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Facts
The assessee, a housing co-operative society, claimed deduction under section 80P(2)(d) for interest income earned from deposits with co-operative banks. The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under section 263, holding that such interest income should be treated as 'Income from Other Sources' and taxed under section 56, making the assessment order erroneous and prejudicial to the revenue.
Held
The Tribunal referred to the Hon'ble Karnataka High Court's later judgment in the assessee's own case (395 ITR 611) which held that interest income earned from deposits with co-operative banks is not eligible for deduction under section 80P(2)(d), even after considering sub-section (4) of section 80P. The exclusion under section 80P(4) is broad enough to deny such benefit, except for primary agricultural credit societies.
Key Issues
1. Whether interest income earned by the assessee-society from deposits with co-operative banks is eligible for deduction under section 80P(2)(d). 2. Whether the PCIT was justified in invoking revisionary jurisdiction under section 263.
Sections Cited
263, 143(3), 144B, 80P, 80P(2)(d), 56, 2(19), 194A(3)(v)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The present appeal has been instituted by the assessee challenging the order of the Ld. PCIT passed u/s 263 of the Act dt. 18.03.2025 whereby the assessment order framed under section 143(3) read with section 144B of the Act dated 21.09.2022 was set aside to make a fresh assessment.
The assessee in the memo of appeal raised multiple grounds numbered 6 to 17, which we, for the sake of brevity and convenience are not inclined to reproduce here.
The brief facts of the case on hand are that the assessee is a housing co-operative society registered under the provisions of Karnataka Co-operative Societies Act, 1959. The assessee is engaged in the business of providing housing facilities to its members. The assessee filed its return of income for the subjected AY to the tune of Rs. 62,79,750/- only after claiming deduction u/s 80P of the Act for an amount of Rs. 28,68,638/- only. The case of assessee was selected for scrutiny under CASS and the assessment was completed by accepting the returned income.
The Ld. PCIT, Bengaluru upon examination of the assessment records was of the view that the assessment order passed by the AO was without making necessary enquiries or verification and it was prejudicial to the interest of revenue as per the provisions of section 263 of the Act. Accordingly, the Ld. PCIT issued a show cause notice dated 17.03.2025 proposing to invoke section 263 of the Act on the ground that assessee has earned interest income to the tune of Rs. 28,18,638 held with banks and financial institutions other than co-operative societies and the same has been claimed as deduction u/s 80P(2)(d) of the Act. According to the Ld. PCIT, such interest income ought to have been assessed under the head “Income from Other Sources” and taxed under section 56 of the Act.
4.1 In response to the SCN issued by the Ld. PCIT, the assessee submitted that it is a housing co-operative society formed with the object of providing housing and developing residential sites exclusively for its members, in accordance with its bye-laws and the provisions of . the Karnataka Co-operative Societies Act, 1959. The assessee further submitted that surplus funds, which were not immediately required for business purposes, were invested in co-operative and commercial banks, resulting in interest income of Rs. 71,84,709/- only. Out of the said interest income, a sum of Rs. 1,13,133 was earned from Bangalore Rural & Ramanagar District Co-operative Central Bank Ltd. and Rs. 27,05,055 was earned from Karnataka State Co-operative Apex Bank, aggregating to Rs. 28,18,368.00 only. The assessee contended that since the said deposits were made with co-operative banks, the interest income earned was eligible for deduction under section 80P(2)(d) of the Act.
4.2 However, the Ld. PCIT rejected the contentions of the assessee, holding that the same were not acceptable. Placing reliance on the decision of the Hon’ble Supreme Court in the case of Totgars Co- operative Society Ltd. vs. ITO, Karnataka reported in 188 taxmann.com 282 (SC), wherein it was observed that interest earned by a co-operative society from investment of surplus or idle funds, even when placed with co-operative banks, partakes the character of “Income from Other Sources” and is taxable under section 56 of the Act, and is not eligible for deduction under section 80P(2)(a)(i) of the Act. Consequently, the Ld. PCIT held that the assessment order passed under section 143(3) read with section 144B of the Act dated 21.09.2022 was erroneous and prejudicial to the interests of the Revenue, inasmuch as the AO had allowed the deduction claimed under section 80P(2)(d) of the Act on interest income earned from deposits with co-operative banks or financial institutions other than co-operative societies, whereas such income ought to have been assessed under the head “Income from Other Sources” and taxed under section 56 of the Act.
Aggrieved by the order passed by the Ld. PCIT, the assessee has preferred the present appeal before us.
The Ld. AR before us submitted that the Ld. PCIT has assumed jurisdiction under section 263 of the Act solely on the ground that the deduction under section 80P(2)(d) was wrongly allowed by the AO on interest income earned from deposits placed with co-operative banks. It was contended that the revision is founded on an erroneous and legally unsustainable premise that co-operative banks are not co-operative societies and, therefore, interest earned from such banks is not eligible for deduction under section 80P(2)(d) of the Act.
6.1 The Ld. AR vehemently argued that the reliance placed by the Ld. PCIT on the judgment of the Hon’ble Supreme Court in Totgars Co- operative Sale Society Ltd. vs. ITO [2010] reported in 188 taxmann.com 282 (SC) is wholly misconceived and misplaced. It was submitted that the said judgment dealt exclusively with the scope of deduction under section 80P(2)(a)(i) of the Act and not with section 80P(2)(d) of the Act. Therefore, according to the Ld. AR, the ratio laid down in Totgars (SC) has no application whatsoever to the facts of the present case, where the deduction has been claimed under section 80P(2)(d) of the Act.
6.2 The Ld. AR further submitted that section 80P(2)(d) of the Act clearly provides for deduction in respect of any income by way of interest or dividends derived by a co-operative society from its investments with any other co-operative society. In the present case, the assessee earned interest income amounting to Rs. 28,18,368 from . deposits made with Bangalore Rural & Ramanagar District Co-operative Central Bank Ltd. and Karnataka State Co-operative Apex Bank. It was contended that both these entities are registered co-operative societies and, therefore, the interest earned therefrom squarely qualifies for deduction under section 80P(2)(d) of the Act.
6.3 Placing reliance on the definition contained in section 2(19) of the Act, 1961, the Ld. AR submitted that a “co-operative society” means a society registered under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. It was argued that co-operative banks are also registered under the respective State Co-operative Societies Acts and hence fall within the definition of “co-operative society” for the purposes of the Act.
6.4 The Ld. AR placed strong reliance on the judgment of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] reported in 392 ITR 74 (Kar), wherein it was categorically held that a co-operative bank is only a species of the genus “co-operative society” and, therefore, interest income earned by a co-operative society from investments made with a co-operative bank is eligible for deduction under section 80P(2)(d) of the Act. The Ld. AR pointed out that in the said judgment, the Hon’ble High Court has expressly distinguished the Supreme Court ruling in Totgars (2010) by observing that it dealt only with section 80P(2)(a)(i) and not section 80P(2)(d) of the Act.
6.5 The Ld. AR further relied on the decision of the Hon’ble Madras High Court in Thorapadi Urban Co-operative Credit Society Ltd. & Ors. vs. ITO [2024] reported in 296 taxmann.com 250 (Mad), wherein it was held that a co-operative bank is also a co-operative society within the meaning of section 2(19) of the Act and that the interest income earned from investments with such co-operative banks is eligible for deduction under section 80P(2)(d) of the Act. It was submitted that the Hon’ble High Court, after considering the judgment of the Hon’ble Supreme Court in Totgars (2010), held that the same is inapplicable where deduction is claimed under section 80P(2)(d) of the Act.
6.6 The Ld. AR also relied upon the judgment of the Hon’ble Gujarat High Court in State Bank of India vs. CIT [2016] reported in 389 ITR 578 (Guj), wherein it was observed that though interest earned from surplus funds deposited with nationalized banks is not eligible for deduction under section 80P(2)(a)(i), but the assessee is entitled to deduction under section 80P(2)(d) if such surplus funds are deposited with a co- operative bank.
6.7 Further reliance was placed on the decision of the Hon’ble Gujarat High Court in PCIT vs. Ashwinkumar Arban Co-operative Society Ltd. reported in 168 taxmann.com 314., wherein it was held that amendments made to section 194A(3)(v) of the Act do not exclude co- operative banks from the definition of co-operative societies and that co- operative banks continue to remain co-operative societies for the purposes of section 80P(2)(d) of the Act.
6.8 The Ld. AR also drew support from various decisions of the co- ordinate benches of the Tribunal, including the Pune Bench decision in Rena Sahakari Sakhar Karkhana Ltd. vs. PCIT reported in 138 taxmann.com 532, wherein it was held that though co-operative banks may not be eligible to claim deduction under section 80P of the Act after insertion of sub-section (4), but they continue to be co-operative societies and, therefore, interest income earned by a co-operative society from investments with a co-operative bank is eligible for deduction under section 80P(2)(d) of the Act.
6.9 Reliance was also placed on the decision of the Bengaluru Bench of the Tribunal in Karnataka State Co-operative Federation Ltd. vs. ACIT (ITA Nos. 864 to 866/Bang/2019), wherein it was held that for the purposes of section 80P(2)(d) of the Act, the head under which the interest income is assessed is not material and that interest income earned by a co-operative society from investments made with co- operative banks qualifies for deduction under section 80P(2)(d) of the Act.
6.10 The Ld. AR, therefore, contended that the AO had taken a legally sustainable view while allowing the deduction under section 80P(2)(d) of the Act and that the revisionary proceedings initiated by Ld. PCIT by placing reliance on an inapplicable Hon’ble Supreme Court judgment are without jurisdiction and bad in law.
Per contra, the Ld. DR supported the order passed by the Ld. PCIT under section 263 of the Act. It was submitted that the Assessing .
Officer allowed deduction under section 80P(2)(d) of the Act without proper verification and without examining whether interest earned from deposits with co-operative banks is eligible for deduction. The Ld. DR argued that after insertion of section 80P(4) of the Act, co-operative banks are excluded from the benefits of section 80P of the Act, and therefore interest income earned from deposits with such banks cannot be treated as income derived from investments with a co-operative society. According to the Ld. DR, a co-operative bank is different from a co-operative society for the purpose of section 80P of the Act. The Ld. DR therefore contended that the Ld. PCIT rightly exercised revisionary powers under section 263 of the Act and that the order passed by the PCIT deserves to be upheld.
We have carefully considered the rival submissions of both the parties and perused the materials placed on record including the orders passed by the lower authorities. Two issues arise for adjudication before us — first, whether the interest income earned by the assessee-society from deposits placed with co-operative banks is eligible for deduction under section 80P(2)(d) of the Act; and secondly, whether the learned Principal Commissioner was justified in invoking revisionary jurisdiction under section 263 of the Act.
8.1 So far as the claim of deduction under section 80P(2)(d) is concerned, the assessee has contended that a co-operative bank is also a co-operative society and that the interest earned from such banks ought to be allowed as deduction. In support, reliance has been placed on the judgment of the Hon’ble Karnataka High Court dated 05-01-2017 in PCIT v. Totagars Co-operative Sale Society (392 ITR 74).
8.2 However, we find that the Hon’ble Karnataka High Court in a later judgment dated 16-06-2017 in the very same assessee’s case reported in 395 ITR 611 has, after examining the scheme of section 80P, particularly sub-section (4) of the Act, categorically held that interest income earned from deposits of surplus or idle funds with a co-operative bank is not eligible for deduction even under clause (d) of sub-section (2) of section 80P of the Act. The Hon’ble Court has further held that the character of such income does not change merely because the deposits are made with a co-operative bank and that the exclusion contained in section 80P(4) of the Act is wide enough to deny such benefit, save and except in the case of a primary agricultural credit society.
8.3 Being bound by the later decision of the Hon’ble Jurisdictional High Court, we respectfully follow the judgment reported in 395 ITR 611. Consequently, on merits also, the interest income earned by the assessee from deposits with co-operative banks is held to be not eligible for deduction under section 80P(2)(d) of the Act.
8.4 Coming to the validity of revision under section 263, it is well settled law that the Principal Commissioner is empowered to revise an assessment order where the same is both erroneous and prejudicial to the interests of the Revenue. An order passed without making enquiries or verification which ought to have been made is deemed to be erroneous within the meaning of Explanation 2 to section 263 of the Act.
8.5 In the present case, the assessment order reveals that the Assessing Officer allowed the deduction under section 80P(2)(d) of the .
Act without examining the binding later decision of the Hon’ble Karnataka High Court reported in 395 ITR 611 and without verifying the nature of the funds invested, namely whether the deposits represented idle or surplus funds or operational reserves. The assessment order is conspicuously silent on these vital aspects.
8.6 Once the Hon’ble Jurisdictional High Court had laid down that interest earned from deposits with co-operative banks is not eligible for deduction under section 80P(2)(d) of the Act, failure on the part of the Assessing Officer to apply the said binding law renders the assessment order unsustainable in law. Such an order cannot be regarded as a plausible or permissible view and, therefore, squarely falls within the mischief of section 263 of the Act.
8.7 We are, therefore, of the considered opinion that the learned Principal Commissioner rightly assumed jurisdiction under section 263 and set aside the assessment order for fresh adjudication. Accordingly, the ground of appeal filed by the assessee stands dismissed.
In the result, the appeal of the assessee is hereby dismissed.