GURUDEODATTA NAGARI SAHAKARI PATSANSTHA LIMITED,PUNE vs. THE PCIT IT-4, PUNE

This appeal filed by the assessee is directed against the order dated 04.02.2025 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 2 carrying on business of providing credit facilities to its members. It filed its original return of income for the impugned assessment year on 20.11.2020 declaring total income at Nil after claiming the deduction of Rs.1,56,76,019/- u/s 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The case of the assessee was selected for scrutiny under CASS to verify the following issues: (i) High Creditors / liabilities (ii) Deduction from total income under Chapter VI-A 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 partly. However, due to time constraint the Assessing Officer completed the assessment u/s 143(3) r.w.s. 144B of the Act on 26.09.2022 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 scheduled banks on which it has earned interest income of Rs.1,56,76,019/- on these investments which has been claimed as deduction u/s 80P(2)(a)(i) of the Act. The Assessing Officer in the assessment order has allowed such deduction without conducting any enquiry. According to the Ld. PCIT, as per the provisions of section 80P(2)(a)(i) 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 3 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 4 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 is 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, material placed on record and the written reply filed by the assessee. The main argument of the assessee is that the activity of making investing surplus funds and earning of interest thereon is intrinsically linked to its main business activity and therefore, any income derived from such an activity is its business income and consequently, eligible for deduction u/s.80P(2)(a) of the Act. This argument of the assessee is not found to be tenable, in view of the specific provisions of the Act. 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.” 8. The assessee has also argued that Co-operative bank can 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 Soc. 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 5 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 80P. 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). 9. The assessee has submitted while adjudicating appeals on similar issue, the Pune Bench of the ITAT has upheld the admissibility of deduction u/s 80P(2)(a)(1) on interest earned on investments made with cooperative banks. However, it needs to be noted that in all of these cases, the merit of the issue has not yet been examined and decided by the Hon'ble Jurisdictional Bombay High Court. Further, the order of the Assessing Officer is being held to be erroneous and prejudicial to the interest of revenue on the strength of decision of Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd., which still happens to be the leading judgment on the issue of allowability of Section 80P(2)(a) of the Act. 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. 11. 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 [or 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 6 (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."