in Annual General Meeting, then these expenses are incurred. We have incurred all expenses as per by laws of our society. So all the expenses are genuine in nature so the profit & loss account of our society is showing true and fair financial statements 14) Deduction u/s 80P of Rs. 37,06,364/- We are cooperative society engaged in the business of advancing loans & advances and accepting deposits from our members. Hence as per sec 80P we are eligible for deduction. Our total income is deductible upto the interest income from members which is Rs.2,62,63,536/- & we have claimed deduction upto profit earned by the society which is Rs. 37,06,354/ 15) Detailed Computation of Income: Attached
Sir, we have given explanation to your each and every point & we are also attaching herewith orders of previous year allowing deduction u/s 80P, for your reference. Please consider the same and do the needful. Sd/- For BELVANDI VYAPARI GRAMIN BEGAR SHETI SAHAKARI PATSNTHA LTD”
He submitted that the Assessing Officer after due verification of various details filed by the assessee from time to time has passed the order. So far as the allegation of the Ld. PCIT that the assessee is not eligible to claim deduction u/s 80P on account of interest received from co-operative banks is concerned, relying on various decisions, the Ld. Counsel for the assessee submitted that the Co- ordinate Benches of the Tribunal are allowing the said claim of deduction u/s 80P. Therefore, the issue being a debatable one and the Assessing Officer after considering the various details filed by the assessee has taken a possible view, therefore, it cannot be said to be erroneous merely because the Ld. PCIT does not agree with the view of the Assessing Officer. Relying on various decisions, he submitted that for assuming jurisdiction u/s 263, the twin conditions namely (i) order is erroneous and (ii) order is prejudicial to the interest of Revenue must be satisfied. In the instant case, the order may be prejudicial to the interest of Revenue as per allegation of the Ld. PCIT, however, it cannot be said to be erroneous since the Assessing Officer has taken a possible view after considering the various details furnished by the assessee. Therefore, the Ld. PCIT is not justified in invoking jurisdiction u/s 263. He accordingly submitted that the grounds raised by the assessee be allowed.
The Ld. DR on the other hand heavily relied on the order of the Ld. PCIT.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. PCIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. From the various details furnished by the assessee we find the Assessing Officer has raised specific queries, to which the assessee during the course of assessment proceedings has replied, the details of which have already been reproduced in the preceding paragraphs. We find the Assessing Officer after considering the various details furnished by the assessee passed the order accepting the contention of the assessee. Therefore, it cannot be said that the Assessing Officer has not applied his mind or there is no enquiry. Further, the issue on which the Ld. PCIT wants to assume jurisdiction u/s 263 is a debatable one. The various Benches of the Tribunal are allowing the claim of deduction u/s 80P on account of interest received on investments by the co-operative society with other co-operative banks. Therefore, the order passed by the Assessing Officer in our opinion may be prejudicial to the interest of Revenue as per the view of the Ld. PCIT but cannot be said to be an erroneous one since the Assessing Officer has taken a view on the basis of submissions made by the assessee in the light of various judicial pronouncements. It is the settled proposition of law that for assuming jurisdiction u/s 263 of the Act, the twin conditions must be satisfied i.e. the order passed by the Assessing Officer must be erroneous as well as must be prejudicial to the interest of Revenue. Absence of any one condition cannot make the order the subject matter of revision u/s 263. As mentioned earlier, the order passed by the Assessing Officer may be prejudicial to the interest of Revenue but it cannot be said to be erroneous one on account of various decisions in favour of the assessee on this very issue. Therefore, in absence of the twin conditions fulfilled i.e. order is erroneous and the order is prejudicial to the interest of Revenue, the Ld. PCIT in our opinion is not justified in invoking jurisdiction u/s 263 of the Act. We, therefore, set aside the order of Ld. PCIT invoking jurisdiction u/s 263. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 8th August, 2025.