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Facts
The assessee, a Credit Cooperative Society, claimed NIL income after a deduction u/s 80P(2)(a)(i) for providing credit facilities to its members, which the AO accepted. The PCIT initiated revision u/s 263, finding that the AO failed to inquire into the taxability of interest earned by the assessee on investments with co-operative and other banks, treating it as income from other sources (u/s 56) rather than business income. The PCIT deemed the assessment erroneous and prejudicial to revenue due to the AO's lack of inquiry and improper allowance of deductions under Chapter VI-A.
Held
The Tribunal held that the PCIT's revisional order was not sustainable for interest earned from co-operative societies/banks, as such income is deductible u/s 80P(2)(d), implying no revenue loss despite the AO's lack of inquiry. However, for interest earned from "other than co-operative societies and other than co-operative banks," the AO's failure to inquire into its nature, taxability (u/s 28 or 56), and deductibility led to an erroneous assessment prejudicial to the revenue. Thus, the PCIT's order was upheld only for this specific category of interest income.
Key Issues
Whether the PCIT's revisional jurisdiction u/s 263 was validly invoked to set aside an assessment where the AO failed to inquire into the taxability and deductibility of interest income earned by a co-operative society from various banks, making the assessment both erroneous and prejudicial to the interest of the revenue.
Sections Cited
Section 263, Section 143(3), Section 253(1), Section 80P(2)(a)(i), Chapter VI-A, Section 56, Section 80P(2)(d), Section 142(1), Section 28, Section 80P(2)
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Income Tax Appellate Tribunal, PANAJI BENCH, GOA
Before: HON’BLE SHRI PAVAN KUMAR GADALE & SHRI G. D. PADMAHSHALI
Appearances Assessee by : Mr Veeranna Murgod [‘Ld. AR’] Revenue by : Capt. Pradeep Arya [‘Ld. DR’] Date of conclusive Hearing : 14/08/2025 Date of Pronouncement : 26/08/2025 ORDER PER G. D. PADMAHSHALI, AM; Against DIN & Order No. 1074873015(1) dt. 22/03/2025 passed by the Principal Commissioner of Income Tax, Hubali, [Abbr. ‘Ld. PCIT’] u/s 263 of the Income-tax Act, 1961 [Abbr. ‘the Act’] which in turn set-aside order of assessment dt. 29/08/2022 passed u/s 143(3) of the Act by the National Faceless e-Asstt. Centre, Delhi [Abbr. ‘Ld. NFeAC’] in relation to assessment year 2020-21 [Abbr. ‘AY’] the assessee filed this appeal u/s 253(1) of the Act.
ITAT-Panaji Page 1 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 2. Tersely stated facts of the case are that; 2.1 The assessee is a registered Credit Cooperative Society engaged in the business of accepting deposits and providing credit facilities to its needy members. The assessee filed its return on 15/01/2021 declaring ₹NIL income after claiming ₹57,34,781/- as deduction u/s 80P(2)(a)(i) of Chapter VI-A the Act. The case of the assessee was selected for scrutiny and in response thereto the assessee filed point-wise written submissions accompanying therewith statement of income, other necessary documents etc. Keeping in view the nature of business of the assessee and the provisions of section 80P(2)(a)(i) of the Act, the Ld. AO accepted the claim for deduction and resultant returned NIL income vide an assessment order framed u/s 143(3) of the Act.
2.2 Post assessment, assessment records were called & perused u/s 263 of the Act wherein it was contrivance to the Ld. PCIT that, for the year under consideration the assessee earned interest on investment (in the form of fixed deposit) held with (i) co-operative banks and (ii) other banks including scheduled banks however the Ld. AO while framing the assessment u/s 143(3) of the Act has failed to carryout necessary inquiry into nature & taxability of such interest earned by the assessee. The interest earned/accrued from investment ITAT-Panaji Page 2 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 with banks since chargeable to tax u/s 56 of the Act as ‘Income from other sources’ [for short ‘IOS’] and not as business income but the Ld. AO without inquiring erroneously accepted & wrongly allowed the deduction u/s 80P(a)(i) of the Act. The Ld. PCIT therefore vide notice dt. 12/02/2025 called upon the assessee to showcase as to why such interest should not be treated as ‘income from other sources’ vis-à- vis deduction u/s 80P(2)(a)(i) claimed & allowed in relation thereto be not disallowed for the purpose of taxation. The assessee’s representation made vide letter dt. 05/03/2025 when failed to inspire any confidence that, (i) earning of interest or dividend by one co-operative society from another one co-operative society (by establishment/incorporation) is deductible u/s 80P(2)(d), and (ii) earning of interest from other banks including co-operative banks is attributable to its business as providing credit facilities to its members and thus allowable as deduction u/s 80P(2)(a)(i) of the Act, the Ld. PCIT invoking clause (a) and (d) of explanation 2 to section 263 of the Act vide impugned order held the assessment as erroneous & prejudicial to the interest of revenue for Ld. AO’s (i) failure to conduct required inquiry to test the taxability of interest income earned by the assessee and (ii) erred in taxing entire interest income & allowing deduction u/c VI-A of the Act thereagainst. ITAT-Panaji Page 3 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 3. Aggrieved by revisionary order passed u/s 263 of the Act the assessee is in appeal on as many as six grounds which are inconsonance with rule 8 of ITAT-Rules, 1963 hence re-producing here for the purpose of adjudication deemed unfit. However it shall suffice to state that, these grounds collectively directed against revisionary action as bad in law as twin test failed to satisfy.
The Ld. AR Mr Murgod submitted that, during the course of assessment proceedings the Ld. AO vide notice dt. 17/11/2021 issued u/s 142(1) of the Act through questionnaire relevant information & data called for. The assessee made detailed submission which was perused and upon satisfaction the Ld. AO concluded the assessment by accepting the retuned NIL income u/s 143(3) of the Act. It is contended that, merely because the assessment order does not speak in clear terms as to (i) what queries were raised, (ii) what was the submission made by the assessee and (iii) how the submissions were dealt with while forming conclusion on taxability of interest and deductibility thereof, the said order cannot be held to be erroneous and prejudicial to the interest of the Revenue. Without prejudice to earlier submissions and arguments made in this case, it is also contended that; if it accepted that there was no specific inquiry into ITAT-Panaji Page 4 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 interest income earned on investment from banks including co- operative banks was made in the course of assessment proceedings, the consequential assessment order at the most may be erroneous for a limited purpose, however such interest since attributable to primary business of providing credit facility and thus eligible for full deduction u/s 80P(2)(a)(i) of the Act therefore tax neutral. There is no loss to the ex-chequer/Revenue. It is thus claimed by the assessee that, it might be a case of no or insufficient inquiry and thus erroneous but not prejudicial to the interest of the Revenue because allowing deduction either u/s 80P(a)(i) or 80P(2)(d) of the Act was tax neutral. The later of twin conditions since not satisfied in the present case therefore the action of the Ld. PCIT deserves to be set- aside. To drive home former contention that, the appellant relied on and ITA No 1792/Mum/2025.
4.1 Per contra, relying on the impugned order the Ld. DR Col. Pradeep Arya tried to dismantle the assessee’s twin arguments by reiterating the applicability Hon’ble Apex Court’s decision in ‘Totagar Co-op. Sales Society Ltd. Vs ITO’ [2010, 188 Taxman 282 (SC)] and the decision of Hon’ble Karnataka High Court in the case of ‘PCIT Vs ‘Totagar Co-op. Sales Society Ltd.’ [2017, 83 Taxmann.com 140 (Kar)]. The Ld. DR submitted that, in view of ITAT-Panaji Page 5 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 ‘Totgars Case’ such interest on FD’s earned by the assessee per-se cannot be termed as business income but income from other sources and therefore taxable u/s 56 of the Act. The Ld. DR further argued that, in the present case as it apparent from the face of the record that, former facts never been actually inquired into by the Ld. AO therefore the assessment order de-facto rendered itself erroneous. Insofar as the prejudicial to the interest of Revenue is concerned, it is proved the minute 80P(2) deduction is allowed when not called for or entitled. By allowing the claim for deduction when not entitled, have reduced the taxable income to NIL and thus tax loss to the Revenue. The Ld. DR concluded his counter argument with a gunshot plea that, setting-aside of assessment order for remand to vouch the issue have caused no prejudice to the appellant assessee.
Heard rival party’s submissions and; subject to rule 18 of ITAT Rules, 1963 perused material placed on records, considered the facts of the case in light of settled legal position and we note that, the solitary dispute in the present case is over inquiry into earning of interest on Fixed Deposit held (i) co-operative banks and (ii) with other than co-operative banks and consequential determination of heads of income for taxability vis-à-vis deductibility therefrom u/c VI-A of the Act. ITAT-Panaji Page 6 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 6. The short question in the present appeal thus deals with ‘as to where inquiry into eligibility & entitlement for claiming deduction u/s 80P(2) of the Act is completely absent and assessment order is partly prejudicial, whether revisionary order be sustained?’
In adjudicating this core issue, let us first came to ambit scope of revisionary jurisdiction through judicial precedents. The Hon'ble apex court’s landmark decision in ‘Malabar Industrial Co. Ltd. Vs CIT’ reported at 243 ITR 83 made it ample clear that the crucial expression ‘prejudicial to the interest of the revenue’ is to be read in conjunction with an ‘erroneous order passed’ in assessment framing the subject-matter of revision. Their Hon’ble lordships have observed that, every loss of revenue in consequence to the assessment in issue cannot be treated as prejudicial to interest of the revenue. For example, where an assessing authority adopts one of the course possible in law and it has resulted in loss of revenue or where two issues are possible and one of them has been taken in assessment and the Commissioner does not agree to same, it cannot be taken as an instance involving erroneous assessment prejudicial to interest of the revenue unless of course the Assessing Officer’s view is unsustainable in law. The very view laid by the Hon’ble Apex Court (supra) stands reiterated in catena of judicial decisions viz; ‘CIT Vs Max India Ltd. ITAT-Panaji Page 7 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 (2007) 295 ITR 282 (SC), CIT v. Nahar Exports Ltd. (2007) 288 ITR 494 (P&H), CIT vs Gabriel India Ltd (1993) 203 ITR 108 (Bom) Grasim Industries vs. CIT (2010) 321 ITR, 92 (Bom).
Keeping in mind former settled legal position now reverting back to the present impugned order under challenge at the very outset we note that, it is an admitted fact that the appellant assessee is a co-operative society registered under State Co-operative society Act. The appellant for the year under consideration was engaged in the business of providing credit facilities to its members as one of its primary objects with which the registration to it was granted under the applicable state co-operative laws. In the course of carrying on its business of providing credit facilitates to its members the appellant for the year under consideration indisputably earned interest income which was admittedly accrued to or earned by it from loans extended by it to its members and from investment made/held by it with various banks including (i) nationalised banks, (ii) scheduled banks and (iii) co-operative bank. In earning such interest income (from members on deposits as well on investment with bank) the appellant inevitably also incurred/paid corresponding interest expenditure on deposits accepted by it and other such expenditure in providing such credit facility to its member which in turn yielded revenue to it. ITAT-Panaji Page 8 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 9. We note that, while carrying inquiries into taxable income and corresponding financial results, specific queries in relation to; (i) investment into fixed deposits/term deposits held with (a) co- operative societies & banks (b) commercial banks (c) scheduled banks and (d) national banks and (ii) interest earned out of such investment held with (a) co-operative societies & banks (b) commercial banks (c) scheduled banks and (d) national banks, were neither asked nor supplied. The copy of notice issued to the appellant seeking answer/information for the purpose of assessment (placed on pg 1-3 of p/b) were perused and we find much less inquiry either into (i) investment held by the appellant with banks (ii) interest earned on such investment and (iii) taxability vis-à-vis deductible of such interest u/s 80P(2) of the Act. In nutshell there was complete absence of inquiry into former issues while framing the scrutiny assessment. Further there is sufficient evidence on record to show or at least brought to our notice that while carrying out the assessment the Ld. AO caused no inquiry into (i) constitution of appellant assessee (ii) nature of activities carried out by it (iii) nature of interest earned on loans extended and on investment held with banks etc. & taxability thereof (iv) nature of surplus from business shown to have earned by the appellant assessee. ITAT-Panaji Page 9 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 10. Now coming to later condition that is ‘prejudicial to the interest is concerned’. As we note that, admittedly the appellant assessee earned interest on its investment held with both (a) co-operative societies and co-operative banks and as well as (b) other than co- operative banks. Insofar as the taxability or deductibility of interest earned on investment held with co-operative societies and co- operative banks (which primarily registered as co-operative societies) is concerned, such interest in our considered view since deductible u/s 80P(2)(d) of the Act, therefore absence of inquiry into such interest income qua investment held with co-operative societies / co- operative banks etc, would not lead to any Revenue loss to the department. In consequence the later condition prescribed by section 263 of the Act fails to satisfy so as to trigger regionary jurisdiction. Therefore impugned order on this issue of interest earned on investment with co-operative societies/banks etc. though held to be erroneous for no inquiry by the Ld. AO but since not prejudicial to the interest of the Revenue, hence cannot be sustained in view of the ratio laid down by the Hon’ble Apex Court in ‘Malabar Industrial Co. Ltd. Vs CIT’ (supra). The Ld. DR could hardly place object the application of former ration and in setting-aside the impugned order on this limited score or issue. ITAT-Panaji Page 10 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 11. Next comes to the interest income earned by the appellant on its investment held with other than co-operative societies and other than co-operative banks. Admittedly, there were no inquiries into the nature of investment and interest earned and therefore the impugned order as was already held as erroneous. Now insofar as the taxability of said interest is concerned, indisputably the nature of such interest income determines as to whether it is taxable u/s 28 of the Act as ‘business income’ or as ‘income from other sources’ u/s 56 of the Act. Once the issue of taxability is ceased by aforestated test, then next question arises or to be dealt with is as to whether such interest is deductible u/c VI-A of the Act or not. If the interest income qualifies to be chargeable to tax u/s 56 of the Act, then no deduction thereagainst would be permissible u/s VI-A of the Act. In the present case, since the assessment proceedings were culminated without any inquiry into nature of interest, its taxability and entitlement for deduction u/c VI-A of the Act, but allowing the deduction u/s VI-A of the Act without such inquiry, the impugned order thus not only rendered erroneous but also had an effect of Revenue loss to the ex- chequer. The twin conditions necessary for invocation of revisionary action u/s 263 of the Act, thus finds satisfied, in consequence the jurisdiction. ITAT-Panaji Page 11 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 12. Placing reliance on ‘Smt. Godavari devi Saraf Vs CIT’ [1978, 113 ITR 589(Bom)] we in view of the principle laid down in ‘CIT Vs Gabrial India Ltd.’ & ‘Malabar Industrial Co. Ltd. Vs CIT’ (supra) adjudicate the limited issue in favour of Revenue by holding that, while assessing the interest income there was much less inquiry into the; (i) type & nature of investment held by the appellant assessee with other than co-operative bank (ii) nature of interest earned (iii) taxability of such interest under the Act and (iv) deductibility therefrom (if any) by the Ld. AO in reaching the conclusion to accept that such interest income was part of the regular business of the appellant assessee and eligible for deduction u/s 80P(2) of the Act. In view therefore, the impugned order holding the assessment order as erroneous and prejudicial to the interest of the Revenue in relation to former limited issue, is upheld. The respective ground thus stands partly allowed.
In result, the appeal stands PARTLY ALLOWED. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on the date mentioned hereinbefore.