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Facts
The assessee, a Co-operative Credit Society, claimed a deduction of Rs. 2,89,55,992/- under Section 80P of the Income Tax Act for interest income earned on investments. The PCIT initiated revision proceedings under Section 263, holding that the AO's assessment order allowing the deduction was erroneous and prejudicial to revenue.
Held
The Tribunal held that the PCIT erred in assuming jurisdiction under Section 263. It was found that the AO had examined the issue, obtained the assessee's response, and taken a plausible view. Therefore, the PCIT's order was set aside.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the AO's order allowing deduction under Section 80P when the AO had conducted due inquiry and taken a plausible view.
Sections Cited
263, 143(3), 80P, 143(2), 142(1), 144B, 80P(2)(a), 80P(2)(d), 56, 80P(4)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI R. K. PANDA & MS ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 27.02.2025 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. PCIT, Pune-4, relating to assessment year 2020-21.
2. 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 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.
4. 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 AR of 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 26.11.2021 accepting the returned income.
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."
8. Further, a Co-operative bank cannot be treated as co-operative society for the purpose of allowability of deduction u/s. 80P(2)(d) of the Act. In this regard, this is to state that a plain reading of the Sec. 80P(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. When there is no ambiguity in the plain reading of the Sec. 80P(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 ITR1) (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 80P(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 BOP. 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 80P(2)(d) is sufficient to deny the claim of the assessee for deduction under section 80P(2)(d).
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.
10. 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 is meant as a deduction against business income. So the AO was duty bound to determine by conducting specific enquiry 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, even under the provision of Sec.80P(2)(d) of the Act interest income earned by a co-operative society will be eligible for deduction only from its investment with another co-operative society. Thus, the AO appears to have allowed the deduction without inquiring into the claim.
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."
12. From the above cited Explanation which has come into effect from 01.06.2015, it is clear that an assessment order, which has not been passed in accordance with a decision which is prejudicial to the assessee rendered by the Hon'ble Supreme Court, will be deemed to be both erroneous and prejudicial to the interest of revenue. Thus, deduction u/s 80P has been granted without making suitable enquiry and without considering the binding judgment of the Hon'ble Supreme Court of India in the case of Totgars Co-operative Sales Society Ltd. (supra). Therefore, assessment order has been passed in violation of sub-clause (b) and sub-clause (d) of Explanation 2 to Section 263 of the I.T. Act, 1961.
13. In the light of the above facts, I am satisfied that the assessment order dated 06/09/2022 passed for the Assessment Year 2020-21 is erroneous in so far as it is prejudicial to the interest of the Revenue. Consequently, the said assessment order dated 06/09/2022 for the A.Y.2020-21 is hereby partly set aside to the file of the A.O for the limited purpose of examining the following issues and passing fresh assessment order in the light of enquiries made: i) The A.O shall examine the eligibility of deduction available to the assessee u/s 80P(2)(a) of the Act in the light of decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. Vs. ITO, (SC) (322 ITR 283)(2010) ii) The A.O shall also examine 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". iii) The AO shall examine whether the assessee is ineligible for deduction u/s 80P in view of specific provision of section 80P(2)(d) r.w.s. section 80P (4) of the Act.
14. The Assessing Officer is directed to give adequate opportunity of being heard to the assessee before passing the fresh assessment order.”
7. Aggrieved with such order of the Ld. PCIT, the assessee is in appeal before the Tribunal.
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.
9. The Ld. DR on the other hand heavily relied on the order of the Ld. PCIT invoking the jurisdiction u/s 263 of the Act.
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:
3. The assessee submission dated 01-12-2021 consists a letter, details of loan interest charged, Registration Certificate, details of interest paid on FDs etc (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: The assessee society vide its submission w.r.t. above issue which is reproduced verbatim as under: “4. Details of Interest expenditure / Finance Cost: a) Interest paid to members on Deposits. Assessee is also accepting deposits from its members on which interest is paid by the assessee. Total Interest paid on deposit in the year 2020 is Rs.3,19,15,685.00
b) Interest Received on Advances/Loans: Total Interest Received on Loans and advances of Rs.6,67,88,463.00” (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. The assessee society vide its submission w.r.t. above issue which is reproduced verbatim as under: “2. Details of High Creditors / Liabilities: Assessee is co-operative credit society and is only dealing with its members (salary earners) in providing credit facilities and the assessee is also accepting deposits from its members, this deposits showed as unsecured Loans (including Deposits and other payables) on which interest is paid by the assessee: The assessee society vide its submission w.r.t. above issue which is reproduced verbatim as under:
S No Nature of Deposit Amount 1 Fixed Deposit 24,71,53,315.00 2 Recurring Deposit 60,40,029.00 3 Permanent Deposit 3,31,531.00 Total 25,35,24,875.00 (ii) Deduction from Total Income under Chapter VI-A: The assessee has claimed deduction u/s 80P(2)(a)(i) of Rs.2,89,55,992/-. The above submission of the assessee dated 01-12-2021 has been verified and found to be in order. 3.1 On further verification of the submission dated 01-12-2021, the assessee in its written submissions, the details of Investment made during the year under consideration has been furnished as under: (i) Pune District Central Cooperative Bank (PDCC) Shares (Rs. 1,35,10,000.00 (ii) Fixed Deposit in PDCC Bank Rs 8,79,37,604.00
(iii) Saguna Co-operative Society Rs 250.00 The Total investments made during the year were stands at Rs.10,14,47,854.00 As seen from the Profit & Loss account appended to the return of income, it is noticed that, the assessee has admitted interest received from members at Rs.6,08,55,932/- interest from Investments made with banks at Rs.59,32,531/- which includes profit/dividend from Pune District Central Cooperative Bank of Rs.20,25,511/- and interest received from Pune District Central Cooperative Bank at Rs.39,07,020/-. Further, it is also noticed from the P&L account, the assessee has arrived net profit of Rs.2,89,55,990/- and claimed the entire net profit of Rs.2,89,55,990/- as deduction u/s. 80P(2)(a)(i) of the IT Act in the ITR filed for the AY 2020-21. 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 or dividend derived from its investments made with other than the cooperative society. A SCN dated 23-08-2022 has been issued to the assessee proposing the above variation.
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.
3. As per Section 2(19) of Income Tax Act, 1961, "Co-operative society” means a cooperative society registered under the Cooperative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any state for the registration of co- operative societies;" A co-operative bank continues to be a co-operative society registered under the Cooperative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any state for the registration of co- operative societies, therefore the interest income derived by a cooperative society from its investments held with a co-operative bank would be entitled for claim of deduction under section 80P of the act. Honourable High Court of Gujarat in the case of State Bank Of India v. CIT (2016) 389 ITR 578 (Guj) (Guj-HC), had 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. Backed by the aforesaid conflicting judicial pronouncements, we may herein observe, that as held by the Honorable High Court of Bombay in the case of K Subramanian & Anr. v. Siemens India Ltd. & Anr. (1985) 156 ITR 11 (Bom) :1985 Tax Pub (DT) 0158 (Bom-HC) where there is a conflict between the decisions of non-jurisdictional High Courts then a view which is in favour of the assessee is to be preferred.
4. Hence Interest & Dividend received from Co-operative banks is deductible u/s 80P of the Income Act, 1961 and we have correctly taken the deduction while filing our income Tax Return.
5. As per Section 144 of Maharashtra Cooperative Societies Act, 1960 it is mandatory for us to keep atleast (minimum) 25% Amount of Deposit of Last quarter in District Central Co-operative Bank which in our case is (Pune District Central Cooperative Bank) PDCC Bank.
6. Hence the deposit is not made for the purpose of investment, it is made to comply with Statutory Requirement, hence the income derived from the same is not Income from Other Sources, but it is a business income.
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"
5. The above submission of the assessee has been considered the judicial precedents have been perused and no variation is proposed.
6. Assessed under section 143(3) r.w.s. 144B of the Income Tax Act, 1961. Computation of Income and demand notice u/s 156 of the Income Tax Act, 1961 are attached.”
11. From the above it is crystal clear that the Assessing Officer has raised query on this issue to which the assessee has replied.
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.
Order pronounced in the open Court on 3rd July, 2025.