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Facts
The assessee, a Co-operative Credit Society, claimed a deduction under Section 80P(2)(a)(i) for interest income earned from investments in co-operative banks. The Assessing Officer allowed this deduction. However, the PCIT invoked Section 263, holding the order erroneous and prejudicial to revenue, as the AO allegedly did not properly inquire into whether the income was business income or from other sources and if Section 80P(2)(d) applied.
Held
The Tribunal held that the PCIT erred in invoking Section 263 as the Assessing Officer had made sufficient inquiries and taken a plausible view. Relying on the judgment of a coordinate bench, the Tribunal stated that interest income earned by a co-operative society on deposits with co-operative banks qualifies for deduction under Section 80P(2)(a)(i) and 80P(2)(d).
Key Issues
Whether the PCIT was justified in invoking Section 263 when the AO had made sufficient inquiries and taken a plausible view regarding the deduction of interest income under Section 80P.
Sections Cited
263, 143(3), 144B, 80P(2)(a)(i), 80P(2)(d), 56, 80P(4)
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 06.02.2025 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.
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 07.10.2020 declaring total income at Nil after claiming the deduction of Rs.62,76,965/- 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 limited scrutiny to verify the following issues: (i) High liabilities as compared to low income / receipts (ii) Deduction from Total income (Chapter VI-A) (Business ITR) (iii) High value cash withdrawals reported in SFT or u/s. 194N (Business Return)
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 08.09.2022 accepting the returned income.
5. 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.62,76,965/- 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. 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 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 also argued that if interest income is to be treated as income from other sources then deduction u/s 57 should also be given. However, this argument is not acceptable as what is claimed as deduction is the net amount of interest income which has been arrived after taking into consideration all incidental expenses.
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 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 08/09/2022 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 08/09/2022 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.”
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, 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. During the course of assessment proceedings, the assessee has filed the following submissions: 3.2.1. The assessee has filed its reply on 22.01.2022, 31.01.2022 in response to the notice issued u/s. 143(2) & 142(1) of Income tax, 1961, dated: 29.06.2021, 16.11 2021 & 15.02.2022 and stated as under: i. Our society has registered under Maharashtra Co-Operative Society Act 1960. Society's object is taking the deposit from members and giving the loans and advances to the members only. Society earns the income in the form of interest from members against loans and advances given to the members and from co-operative Society against fixed deposit. ii. During the F.Y. 01.04.2019 to 31.03.2020, the society has not earned income other than interest from members and fixed investment from co-operative Societies. iii. As per section 80P of the Income Tax Act 1961, where in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2)(a)(i) there shall be deducted in accordance with and subject to the provision of this section, the sums specified in sub-section (2)(a)(i) in computing the total income of assessee. The sums referred in sub-section (1) shall be the following namely In the case of co-operative society engaged in carrying on the business of banking or providing credit facilities to its member. Therefore, as per above provision our society is eligible for claiming the deduction under 80P of the income tax Act 1951. iv. This Society nature of business is providing banking facility to its members and Society has given banking facility to its member, daily transactions required cash so society withdraw cash and paid to its member as per the requirement of Member. 3.2.2. Subsequently, a show cause notice has been issued to the assessee on 22.08.2022 and requested to show cause as why the interest received on banks at Rs.20,06,695/- and interest received on Investments at Rs.62,91,117/- should not be disqualified for deduction u/s 80P(2)(a)(i) of the IT Act 1961. 3.2.3. In response, the assessee has filed its explanation on 31-08-2022 and explained as under: The assessee is Co-operative Credit Society carrying out its business activities as per the Bye-laws of the society and engaged in business of banking activities and has made deposits with other Co-operatives Banks. The investment in fixed deposits is made as per the provisions of the Maharashtra Co-op Society's Act 1960. It is not the investment of surplus funds lying idle with the Society but for the fulfillment of a statutory obligation as per Maharashtra Co-op Society's Act 1960, which directly arises from the business activity of providing credit facilities to its members. Hence, the income from these investments is eligible for deduction under section 80P(2)(d) of the Income Tax Act. In view the facts and circumstances, we are of the considered view that the assessee is entitled to the deduction of surplus of Rs.62,76,965/- in respect of interest received/derived by it on deposits with cooperative banks& societies In view of the forgoing explanation, it is strongly emphasized that the Society has entitled to & eligible for the deduction u/s.80P(2)(a)(i) of IT Act, 1961 for the AY under consideration. Therefore, considering the decision given by Hon. ITAT, Mumbai, we are requested to the honour to kindly accept my submission of documents, do the needful at your earliest and allow deduction u/s 80P(2)(a)(i) & 80P(2)(d) of the Income Tax Act, 1961. Therefore, please accept the above Submission.
4. On perusal of the explanation furnished by the assessee in respect of deduction claimed u/s 80(P)(2)(a)(i), it is noticed that the assessee has received interest income of Rs.62,76,965/- from Co-operative Banks. The assessee society has filed CIT(A) order in the case of KUNABI VIKAS SAHAKARI PATHSANSTHA LTD, RATNAGIRI, Maharashtra for the AY 2018-19. As seen from the same, it is noticed that the CIT(A) has relied upon the judgment of Hon'ble ITAT, "B" BENCH, PUNE in the case of Rena Sahakari Sakhar Karkhana Ltd, dated 07.01.2022 and it was held that though the co-operative banks pursuant to the insertion of sub-section (4) to Sec. 80P would no more be entitled for claim of deduction under Sec. 80P of the Act, but as a Co-Operative bank continues to be a co-operative society registered under the Co-operative 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 co-operative society from its investments held with a co-operative bank would be entitled for claim of deduction under Sec. 80P(2)(d) of the Act.
Further, the society in its submission has explained that the Society's nature of business is providing banking facilities to its Society members, daily transactions require cash and so the society has withdrawn cash and paid to its members as per the requirement of members. On perusal of the information, it is noticed that the assessee is a co-operative credit society carrying on its business activities as per the Bye-laws of the society and engaged in business of providing banking facilities and has made deposits with other Co-operative Banks. The investment in fixed deposits is made as per the provisions of the Maharashtra Co- op Society's Act 1960. It is not the investment of surplus funds lying idle with the Society but the fulfillment of a statutory obligation as per Maharashtra Co-op Society's Act 1960, which directly arises from the business activity of providing credit facilities to it's members. Hence, the income from these investments is eligible for deduction under section 80(P)(2)(a)(i) of the Income Tax Act. Hence, the claim of the assessee is accepted and deduction claimed u/s. 80P(2)(a)(i) of Rs.62,76,965/- is, therefore, allowed.
6. The reasons for selection of Limited scrutiny and submissions of the assessee society have been verified and found to be in order. Accordingly, the income returned is therefore accepted.”
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 17th June, 2025.