THE WEST GODAVARI DISTRICT CO OP MARKETING SOCIETY LTD ,ELURU vs. PRINCIPAL COMMISSIONER OF INCOME TAX-1, VISAKHAPATNAM

Subsequently, vide notice dated 13.03.2025 issued under section 263 of the Act, the learned PCIT initiated revisionary proceedings on the basis that the assessee claimed deduction of Rs.1,06,79,044 under section 80P(2)(a)(iv) of the Act. However, on the verification of the schedule on interest income, the learned PCIT noted that the assessee received interest income of Rs. 68,94,925 on investments, which was also claimed as a deduction under section 80P(2)(a)(iv) of the Act. Accordingly, the learned PCIT alleged that such interest income does not constitute the “operational income”, and therefore, is not allowable under section 80P(2)(a) of the Act. The learned PCIT further alleged that the said interest income is also not eligible for deduction under section 80P(2)(d) of the Act, as the said section only allows deduction in respect of income by way of interest or dividend derived from investment with the co-operative society, but not interest income from any bank. Accordingly, the learned PCIT alleged that the assessment order passed under section 143(3) read with section 144B of the Act is erroneous insofar as it is prejudicial to the interest of the Revenue.

The learned PCIT, vide impugned order, disagreed with the submissions of the assessee and held that the AO has passed the assessment order without making any inquiry or verification with respect to the allowability of the deduction claimed under section 80P in respect of interest income amounting to Rs. 68,94,925 on investment with the bank. Accordingly, the learned PCIT held that the assessment order dated 25.09.2022, passed under section 143(3) read with Section 144B of the Act, is erroneous insofar as it is prejudicial to the interest of the Revenue. Accordingly, the learned CIT(A) set aside the assessment order on the issue of allowability of deduction under section 80P(2)(a)(iv) of the Act and directed the AO to verify and restrict the deduction under the aforesaid provisions of the Act only to such interest income earned on the investment which are attributable to the profits and gains arising out of the activity carried out by the assessee. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is a Co- operative Society. In its return of income, the assessee claimed a deduction of Rs. 1,06,79,044 under section 80P(2)(a)(i), Rs. 1,00,000 under section 80P(2)(c) and Rs. 7,35,068 under section 80P(2)(d) of the Act. We find that vide notice dated 29.08.2022 issued under section 142(1) of the Act, forming part of the paper book on pages 40-43, the assessee was asked to submit a list of members and latest registration certificate issued by the concerned Registrar of the District Co-operative Societies in order to verify its claim under various provisions of section 80P of the Act. The said notice was responded to by the assessee vide its reply filed on 14.09.2022, which forms part of the paper book from pages 44-47. We find that another notice dated 14.03.2022 was issued by the AO under section 143(2) of the Act, forming part of the paper book from pages 30-32, seeking details about the calculation of the amount of deduction and a note on the eligibility of deduction under section 80P of the Act. We find that the said notice was responded to by the assessee vide its reply filed on 04.04.2022, which forms part of the paper book on pages 34-39. After considering the submissions of the assessee, the AO accepted the assessee’s claim of deduction under various sub-sections of section 80P of the Act and observed as under in the assessment order: - “Again the assessee has submitted that the assessee is a District level Apex Co-operative Society engaged in the distribution of agricultural products, fertilizers and chemicals to its members on Co-operative lines which is exempt u/s 80P(2)(a)(iv) of the Act. The assessee has claimed exemption u/s 80P(2)(a)(iv) of the Act amounting to Rs. 1,06,79,044/-

Accordingly, the income of the assessee was assessed at the returned income by the AO, accepting the claim of deduction under section 80P of the Act. Therefore, having considered the material available on record, we are of the considered view that the AO conducted the inquiry into the aspect of the claim of deduction under section 80P of the Act by the assessee. Thus, we do not find merit in the findings of the learned PCIT that the AO conducted no inquiry or verification with respect to the eligibility of deduction claimed by the assessee under section 80P(2)(a) of the Act.

As regards the findings of the learned PCIT that the interest income of Rs. 68,94,925 claimed as deduction by the assessee under section 80P(2)(a)(iv) of the Act does not constitute the “operational income” but simply accrues to the assessee outside the ambit of section 80P of the Act, the learned Authorised Representative (“learned AR”) submitted that the interest income received by the assessee is out of its own funds from activities contemplated under section 80P(2)(a) and the said interest income is also entitled for deduction under section 80P(2)(a) of the Act. In this regard, the learned AR placed reliance upon the decision of the coordinate bench of the Tribunal in The Chebrole Large-Sized Co-op Society Limited v/s The Income Tax Officer, in for the assessment year 2018-19. From the perusal of the aforesaid decision, we find that the coordinate bench of the Tribunal vide its order dated 04.03.2025 observed as follows: – “6. We have gone through the record in the light of the submissions made on either side. It could be seen from the record that the assessee offers credit services and also sale of fertilizers and pesticides with its members. Coming to the objection of the learned PCIT that any interest accrued from investment with the state cooperative central bank not attributable to the activities specified in section 80P(2)(a) of the Act, and cannot be allowed as a deduction is concerned, this issue is no longer res integra. Hon’ble jurisdictional High Court considered the same in extenso in The Vavveru Co-operative Rural Bank Ltd. (supra). On a threadbare analysis of the provisions under section 80P of the Act in the light of various decisions including the decision of the Hon’ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) and jurisdictional High Court in the case of CIT vs. Andhra Pradesh State Co- operative Bank Ltd [2011] 12 taxmann.com 66 (Andhra Pradesh), the Hon’ble High Court reached a conclusion that if the investment is made in fixed deposits in nationalised banks from out of the own funds of the assessee, the interest derived from such investment would be from the activities listed in clause (i) to (vii) of section 80P(2)(a) of the Act and would be eligible for deduction. For the sake of completeness, we deem it necessary to extract the relevant observations of the Hon’ble High Court hereunder,- “28. ……… Before considering the effect of the various decisions cited on both sides, we think it would be ideal to look at the statutory prescription in pure and simple form. As we have indicated earlier, section 80P(2) is actually divided into six parts, categorised under clauses (a), (b), (c), (d), (e) and (f). Each one of these clauses deal with different types of co-operative societies engaged in different types of activities. The benefit made available to each one of them is also different from the other. Therefore, it may be useful to present a tabular form, the six categories of co-operative societies covered by clauses (a) to (f) and the nature and extent of the benefit available to each one of them, as follows: … … … … … … 30. Therefore, what follows is that when a co-operative society engaged in any one of the activities stipulated in sub-clauses (i) to (vii) of clause (a) makes profits and gains out of business attributable to anyone of those activities, the case would fall under clause (a). The moment the income derived from one of those activities is invested in another co- operative society and an interest or dividend is derived therefrom, the case would be covered by clause (e). In case the profits and gains of business arising out of the activities listed in sub-clauses (i) to (vii) of clause (a) is invested in immovable properties, such as, godowns or warehouses and an income is derived therefrom, the case would be covered by clause (e) of section 80P(2).

The only area of distinction between clause (a) on the one hand and clauses (d) and (e) on the other hand is that the benefit under clause (a) is restricted only to those activities of a co-operative society enlisted in sub-clauses (i) to (vii) of clause (a). On the other hand, the benefit under clauses (d) and (e) are available to all cooperative societies, without any restriction as to the nature of the activities carried on by them.

In simple terms, the position can be summarised like this. If there is a co-operative society, which is carrying on several activities including those activities listed in sub-clauses (i) to (vii) of clause (a), the benefit under clause (a) will be limited only to the profits and gains of business attributable to any one or more of such activities. But, in case the same cooperative society has an income not attributable to any one or more of the activities listed in sub-clauses (i) to (vii) of clause (a), the same may go out of the purview of clause (a), but still, the co-operative society may claim the benefit of clause (d) or (e) either by investing the income in another cooperative society or investing the income in the construction of a godown or warehouse and letting out the same.

In other words, the benefit conferred by clause (d) upon all types of co-operative societies is restricted only to the investments made in other co-operative societies. Such a restriction cannot be read into clause (a), as the temporary parking of the profits and gains of business in nationalised banks and the earning of interest income therefrom is only one of the methods of multiplying the same income. To accept the stand of the Department would mean that cooperative societies carrying on the activities listed in clauses (i) to (vii), which invest their profits and gains of business either in other cooperative societies or in the construction of godowns and warehouses, may benefit in terms of clause (d) or (e), but the very same societies will not be entitled to any benefit, if they invest the very same funds in banks. Such an understanding of section 80P(2) is impermissible for one simple reason. The benefits under clauses (d) and (e) are available in general to all co- operative societies, including societies engaged in the activities listed in clause (a). Section 80P(2) is not intended to place all types of co- operative societies on the same pedestal. The section confers different types of benefits to different types of societies. Special types of societies are conferred a special benefit.

The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a cooperative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph- 3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.

But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other cooperative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.

The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to".

Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside”.

Therefore, respectfully following the aforesaid decision rendered by the coordinate bench of the Tribunal, we are of the considered view that the assessee is entitled to claim a deduction under section 80P(2)(a) of the Act in respect of interest income of Rs. 68,94,925.

Accordingly, we do not find any merit in the findings of the learned PCIT vide impugned order passed under section 263 of the Act. As a result, the impugned order is quashed and the grounds raised by the assessee are allowed.

In the result, the appeal by the assessee is allowed. Order pronounced in the Open Court on 27/10/2025