DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12 PUNE, PUNE vs. JANATA GRAHAK MADHYAWARTI SAHKARI SANGH MARYADIT, PUNE

Aggrieved, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) in para 5.4 of his appellate order observed that the seven Co-operative Banks in respect of which the addition has been made by the Ld. AO on account of these being unregistered, the assessee has infact provided necessary evidences to substantiate that these banks are registered under the Co-operative Societies Act. In view thereof, the only issue to be decided relates to the claim of the assessee in respect of interest earned from all the 12 Co-operative Banks when all of these banks are found to be registered under the Co-operative Societies Act, either under the Central Act or State Act. The Ld. CIT(A) in para 5.8 of his appellate order further observed that the impugned issue is no longer res integra and has been decided in favour of the assessee by the Pune Bench of the Tribunal in assessee’s own case for AY 2009-10 and also in the case of The Ugar Sugar Works Kamgar & Dr. Shirgaokar Shaikshanik Trust Nokar Co- op. Credit Society Vs. ITO in for AY 2012-13, dated 27.05.2022 and therefore following the decision(s) (supra) of the Pune Tribunal, AYs. 2016-17, 2017-18 & 2020-21 the Ld. CIT(A) observed that the assessee is eligible for the said claim of deduction u/s 80P(2)(d) of the Act. The Ld. CIT(A) in para 5.11 of his order also observed that the revision order passed u/s 263 for AY 2017-18 in assessee’s own case has been quashed by the Pune Bench of the Tribunal holding that the original assessment order passed by the Assessing Officer which allowed the claim of deduction u/s 80P(2)(d) of the Act in respect of interest earned from the Co-operative Banks is neither erroneous nor prejudicial to the interest of the revenue. In the light of these observations, the Ld. CIT(A) allowed the appeal of the assessee and directed the Jurisdictional AO to allow the claim of deduction u/s 80P(2)(d) of the Act in respect of the interest income earned from the Co-operative Banks, to the assessee. The relevant observations and findings of the Ld. CIT(A) are reproduced below :

The Revenue is aggrieved by the impugned order of the Ld. CIT(A) and is in appeal before the Tribunal raising the following grounds of appeal:

The Ld. DR supported the order the Ld. AO and submitted that the assessee has not proved with the sufficient documentary evidence that the seven Co-operative Banks identified by the Ld. AO are registered under the Co- operative Societies Act. The Ld. CIT(A) though has recorded the findings that all the 12 Co-operative Banks from whom the assessee has earned interest income are registered Co-operative Banks, however, no verification has been done by the Ld. AO in respect of the same. Therefore, the Ld. CIT(A) is not justified in deleting the addition made by the Ld. AO.

The Ld. AR, on the other hand, submitted that the Department has not raised the above plea in its grounds of appeal

We have heard the Ld. Representatives of the parties and perused the material on record. The facts of the case are not disputed. We observe that the Ld. CIT(A) has categorically recorded a finding that the assessee has earned interest income from 12 Co-operative Banks and all the banks are registered banks/societies. The Ld. Counsel for the assessee also stated at the Bar that all the 12 Co-operative Banks are registered Co-operative Banks. We observe that the impugned issue is no more res integra and is covered in favour of the assessee by various judicial precedents on the subject. The Revenue is aggrieved by the order of the Ld. CIT(A) on the ground that the Ld. CIT(A) has allowed the claim of the assessee u/s 80P(2)(d) of the Act in respect of interest income earned from Co-operative Banks during the relevant AY ignoring the decision of the Hon’ble Supreme Court in the case of Totagars Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283. In our considered view, the case of Totagars Co-operative Sale Society Ltd. (supra) is distinguishable on facts and therefore not be applied in the instant case of the assessee. In that case the society was also marketing the agricultural produce of its members and hence was engaged in carrying on the business of marketing agricultural produce of the members of the assessee. However, in the present case, the interest income earned by the assessee from deposits made with the Co-operative Banks form an integral part of its business.

Having heard learned advocates for the respective parties and considering the controversy arising in these tax appeals, we are of the opinion that the controversy sought to be canvassed with regard to deduction under section 80P(2)(d) of the Act is no more res integra in view of the decision of this Court in case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. as well as in case of State Bank of India (supra) wherein it was held that the deduction of under section 80P(2)(d) of the Act is available to the cooperative societies on the income earned as interest on the investment made with the cooperative bank which in turn, is a cooperative society itself.

Reliance placed by the learned advocate for the revenue on decisions of the Hon‟ble Karnataka High Court and Hon‟ble Supreme Court in case of Totgars‟ Cooperative Sale Society Ltd, the Hon‟ble Karnataka High Court appears to have taken into consideration the amendment in section 194A(3)(v) of the Act wherein the cooperative bank is excluded from the applicability of tax to be deducted at source. However, it appears that the interpretation made by the Hon‟ble Karnataka High Court to the effect that the cooperative banks have been excluded from the definition of the cooperative societies by Finance Act,2015 by amending section 194A(3)(v) of the Act is concerned, on perusal of section 194A (3) of the Act, it appears that it provides for exemption from deducting Tax Deducted at Source [„TDS‟ for short] from the income on interest other than interest on securities as the cooperative societies other than cooperative banks meaning thereby that the cooperative banks are liable to deduct TDS from the interest other than interest on securities. Therefore it cannot be said that cooperative banks are excluded from the definition of cooperative societies by such an amendment. AYs. 2016-17, 2017-18 & 2020-21

Moreover, as reliance placed on the aforesaid decision for applicability of section 80P(4) of the Act in the facts of the case is also not possible to accept as section 80P(4) of the Act would be applicable to the cooperative bank when the cooperative bank is liable to pay tax under the provisions of the Act and in such eventuality, the provision of section 80P would not be applicable as per the amendment of sub-section (4) of section 80P of the Act. Therefore, the exclusion of applicability of section 80P to cooperative banks by section 80P (4) of the Act would not disentitle the respondent-assessee from claiming deduction under section 80P(2)(d) of the Act in absence of any amendment in the said section and that would not be sufficient to deny the claim of the respondent-assessee for deduction of interest earned from investment made in a cooperative bank which is also a cooperative society from the total income.

The Hon‟ble Apex Court in case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd. vs. Assessing Officer (supra) while considering various provisions of the Banking Regulation Act read with provisions of the Income Tax Act has held that the provision of section 80P(4) of the Act would not be applicable to a cooperative bank which is not a bank as per the provisions of the BR Act,1949, as under: “5. Interpretation.— In this Act, unless there is anything repugnant in the subject or context, X X X

After considering the above interpretation of various provisions and the Case laws, the Hon‟ble Apex Court has analyzed the provisions as under: “14.1. In Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd., it was categorically held that under Section 56 of the BR Act, 1949 only three co-operative banks have been defined, namely, state cooperative bank, central co-operative bank and primary co-operative bank which are covered under Section 56 (cci) read with (ccvii) read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence under the BR Act, 1949 to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, 1981, it would not be a co-operative bank within the meaning of Section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act. It was further stated that if a bank has to be a state co- operative bank, there has to be a declaration made by the State Government in terms of Section 2(u) of NABARD Act, 1981. Hence, it is necessary to go into the question as to, whether, the appellant herein has been so declared as a state cooperative bank. This question would need not detain us for long as the Kerala High Court in A.P. Varghese had categorically stated that the “Kerala State Co- operative Bank” is a “state co-operative bank” as defined under the NABARD Act, 1981. Therefore, the appellant bank has not been declared as a state co- operative bank under the provisions of NABARD Act, 1981. Further, in the case of Mavilayi Service Co-operative Bank, this Court observed that a co-operative bank would engage in banking business on obtaining a licence under Section 22(1b) of the BR Act, 1949. In the instant AYs. 2016-17, 2017-18 & 2020-21 case, the appellant herein is not a co-operative bank having regard to the aforesaid conspectus of the provisions so as to require a licence under the aforesaid provision for carrying on banking business. In the circumstances, the question could still arise as to whether the appellant herein is entitled to benefit of deduction under Section 80P of the Act. 14.2. In Mavilayi Service Co-operative Bank, it has been observed that Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee. That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub- section (2) of Section 80P must be given by way of deduction vide Citizen Cooperative Society. This is because sub-section (4) of Section 80P is in the nature of a proviso to the main provision contained in sub- sections (1) and (2) of Section 80P. The proviso excludes co-operative banks, which are co- operative societies which must possess a licence from the Reserve Bank of India to do banking business. In other words, if an entity does not require a licence to do banking business within the definition of banking under Section5(b) of the BR Act, 1949, then it would not fall within the scope of sub-section (4) of Section 80P. 14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court: i) Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” is significant as it indicates the general “drift” of the provision. ii) Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”. iii) Thirdly, the gross total income must include income that is referred to in sub-section (2). iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being “engaged in”, inter alia, carrying on the business of banking or providing credit facilities to its members. v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. vi) Sixthly, the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non- members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. vii) Seventhly, under Section 80P(1) (c), the co-operative societies must be registered either under Cooperative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other cooperative societies, the whole of such income is eligible for AYs. 2016-17, 2017-18 & 2020-21 deduction, the object of the provision being furtherance of the co- operative movement as a whole. 14.4. In paragraph 42 of Mavilayi Service Co-operative Bank, this Court observed that the object and purpose of sub-section (4) of Section 80P is to exclude only co-operative banks that function on par with other commercial banks i.e. which lend money to members of the public. That on a reading of Section 3 read with Section 56 of the BR Act, 1949, the primary co- operative bank cannot be a primary agricultural credit society. As such co- operative bank must be engaged in the business of banking as defined by Section 5(b) of the BR Act, 1949, which means accepting, for the purpose of lending or investment, of deposits of money from the public. Also under Section 22(1)(b) of the BR Act, 1949, no co- operative society can carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by Reserve Bank of India. It was pointed out that as opposed to the above, a primary agricultural credit society is a co- operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. 14.5. It was further observed in the said case that some primary agricultural credit societies had sought for banking licence from Reserve Bank of India but the same was turned down by observing that such a society was not carrying on the business of banking and that it did not come under the purview of Reserve Bank of India requiring a licence for its business. 14.6. Thereafter in paragraph 48 of the judgment, it was observed that a deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. That subsection (4) of Section 80P which is in the nature of a proviso specifically excludes co- operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from Reserve Bank of India.”

In view of the above dictum of law as well as the provisions of the Act which are considered we are of the opinion that the provisions of section 80P(2)(d) would be applicable in the facts of the case and the PCIT was not justified in invoking revisional powers under section 263 of the Act which is rightly reversed by the Tribunal holding that the cooperative bank is a cooperative society registered under the Gujarat State Cooperative Societies Act and in view of the various decisions of the Court, the Tribunal after following the same has come to the conclusion that the assessment was not erroneous allowing deduction of section 80P(2)(d) of the Act which is in consonance with the various decisions of the Court as a twin condition invoking section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled.”

In the result, the appeal of the Revenue in is dismissed. AY 2020-21 AYs. 2016-17, 2017-18 & 2020-21

At the outset, both the Ld. DR and Ld. AR submitted that the facts of this case are exactly similar to the facts in appeal for AY 2016-17 and the Ld. CIT(A) has allowed the appeal of the assessee for the same reasons as reproduced above. The Revenue has raised the common grounds of appeal except the variance of amount of deduction claimed u/s 80P(2)(d) of the Act for AY 2020- 21, the same being Rs.4,16,93,020/-.

Thus, in view of the above submission of the Ld. Representatives of the parties that the issue raised in the appeal are identical and are arising from same set of facts, the findings given by us while adjudicating the appeal in as well. Accordingly, the appeal of the Revenue is dismissed in the same terms.

In the result, the appeal of the Revenue in is dismissed.

Briefly stated the facts of the case in the relevant AY are that the Ld. AO allowed the claim of deduction u/s 80P(2)(d) of the Act amounting to Rs.5,90,63,718/- made by the assessee accepting the income returned by the assessee vide his order dated 14.11.2019 passed u/s 143(3) of the Act. The Ld. PCIT initiated revision proceedings by invoking provisions of section 263 of the Act and directed the Ld. AO to re-verify/re-examine the assessee’s claim of deduction u/s 80P(2)(d) of the Act vide his revision order dated 28.03.2022. Aggrieved, the assessee filed appeal against revision order of the Ld. PCIT passed u/s 263 of the Act before this Tribunal. The Tribunal vide order dated 25.01.2024 quashed the revision order of the Ld. PCIT u/s 263 of the Act, dated 28.03.2022 in for AY 2017-18. 12.1 In the meantime, the Ld. AO passed the fresh assessment order u/s 143(3) r.w.s. 263 of the Act pursuant to the direction of the Ld. PCIT vide order dated 28.03.2023 and dismissed the claim of the assessee u/s 80P(2)(d) of the Act. The assessee challenged the said order of the Ld. AO dated 28.03.2023 before the Ld. CIT(A) and the Ld. CIT(A) decided the appeal in favour of the assessee vide his order dated 26.04.2024. It is against this order of the Ld. AYs. 2016-17, 2017-18 & 2020-21 CIT(A) that the Revenue is in appeal before this Tribunal, raising the following grounds of appeal : “A. Whether in the facts and circumstances of the case, the Ld. CIT (A) has erred in allowing deduction under u/s 80P(2)(d) on surplus fund parked with cooperative banks. B. "Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in holding that the interest income of Rs.5,90,63,718/- the society earned from investment with other co-operative banks was allowable as deduction u/s u/s.80P(2)(d) of the IT Act, ignoring the decision of Hon'ble Supreme Court in the case of TOTAGARS CO-OPERATIVE SALE SOCIETY LTD vs ITO 322 ITR 283 ?" C. Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT has erred in concluding that the Assessment Order is not erroneous and prejudicial to the interest of Revenue without appreciating the fact that The interest income from investment earned by the assessee society is out of its surplus funds, not immediately required for its business, and that which is parked as "investment". The Assessing Officer should have examined that the assessee Society is investing its Surplus money which is not required for its activities in to Deposits and hence should have applied the Decision of Hon'ble Supreme Court in the case of TOTAGARS CO-OPERATIVE SALE SOCIETY LTD vs ITO 322 ITR 283. Failure on the part of the Assessing Officer in examining the above issue has rendered the assessment order dated 14/11/2019 erroneous in so far as it is prejudicial to the interest of the revenue. D. Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT has erred in concluding that the Assessment Order is not erroneous and prejudicial to the interest of the Revenue without appreciating the fact that the interest income earned by the assessee society in the instant case, cannot be held eligible for deduction u/s 80P (2)(d) as the provisions of sec.80P(2)(d) specifies that the interest income earned by the Co-operative societies from its investment with any other Cooperative Society would be eligible for deduction under the said section. Interest income earned from investment with Co-operative Banks do not qualify for deduction u/s 80P of the I.T. Act, 1961. In the instant case The Assessing officer has also failed to examine whether the Co-operative Banks wherein surplus funds have been invested are only Co-operative Societies or they have License given by RBI. If they are registered with RBI then in view of above stated apex court's decision, the interest received from them is not entitled for deduction u/s 80P(2)(d). By not verifying this aspect, the Assessing Officer has allowed the claim of deduction made by the assessee. This also has rendered the assessment erroneous and prejudicial to the Interest of revenue.”

Both the Ld. AR and Ld. DR conceded that the Tribunal has already allowed the appeal of the assessee against the order of the Ld. PCIT passed u/s 263 of the Act dated 28.03.2022 in for AY 2017-18, a copy of which was placed before the Bench. In this view of the matter, the appeal filed by the Revenue becomes academic in nature.

We have perused the order of the Pune Tribunal in assessee’s own case for AY 2017-18 in (supra) and find that the Co- ordinate Bench has decided the impugned issue in favour of the assessee holding that the assessment order is neither erroneous nor prejudicial to the AYs. 2016-17, 2017-18 & 2020-21 interest of the revenue for the Ld. PCIT to invoke the provisions of section 263 of the Act.

On the facts and in the circumstances of the case set out above and in the light of the order of the Co-ordinate Bench of Tribunal in assessee’s own case in for AY 2017-18 (supra), in our considered view the grounds raised by the Revenue in the present appeal has no legs to stand. Accordingly, grounds raised by the Revenue are dismissed.

In the result, the appeal of the Revenue in is dismissed.

To sum up, all the three appeals by the Revenue for AYs 2016-17, 2017- 18 and 2020-21 are dismissed.