PUNE MADHYAMIK SHIKSHAK SAHKARI PATAPEDHI MARYADIT,PUNE vs. PRINCIPAL COMMISSIONER OF INCOME TAX,PUNE 4, PUNE

Facts of the case, in brief, are that the assessee is a Co-operative Credit Society registered under the Maharashtra Co-operative Society Act, 1960 and carrying on business of providing credit facilities to its members. It filed its original return of income for the impugned assessment year on 06.01.2021 declaring total income at Nil after claiming the deduction of Rs.2,89,55,992/- u/s 80P of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The case of the assessee was selected for limited scrutiny to verify the following issues: (i) High interest expenditure/finance costs. Assessee has claimed high interest expenditure in P & L a/c and shown huge advances in balance sheet which is in excess of total proprietors/partners fund. It may be seen whether advances given are interest bearing and whether they meet the test of commercial expediency if not, proportionate disallowance from the interest paid may be made. (ii) High Creditors/liabilities: Assessee has shown high liabilities in balance sheet as compared to low income/receipt declared in ITR, Genuineness of liabilities declared may be verified. (iii) Deduction from Total Income under Chapter VI-A: The assessee has claimed large deduction under chapter VI-A (excluding deduction claimed u/s 80-IA / 80- IAB/80-IAC/80-IB/80-IBA/80-IC/80-IE/80-ID). Here whether the assessee has claimed deduction u/s VIA correctly may be verified.

Subsequently, the Ld. PCIT on perusal of the assessment record noted that the assessee has made investments with Co-operative Banks and has earned interest income of Rs.2,89,55,990/- on these investments which has been claimed as deduction u/s 80P(2)(a) of the Act. The Assessing Officer in the assessment order has allowed such deduction. According to the Ld. PCIT, as per the provisions of section 80P(2)(a) of the Act, there are different situations in which the claim of deduction can be allowed. As per the provisions of Sec. 80P(2)(a) deduction will be allowable to an assessee being a cooperative society, if it is deriving income from business of banking or providing credit facilities to its members. In the present case, the Assessing Officer has not conducted any enquiry to determine whether the interest income earned by the assessee is related to its core business or is a residuary income which is required to be taxed under the head ‘Income from Other Sources'. Similarly, as per the provisions of section 80P(2)(d), interest income earned by a cooperative society will be eligible for deduction only from its investments with another cooperative society. He noted that although the case of the assessee was selected for scrutiny to examine the claim of deduction under Chapter VI-A and there is a landmark judgment of Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. vs. ITO (2010) 322 ITR 283 (SC) in which it has been 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 and would not qualify for deduction as business income u/s 80P(2)(a), however, the Assessing Officer has prima facie not considered the judgment. Similarly, on the issue of section 80P(2)(d), there is a judgment of Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sales Society Ltd. (2017) 395 ITR 611 (Kar) which clearly states that a cooperative society would not be eligible for deduction u/s 80P(2)(d) on the interest income earned by it on account of deposit of its surplus funds in a cooperative bank. However, the Assessing Officer has passed the order without examining the eligibility of the assessee for claim of deduction under the provisions of section 80P(2)(a) or section 80P(2)(d). Therefore, the order of the Assessing Officer has become erroneous and prejudicial to the interest of revenue. He, therefore, issued a show cause notice u/s 263 of the Act to the assessee in response to which the assessee filed its submissions.

However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee and held the order passed by the Assessing Officer as erroneous in so far as it is prejudicial to the interest of revenue by observing as under: “7. I have carefully gone through the facts of the case as well the written submission filed by the assessee. During the assessment proceedings, the AO has not asked any specific question to the effect whether the income in question is business income or not. The provision of Sec. 80P(2)(a) of the Act 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."

The assessee has submitted while adjudicating appeals on similar issue, the decisions of Hon'ble Supreme Court, various Hon'ble High courts and ITAT Bench. The fact of the case law submitted by the assessee is different from the fact of this case. In this case, the A.O. has not examined whether the interest income received by the assessee is related to its core business or is a residual income which is required to be taxed under the head "Other Sources". Thus, the order of the A.O. dated 06/09/2022 for A.Y. 2020-21 becomes prima facie erroneous and prejudicial to the interest of revenue.

After the introduction of Explanation 2 to Sec. 263, of the Act it has been made clear as to what kind of assessment order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The Explanation 2 to Sec. 263 is reproduced below:- "Explanation 2 - For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer for the Transfer Pricing Officer, as the case may be, shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal (Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner- (a) the order is passed without making inquiries or verification which should have been made, (b) the order is passed allowing any relief without Inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person."

The Ld. Counsel for the assessee at the outset drew the attention of the Bench to paras 3 to 5 of the order of the Assessing Officer and submitted that the Assessing Officer during the course of assessment proceedings has asked for various details on this issue and the assessee has made elaborate submissions which have been reproduced by the Assessing Officer in the body of the order. Further, the Co-ordinate Bench of the Tribunal in the case of Talegaon Nagari Sahakari Patsanstha Limited vs. ITO vide for assessment year 2020-21, order dated 03.06.2024 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. Accordingly, the Bench has directed the Assessing Officer to allow the deduction under section 80P(2)(a)(i) and 80P(2)(d) in respect of interest income earned from the co-operative banks. Therefore, the issue raised by the Ld. PCIT has already been decided in favour of the assessee. Even otherwise also, it is a highly debatable issue and the Assessing Officer 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. Relying on various decisions including the recent decision of the Tribunal in the case of Shreenath Mhaskoba Credit Co-operative Society Ltd. Vs. PCIT, Pune-4, vide order dated 17.06.2025 for assessment year 2020-21, he submitted that the order of the Ld. PCIT assuming jurisdiction u/s 263 of the Act is not in accordance with law.

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. We find the Ld. PCIT in the instant case assumed jurisdiction u/s 263 of the Act on the ground that the Assessing Officer, 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. Further, according to him, a cooperative bank cannot be treated as cooperative society for the purpose of allowability of deduction u/s 80P(2)(d) of the Act. We find the Assessing Officer during the course of assessment proceedings has examined the issue and has asked the queries to the assessee to which the assessee has responded, the details of which are as under:

In response, the assessee vide its submission dated 26-08-2022 has submitted that, the contents of which is reproduced as under: "Subject: Reply to Show Cause Notice dated 23/08/2022 Reference : ITBA/AST/F/143(3)(SCN)/2022-23/1044854468(1) Respected Sir, We are in receipt of your Show Cause Notice dated 23/08/2022. In the said notice the variation proposed is "The assessee is not eligible for the deduction claimed u/s 80P (2)(a)(i) of the IT Act on the amount of interest received from Investments made with banks at Rs.59,32,531/- and the same is to be brought to tax under the head income from Other Sources for the reason that the assessee has received income by way of interest and dividend derived from its investments made with other than the cooperative society.” We do not accept the Proposed Variation on the following basis; 1. The assessee is a Primary Co- operative Credit Society and its prime activities are accepting deposits and providing credit facilities to its members only.

In the proposed variation is mentioned that interest and dividend derived from its investments made with other than the cooperative society is not allowed deduction u/s 80P. But we have made deposit in Co-operative banks which come under the definition of Cooperative Society as per Section 2(19) of Income Tax Act, 1961.

We respectfully follow the view taken by the Honorable High Court of Gujarat in the case of State Bank Of India v CIT (2016) 389 ITR 578 (Guj) 2016 (Guj-HC), wherein it was observed that the interest income earned by a co-operative society on its investments held with a co-operative bank would be eligible for claim of deduction under section 80P (2) (d) of the act”. Considering the above facts & circumstances, we are eligible for deduction u/s 80P of the act & hence we do not accept the variation proposed by you. Thanking You in Anticipation"

Further, the Coordinate 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 Assessing Officer in the instant case after considering the reply 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 proposition of law that for assuming the jurisdiction u/s 263 of the Act, the twin conditions i.e. (i) the order of the Assessing Officer is erroneous and (ii) the order is prejudicial to the interest of revenue must be fulfilled. In the instant case the order passed by the Assessing Officer may be prejudicial to the interest of revenue but it cannot be said to be erroneous since the Assessing Officer has taken a plausible view on this issue after calling for various details from the assessee to which the assessee has replied. Therefore, in absence of fulfillment of the twin conditions, the Ld. PCIT in our opinion is not justified in assuming the jurisdiction u/s 263 of the Act. We, therefore, set aside the order passed by the Ld. PCIT. The grounds raised by the assessee are accordingly allowed.

In the result, the appeal filed by the assessee is allowed.