2025 (6) TMI 2012 - HC - Income Tax

Revision u/s 263 - disallowance of deduction claimed u/s 80P on interest received from PGVCL and interest received on refund - as submitted section 80P(2)(d) does not contain the work Bank and its scope is limited to only Cooperative Societies - HELD THAT - Main issue regarding taxability of the interest earned by the respondent-assessee from the investment made with the Co-operative bank to be eligible for deduction under section 80P(2) (d) of the Act is no more res-integra pursuant to the decision rendered by this Court in the case of Principal Commissioner of Income-Tax v. Ashwinkumar Arban Cooperative Society Ltd. 2024 (11) TMI 971 - GUJARAT HIGH COURT We are of the opinion that the provisions of section 80P(2)(d) is applicable in the facts of the case and the Principal Commissioner of Income-Tax Rajkot was not justified in invoking revisional powers under section 263 of the Act which was 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 the twin condition invoking Section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled. Decided in favour of assessee.

The core legal questions considered by the Court in this appeal under section 260A of the Income Tax Act, 1961, pertain to the validity and correctness of the order passed under section 263 of the Act by the Principal Commissioner of Income Tax (PCIT). Specifically, the issues are:

(A) Whether the Income Tax Appellate Tribunal (Tribunal) was justified in quashing the revisional order under section 263 of the Act, especially when the original assessment order by the Assessing Officer (AO) was alleged to be erroneous and prejudicial to the interest of revenue;

(B) Whether section 80P(2)(d) of the Act permits deduction of interest income earned by a cooperative society from investments made in cooperative banks, given that the term "bank" is not expressly mentioned in the provision and its scope is contended to be limited only to "cooperative societies";

(C) Whether the Tribunal was justified in quashing the order under section 263 without considering the binding precedent of the jurisdictional High Court that interest income from investments in cooperative banks and nationalized banks does not qualify for deduction under sections 80P(2)(a)(i) and 80P(2)(d) of the Act.

In addressing these issues, the Court undertook a detailed legal analysis grounded in statutory interpretation, judicial precedents, and the facts of the case.

Issue (A): Validity of the Revisional Order under Section 263

The Court examined the legal framework of section 263 of the Income Tax Act, which empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the revenue. The twin conditions for invoking this power are that the order must be both erroneous and prejudicial.

The Tribunal had quashed the revisional order passed by the PCIT, holding that these conditions were not satisfied. The Court noted that the AO had allowed deduction under section 80P(2)(d) on interest income earned by the assessee, a cooperative society, from investments in a cooperative bank. The PCIT's order under section 263 was premised on the view that such deduction was impermissible because the cooperative bank was not covered under section 80P(2)(d).

However, the Court observed that the Tribunal had relied on authoritative decisions, including a Coordinate Bench ruling, to hold that the AO's order was neither erroneous nor prejudicial. The Court emphasized that the revisional power under section 263 is not to be exercised lightly and must be based on clear error affecting the revenue. Since the AO's order was supported by legal precedents, the Tribunal's quashing of the revisional order was justified.

Issue (B): Interpretation of Section 80P(2)(d) Regarding Eligibility of Deduction on Interest Income from Cooperative Banks

The Court undertook an extensive interpretation of section 80P(2)(d), which provides deduction to cooperative societies on interest or dividend income derived from investments made with other cooperative societies. The appellant contended that the provision does not mention "bank" and is limited to cooperative societies only, excluding cooperative banks.

The Court referred to the statutory scheme and relevant case law to clarify the position. It noted that cooperative banks are themselves cooperative societies registered under the respective State Cooperative Societies Acts and thus fall within the purview of section 80P(2)(d). The Court relied heavily on the decision in Principal Commissioner of Income-Tax v. Ashwinkumar Arban Cooperative Society Ltd., which held that cooperative banks are cooperative societies entitled to claim deduction under section 80P(2)(d).

The Court analyzed the amendment to section 194A(3)(v) of the Act and rejected the argument that cooperative banks are excluded from the definition of cooperative societies. It clarified that the exemption from TDS under that provision applies to cooperative societies other than cooperative banks, meaning cooperative banks remain cooperative societies for the purposes of section 80P.

Further, the Court examined section 80P(4), which excludes cooperative banks engaged in banking business licensed by the Reserve Bank of India (RBI) from claiming deduction. The Court distinguished cooperative banks that do not require RBI license and do not carry on banking business as defined under the Banking Regulation Act, 1949, from those that do. It held that such cooperative banks remain eligible for deduction under section 80P(2)(d).

The Court relied on the Supreme Court's interpretation in Kerala State Co-operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer, which clarified that only cooperative banks licensed by RBI and engaged in banking business are excluded under section 80P(4). Other cooperative banks, including those registered under State Cooperative Societies Acts and not carrying on banking business as defined, qualify as cooperative societies entitled to claim deduction.

The Court further elaborated on the legislative intent behind section 80P, highlighting its beneficial nature aimed at promoting the cooperative sector. It emphasized that the provision must be construed liberally in favor of the assessee cooperative society.

Issue (C): Applicability of Binding Precedents Regarding Deduction on Interest from Cooperative Banks and Nationalized Banks

The appellant relied on a jurisdictional High Court decision in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd., which held that interest income from investments in cooperative banks and nationalized banks does not qualify for deduction under sections 80P(2)(a)(i) and 80P(2)(d).

The Court distinguished the facts and legal reasoning of that case from the present matter. It noted that the present cooperative bank is registered under the State Cooperative Societies Act and does not carry on banking business requiring RBI license. The Court also relied on the subsequent authoritative decision in Ashwinkumar Arban Cooperative Society Ltd., which clarified and overruled the restrictive interpretation of section 80P(2)(d) as excluding cooperative banks.

The Court rejected the appellant's contention that the Tribunal failed to appreciate the binding precedent, holding that the Tribunal correctly applied the latest and most authoritative decisions. It emphasized that the deduction under section 80P(2)(d) is available for interest income earned from investments in cooperative banks that qualify as cooperative societies and are not excluded under section 80P(4).

Application of Law to Facts and Treatment of Competing Arguments

The Court applied the statutory provisions and judicial precedents to the facts that the assessee is a cooperative society engaged in supplying agricultural inputs to its members and earned interest income from investments in a cooperative bank registered under the Gujarat State Cooperative Societies Act. The AO allowed deduction under section 80P(2)(d) on such interest income.

The PCIT's revisional order was challenged on the ground that such deduction was impermissible. The Court found that the AO's order was supported by binding precedents and consistent with the legislative intent to encourage cooperative societies. The Court rejected the Revenue's argument that cooperative banks are excluded from section 80P(2)(d) and that the revisional order was justified.

The Court concluded that the twin conditions for invoking section 263 were not fulfilled, as the assessment order was neither erroneous nor prejudicial to the revenue. The Tribunal's quashing of the revisional order was therefore upheld.

Significant Holdings

"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 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."

"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'] 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."

"Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the cooperative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee."

"Sub-section (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."

"The twin condition invoking Section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled."

The Court's final determination was to dismiss the Revenue's Tax Appeal, holding that the Tribunal was justified in quashing the revisional order under section 263. The deduction under section 80P(2)(d) on interest income earned from investments in a cooperative bank registered under the State Cooperative Societies Act was held to be valid and permissible. The AO's assessment order was neither erroneous nor prejudicial to the interest of revenue, thus not warranting revision under section 263.

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