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Facts
The assessee, a cooperative society, filed an appeal before the Tribunal with a significant delay of 670 days, citing reasons such as the death of their consultant and changes in their managing committee. The appeal challenges an order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263, which revised an earlier assessment order allowing deduction under Section 80P.
Held
The Tribunal condoned the delay, holding that the reasons provided by the assessee constituted a reasonable cause and that substantial justice should be preferred over technicalities. Subsequently, the Tribunal found that the twin conditions for invoking Section 263 (erroneous order and prejudicial to revenue) were not met, as the Assessing Officer had taken a plausible view after due inquiry, and therefore set aside the PCIT's order.
Key Issues
Whether the delay in filing the appeal should be condoned, and if the PCIT was justified in invoking Section 263 when the AO had made a plausible assessment on the claim of deduction u/s 80P.
Sections Cited
263, 143(3), 80P, 142(1), 80P(2)(a)(i), 80P(2)(d)
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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
आदेश / ORDER
PER ASTHA CHANDRA, JM :
The appeal filed by the assessee is directed against the order dated 23.03.2022 of the Ld. Principal Commissioner of Income Tax, Pune-4 (“PCIT)” passed u/s 263 of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2017-18.
2. There is a delay of 670 days in filing of this appeal before the Tribunal for which the assessee has filed an affidavit explaining the reasons for such delay. He submitted that the delay is not intentional and is a bonafide one for the reasons beyond the control of the assessee as evident from the affidavit filed in support thereof and therefore prayed that the delay may be condoned and the appeal be admitted for adjudication.
2.1 The Ld. DR, on the other hand, strongly opposed the arguments advanced by the Ld. Counsel for the assessee.
2.2 We have heard the rival contentions and perused the record. It is an admitted fact that there is a delay of 670 days in filing of the appeal before the Tribunal. The Ld. Counsel for the assessee has filed an affidavit of the assessee stating the reason for such delay which are as under :
“1. Death of the Consultant: During the period, the audit and tax compliances of the appellant was done by the Certified Auditor who was also a tax practitioner. The consultant used to look after all the tax compliances and related tax litigations from the last 10 to 12 years. In the month of July 2022, the counsel of the appellant expired due to heart attack. As the email ID of the consultant was given on the income tax portal for all the communications, the appellant was not aware about any notices which were sent by electronic media. As all the tax compliances was looked after by the counsel, the appellant was totally handicapped. Also, the data earlier submitted by the old counsel was not available with the appellant. The retrieval of the data from the old consultant consumed a lot of time.
Appointment of a new counsel: The appellant was in search of a new counsel who will guide the appellant regarding the tax compliances, Audit and litigations. It took a lot of time for the appellant to appoint a new counsel. Therefore, proper documents and explanations could not be submitted by the appellant.
Addition for the first time: The assessee was subjected to scrutiny for AY 2017-18. However, this was the first time when any addition was made to the total income of the assessee and income tax demand was raised. The assessee could not understand the implications of such an order and could not decide on the further course of action.
4. Change in managing committee : Recently, after the elections in the month of January 2023, the managing committee of the assessee was changed. The new managing committee had almost 90% members which were newly elected who were not aware about any of the past proceedings of Income Tax. Also, after the appointment of the new managing committee, the chairman and secretary in the new committee resigned which compelled the appellant to conduct a new election for the post of Chairman and secretary. The new board members were understanding the status of various pending matters. They came to know about the various pending tax demands. Hence, having better connects, they decided to approach a new counsel, who would advise them on the further course of action on the pending tax matters. Now, the appeal is being filed before the Hon. ITAT. Due to all these difficulties being faced by the assessee, the appeal could not be filed in time and delay of about 669 days crept into the process. The main reason for delay is the death of the counsel. The delay was purely unintentional and beyond the control of the assessee.”
2.3 In light of the above reason stated by the assessee in his affidavit, we find some merit in the submission of the Ld. Counsel for the assessee that there was a reasonable cause in not filing the appeal before the Tribunal within the stipulated time.
2.4 We find the Hon'ble Supreme Court in the case of Collector, Land Acquisition vs. Mst. Katiji & Ors. (supra) has held that when substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties.
2.5 We find recently the Hon'ble Supreme Court in the case of Inder Singh Vs. The State of Madhya Pradesh reported in 2025 LiveLaw (SC) 339 has held as under: “14. There can be no quarrel on the settled principle of law that delay cannot be condoned without sufficient cause, but a major aspect which has to be kept in mind is that, if in a particular case, the merits have to be examined, it should not be scuttled merely on the basis of limitation.”
2.6 Considering the totality of facts and in the circumstances of the case set out above and respectfully following the above decision(s) of the Hon'ble Supreme Court, we hereby condone the delay in filing of the appeal and admit the same for adjudication.
3. The assessee has raised the following grounds of appeal :
1. The learned CIT erred in law and on facts in initiating the proceedings u/s 263 of the IT Act, 1961, without appreciating the fact that the assessment order is not erroneous and prejudicial to the interest of the revenue.
2. The learned CIT erred in law and on facts in treating the assessment order to be erroneous on account of "non-enquiry about allowability of deduction u/s 80P. The learned CIT ought to have appreciated that the learned AO had made specific enquiry about the allowability of deduction u/s 80P and that the said issue was examined and allowed in all the past years' assessments.
3. The learned CIT erred in law and on facts in treating the assessment order to be prejudicial to the interest of the revenue. The learned CIT ought to have appreciated that the benefit of deduction either u/s 80P(2)(a)(i) or u/s 80P(2)(d) shall be available to the assessee.
4. The appellant craves leave to add, alter, amend and delete all or any of the grounds of the appeal.”
Briefly stated, the facts of the case are that the assessee is a employees' credit co-operative society and engaged in providing credit facilities to its members. For AY 2017-18, the assessee filed return of income declaring total income of Rs. Nil by claiming deduction u/s 80P(2)(a)(i) Income Tax Act, 1961 (the “Act”) of Rs.28,03,199/- which was restricted to gross total income of Rs.28,03,199/-. The case was selected for limited scrutiny u/s 143(3) of the Act under CASS for the reason "Deduction from Total Income under Chapter VI-A". During the course of assessment proceedings, the Ld. Assessing Officer (“AO”) made detailed enquiry about the assessee’s claim of deduction u/s 80P of the Act. In response to the same, the assessee submitted all the relevant details. After considering the submissions of the assessee, the Ld. AO allowed the deduction u/s 80P of the Act to the assessee and completed the assessment passed u/s 143(3) of the Act on 30.09.2019, accepting the returned income of the assessee.
4.1 Thereafter, the Ld. PCIT issued a show cause notice on 09.03.2022 u/s 263 of the Act stating that the assessment order passed u/s 143(3) appears to be erroneous in so far as it is prejudicial to the interests of the Revenue for the following reasons:-(i) the assessee has earned interest income of Rs.10,63,310/- on investments with co-operative banks. The same is not operational income and should be taxed as "other sources"; (ii) the interest income earned is out of surplus funds and hence, not eligible for deduction u/s 80P(2)(a); and (iii) further, income from co-operative banks do not qualify for deduction u/s 80P(2)(d). In response to the notice under section 263 of the Act, the assessee submitted its reply raising the following contentions: i. Assessee has only invested in co-operative banks. ii. Assessee being a cooperative society is entitled to claim deduction u/s 80-P(2)(a)(i) of the Act. iii. Assessee also eligible to claim deduction u/s 80-P(2)(d) in respect of the whole of interest and dividend income derived by it being a cooperative society from its investments in another cooperative society. iv. The entire income the assessee is eligible for claim deduction u/s 80P(2)(a) and80P(2)(d) of the Act.
4.2 However, the Ld. PCIT did not agree with the above submissions/ contentions of the assessee and by observing that the funds immediately not required for providing credit facilities are invested and the interest on surplus funds is to be treated as taxable under the head "Other Sources", he rejected the deduction claimed u/s 80P of the Act. He further observed that the Ld. AO has not caused any verification of this issue which was required. Hence, failure on the part of the Ld. AO in examining the above issue has rendered the assessment order erroneous in so far as it is prejudicial to the interest of the Revenue. Also, the Ld. AO has not verified the aspect of principle of mutuality and relying upon the decision of the Hon’ble Supreme Court in the case of Totgar’s Cooperative Sale Society Ltd. Vs. ITO (2010) 188 Taxman 282 (SC) and the Hon’ble High Court of Karnataka in the case of Pr. CIT, Hubali Vs. Totgars Cooperative Sale Society, 392 ITR 74 (Karnataka, the Ld. PCIT set aside the order of the Ld. AO for proper verification of facts and to re-examine the assessee's claim for deduction u/s 80P of the Act by observing as under :
“7. I have examined the submission made by the assessee and issues involved there in support of claim of Rs. 28.03,199/- u/s 80P. The contention raised by the assessee are examined with reference to assessment record and it is found that Assessing officer has arrived at decision without properly examining the eligibility of assessee to claim deduction u/s 80P of the Act. As per provisions of section 80P(2)(a)(i), the Society is required to substantiate the principle of mutuality with respect to the loans taken from members to loan advanced/ investment made by it. To come to a conclusive discussion, the AO should have verified whether the loans/ deposit taken are given back to the members as loans/ advances or not. The assessment order does not indicate whether this exercise has been done or not. The non-verification of principle of mutuality by the Assessing Officer has rendered the view taken by him regarding allowability of deduction u/s 80P of the Act is legally unsustainable. Since the view taken by the Assessing Officer is unsustainable, the assessment order passed by the Assessing Officer is liable for revision u/s 263 of the Act.
8. As seen from the Balance Sheet, the assessee has received deposits amounting to Rs. 59,709/-, Paid up capital at Rs. 2,61,27,640/-, reserve fund at Rs. 81,32,297/- as on 31.03.2017. Against the same, the assessee has advanced Rs. 1,85.17,879/- only to its members. Thus, around Rs. 1,58,01,767/- have not been utilized for the activity of lending to the members by the assessee and have been invested in time deposits with various banks. Further, in its submission, the assessee has stated that investment in co-operative banks are made out of deposits from members and that interest income earned from members has also been utilized for making deposits with banks. The total interest income of Rs. 10,68,309/- shown in the Profit & Loss account, has been received by way of dividend received and interest on deposits with banks. Thus, in the assessee's case, a major portion of its income is earned by way of interest on deposits made with other nationalized/co-operative banks. As has been held by the Hon'ble Supreme Court in the case of Totgar's Cooperative Sale Society Ltd. Vs. ITO (supra) and also by Hon'ble Karnataka High Court in the case of Pr. Commissioner of Income Tax, Hubali Vs. Totgars Cooperative Sale Society (supra) this act of making deposits out of the deposits received from members cannot be considered to be attributable to the business of carrying on of the business of providing credit facilities to its members. In view of the aforesaid decisions of the Hon'ble Supreme Court & Karnantaka High Court, Interest earned on such deposits kept with Scheduled Bank/Cooperative Bank cannot be allowed as deduction under section 80P of the Act and such interest should be brought to tax. a. In this regard, the Assessment record has been verified in detail. The submissions made before the Assessing Officer regarding the deposits made with different bank/institution are seen to have been given without details as to when they were made and whether they were made out of the Deposits of the members or otherwise from out of the surplus generated. b. Also, the assessee has claimed that the assessee is a co-operative credit society engaged in the business of providing credit facilities to its members only. Means the assessee accept deposits from its members and provide credit facilities to its members However, no requisite details were furnished by the assessee either before the Assessing Officer or during the present proceedings. The Assessing Officer also has not verified this aspect.
9. It is seen from the Profit and Loss account that the assessee has received interest of Rs. 10.68 lakh on fixed deposits investments with various co- operative banks. It is not clear whether these co-operative banks are registered with the RBI or not. If it is registered with the RBI then the interest received from the bank is not entitled for deduction u/s 80P(2)(d). The Assessing Officer has not caused any verification of this issue.
10. Since the assessee's large claim of deduction under chapter VI-A was the reason of selection of its case for scrutiny, the Assessing Officer was required to conduct in-depth verification of the assessee's claim. Since the above mentioned bank is not a cooperative society, the interest earned is not eligible for deduction under Section 80P(2)(a)(i) or 80P(2)(d). Hence, allowing of the deduction by the Assessing Officer under section 80P for the above amount is not as per the provisions of the Income Tax Act, 1961. In Para 10 of the Hon'ble Karnataka High Court decision in the case of Tumkur Merchants Souharda Credit Co-op Society Ltd V CIT (2017) 396 ITR, the Hon'ble Court has held that the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In the case of the present assessee, it was stated that the society accepts deposits only from its members which means deposits in banks are made out of deposits made by members. These deposits are liable to be returned back to the members and hence, are to be shown as liability in the balance sheet. These deposits from members are invested in the fixed deposits and interest income is earned from them. As mentioned in Para 8, the assessee received deposits from members Rs.59,709/- Paid up capital at Rs.2,61,27,640/- and reserve fund at Rs.81,32,297/- and advanced only Rs.1,85,17,879/- to its members.
Loans/Advances/Deposits received from members by 3,43,19,646 the society including paid up capital & reserve fund Loans/Advances given to members by the society 1,85,17,879 Excess of Loans/Advances/Deposits from members 1,58,01,767 available with the society
It implies that the deposits accepted from the members were not used by the society in its business of providing credit facilities to its members. Instead they are put in to deposits to earn interest. Investments made in FDs with institutions by the 1,65,50,556 society out of Loans/Advances made by members This act of making deposits out of the deposits received from members cannot be considered to be attributable to the business of providing credit facilities to its members. Thus, making deposits to the bank out of the deposits received from Members is not in accordance to the principles of mutuality.
11. In the light of these facts, the Assessment Order dt 30.09.2019 is hereby set aside to the Assessing Officer for proper verification of facts and to re- examine the assessee's claim of deduction of Rs. 28,03,199/- under section 80P of the Income-tax Act, 1961. However, before arriving at any conclusion, the Assessing Officer shall give reasonable opportunity to the assessee to adduce the evidence and information with regard to: a. the Source of deposits made with all institutions from which interest income is earned with specific details and nexus as to whether those deposits are made from the deposits received from the members which are returnable to the members or from out of the surplus funds arising from profits and gains. b. Whether the deposits are made with institutions which are registered with RBI for carrying out business of Banking. c. Whether the Principle of Mutuality is satisfied to allow deduction u/s 80P in respect of income earned from deposits made with Co-op Banks. d. Based on the evidence, decide the allowability of deduction u/s 80P. The Assessing Officer shall, accordingly, re-frame the assessment in the assessee's case in due compliance with the above directions.
12. The Assessment is set aside u/s 263 in terms of para 11 Supra.”
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 para 3 to 5 of 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. The Ld. AR submitted that the assessee is a regular filer of Income Tax Returns and has been claiming deduction u/s 80P of the Act which had been subjected to scrutiny assessment in the past years as well. The assessee was granted deduction u/s 80P in all the preceding years including the relevant AY under consideration i.e. 2017-18. 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. In support thereof, the Ld. AR submitted a legal compilation of the following decisions : Cases wherein deduction u/s 80P(2(a)(i) allowed i. Tumkur Merchants Souharda Credit Co-op. Ltd. Vs. ITO-55 taxmann.com 447 (Karnataka), dated 28-10-2014. ii. CIT Vs. Kangra Central Co-op Bank Ltd. - 28 taxmann.com 101 (HP), dated 04-10-2012. iii. Kakasaheb Thorat Gramin Bigarsheti Sah. Patsanstha Maryadit Vs. ITO - dated 02-11-2018. iv. Jaimalhar Sahyadri Nagri Sah. Patpedi Maryadit Vs. ITO-ITA No. 439/MUM/2017, dated 16-03-2018. v. ITO Vs. Kundalika Nagari Sah. Patsanstha Maryadit -83 taxmann.com 67 (Pune - Trib.), dated 29-01-2016. vi. Gandhinglaj Taluka Sah. Patpedhi Ltd. Vs. ITO - 83 taxmann.com 40 (Mumbai - Trib.), dated 14-08-2015. vii. Jaoli Taluka Sahakari Patpedhi Maryadit Vs. ITO-83 taxmann.com 247 (Mumbai - Trib.), dated 10-08-2015. Cases wherein deduction u/s 80P(2)(d) allowed viii. PCIT Vs. Totagars Co-op Sale Society - 392 ITR 74 (Karnataka), dated 05-01-2017. ix. Mantola Co-op Thrift & Credit Society Ltd. Vs. ITO -118 taxmann.com 276 (Delhi - Trib.), dated 27-07-2020. x. Shree Mahadeshwar Sah. Patpedhi Maryadit Vs. ITO - 374/MUM/2018, dated 13-03-2019. xi. Sai Prerna Co-op Society Ltd. Vs. ITO - dated 03-12-2018. xii. Siemens Employees Co-op Credit Society Ltd. Vs. ITO - ITA No. 2237/MUM/2017, dated 29-11-2018.
6.1 The Ld. AR further contended 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 and considering that the assessee’s claim of deduction has been consistently allowed in the preceding AYs. Relying on the various decisions listed below wherein section 263 orders have been set aside on similar facts, the Ld. AR submitted that the order of the Ld. PCIT assuming jurisdiction u/s 263 is not in accordance with law. i. CIT Vs. Sri Biluru Gurubasava Pattina Sah. Sangh Niyamitha Bagalkot - 369 ITR 86 (Karnataka), dated 05-02-2014. ii. Sant Motiram Maharaj Sah. Patsanstha Ltd. Vs. ITO - 120 taxmann.com 10 (Pune - Trib.), dated 23-09-2020. iii. Sadguru Nagari Sah. Patsanstha Maryadit Vs. ITO -ITA No. 366/PUN/2019, dated 05-02-2020. iv. Technopolis Premises Co-op Society Ltd. Vs. PCIT -ITA No. 6433/MUM/2019, dated 08-01-2020. v. Solitaire CHS Ltd. Vs. PCIT - dated 29- 11-2019.
The Ld. DR, on the other hand, strongly supported the order of the Ld. PCIT contending that the Ld. PCIT is completely justified in assuming the jurisdiction u/s 263 of the Act.
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. The Ld. PCIT has assumed jurisdiction u/s 263 of the Act for the reason that the Ld. AO during the course of assessment proceedings has not caused any verification of the impugned issue and allowed the assessee’s entire claim of deduction of Rs.28,03,199/- u/s 80P of the Act without conducting in depth verification of the assessee’s claim. Hence, failure on the part of the Ld. AO in examining this issue has rendered the assessment order passed u/s 143(3) dated 30.09.2019 erroneous and prejudicial to the interest of the Revenue. According to Ld. PCIT, the Ld. AO has not verified the aspect of the principle of mutuality which has rendered the allowability of claim of deduction u/s 80P of the Act as legally unsustainable calling for revision u/s 263 of the Act. We, however, find that the Ld. AO during the course of assessment proceedings has examined the issue and has asked the specific query to the assessee vide notice issued u/s 142(1) of the Act dated 20.08.2019 and 14.09.2019 requesting the assessee to furnish the details of deduction claimed and justification of claim for deduction (pages 61 to 64 of the paper book refers) to which the assessee responded vide his submissions dated 12.09.2019 (pages 65 to 66 of the paper book refers). It is thus clear that the Ld. AO has 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 categorically recording in para 3 to 5 of the said assessment order that the assessee has submitted the requisite details on ITBA system in response to be notice issued u/s 143(2) and 142(1) of the Act along with questionnaire and that after considering the returned income filed by the assessee and the various submissions made during the assessment proceedings, the Ld. AO assessed the income of the assessee to be Nil. It is also noteworthy that the assessee has been allowed the claim of deduction u/s 80P of the Act consistently in the past assessment years. Hence, in our view, since the Ld. AO in the instant case has 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 (pages 75 to 151 of the legal paper book refers). The case of the assessee also finds support from various decisions (supra) (pages 152 to 179 of the paper book refers) wherein revision order under section 263 has been set aside under the similar set pattern to that of the assessee in the present appeal.
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 Assessing Officer 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 Assessing Officer 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.
Order pronounced in the open court on 22nd July, 2025.