Gujarat High Court
The Principal Commissioner Of Income ... vs Shree Madhi Vighag Khand Udyog Sahakari ... on 24 December, 2024
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/803/2024 ORDER DATED: 24/12/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 803 of 2024
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THE PRINCIPAL COMMISSIONER OF INCOME TAX , SURAT 1
Versus
SHREE MADHI VIGHAG KHAND UDYOG SAHAKARI MANDLI LTD.
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Appearance:
KARAN G SANGHANI(7945) for the Appellant(s) No. 1
MR MANISH J SHAH(1320) for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
Date : 24/12/2024
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Standing Counsel Mr. Karan G. Sanghani for the appellant and learned advocate Mr. Manish J. Shah for the respondent.
2. This Tax Appeal is filed under section 260A of the Income Tax Act,1961 [for short 'the Act'] by the appellant-Revenue Page 1 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined arising out of the Judgement and Order dated 10.07.2023 passed by the Income Tax Appellate Tribunal, Surat [for short 'the Tribunal'] in ITA No. 233/SRT/2023 for Assessment Year 2018-19 proposing following substantial questions of law:
"(i) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is justified in quashing the order of the Pr. CIT passed u/s. 263 and holding that decision of Assessing Officer cannot be treated as erroneous and prejudicial to the interest of revenue even if the AO has not made enquiry what ought to have been made and the same resulted in loss to the revenue?
(ii) Whether on facts and circumstances of the case and in law, the Hon'ble Tribunal had erred in holding that the order passed by the AO is not erroneous by ignoring the decision of Hon'ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd. reported in 322 ITR 283, wherein it was held that interest earned from investments Page 2 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined made in any bank not being cooperative society, is not deductible under section 80P of the Act.
iii) Whether on facts and circumstances of the case and in law, the Hon'ble Tribunal has erred in quashing the revision proceedings u/s 263 of the Income Tax Act by overlooking the fact that the Hon'ble High Court of Karnataka in the case of Totgars Cooperative Sale Society (2017) 395 ITR, has held that the intention of legislature is clear that cooperative banks are not specie of genus cooperative society, which would entitle to exemption or deduction under the special provisions of chapter VI-A in the form of section 80P of the Act. This finding has also been approved by the Hon'ble High Court of Gujarat in the case Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. for A.Y.2015-16 in R/SCA No.20585 of 2019?
(iv) Whether on facts and circumstances of the case and in law, the order of Hon'ble Tribunal is not perverse in holding that the Assessing officer has examined the issue of the deduction claimed by the assessee u/s 80P(2)(d) of the Act w.r.t the interest received Rs.2,01,36,071/- from the Page 3 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined Co-operative Bank even though the assessment records does not suggest the same?
(v) Whether on the facts and in the circumstances of the case and in law, Hon'ble ITAT has committed an error on fact by holding that the issue of eligibility of the deduction u/s 80P(2)(d) of the Act w.r.t interest received on the investment from the Co-operative Bank was examined by the AO during assessment proceedings when no such examination was made by the AO. Therefore, the Pr. CIT, on the ground of non-enquiry as well as non- application of mind on the part of A.O., has lawfully invoked jurisdiction U/s 263 of the Act.
Hence, the order passed by Hon'ble ITAT is unsustainable in the eyes of law and perverse on facts and deserves to be quashed.
vi) Whether on the facts and in the circumstances of the case and in law, Hon'ble ITAT is right in holding that the AO has made full enquiry, he made up his mind, the notice of revision is not valid and when two views are possible on an issue and it is not the case of the commissioner that the view taken by the AO is not permissible in law, commissioner cannot invoke his jurisdiction u/s 263 of the Act even though section 80P(2) (d) Page 4 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined clearly provided that the interest received from the Co-operative Society is eligible for deduction and Co-operative Bank has not been mentioned in the said section therefore the view taken by the Assessing officer is not permissible in law?
vii) Whether on the facts and in the circumstances of the case and in law, Hon'ble ITAT has committed an error in holding that the Assessing Officer has taken a reasonable and possible view which cannot be erroneous whereas interest received from the investment in Co-operative bank is not eligible for deduction u/s 80P(2)(d) of the Act and the therefore the view taken by Assessing Officer in allowing the deduction is a reasonable and possible view?
viii) Whether on the facts and Circumstances of the case and in law, the Hon'ble ITAT is justified in quashing the order of the Pr. CIT passed u/s 263 of the Act holding that the decisions of assessing officer cannot be treated as erroneous and prejudicial to interest of revenue even though the Assessing Officer has not made inquiry which should have been made as envisage by the decision of the Apex Court in the Page 5 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined case of CIT-1, Mumbai Vs Amitabh Bachchan in Civil Appeal No 5009 of 2016?
ix) Whether on the facts and circumstances of the case and in law, in view of decision of the Hon'ble Supreme Court in the case of CIT VS Paville Projects (P.) Ltd reported in (2023) 149 Taxmann.com 115, the order of the Hon'ble ITAT is justified?"
3. Brief facts of the case are that the assessee is a cooperative society duly registered under the Gujarat Cooperative Society Act and is engaged in manufacturing of white crystal sugar from the sugarcane supplied by the cane grower members and selling the sugar and its bye-
products.
4. The assessee filed its return of income on 16.10.2018 for the Assessment Year 2018- 2019 at Rs. Nil and case of the assessee Page 6 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined was selected for scrutiny under CASS for complete scrutiny.
5. Notice under section 143(2) was issued on 23.03.2019 and notices under section 142(1) of the Act were issued on 29.05.2019, 23.10.2019 and 01.12.2020 to the assessee.
6. The assessment was completed under section 143(3) of the Act on 16.11.2019 by accepting the returned income.
7. However Principal Commissioner of Income Tax (PCIT) on perusal of the assessment records, was of the opinion that the Assessing Officer had wrongly allowed the deduction claimed by the assessee under section 80P(2)(d) of the Act amounting to Page 7 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined Rs.2,01,36,071/- which was earned by the assessee in the form of interest from the Surat District Cooperative bank Ltd and hence was not allowable as the activities were not associated with the members of the society. The Assessing Officer had not disallowed the same which resulted into under assessment of Rs.2,01,36,071/- with a potential tax effect of Rs. 72,24,821/-.
8. In view of such facts, learned PCIT by order dated 02.03.2023 set aside the order passed by the Assessing Officer by invoking the provisions of section 263 of the Act and directed the Assessing Officer to pass fresh assessment order.
9. Being aggrieved with the decision of learned PCIT, the assessee preferred an Page 8 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined appeal before the Tribunal wherein the Tribunal vide impugned order dated 10.07.2023 allowed the appeal of the assessee.
10. Being aggrieved by the impugned order, the Revenue has preferred the present appeal.
11. Learned Senior Standing Counsel Mr. Karan Sanghani appearing for the appellant-
Revenue candidly submitted that issue involved in this appeal is already decided by this Court in favourof the assesee in case of Principal Commissioner of Income Tax v. Ashwinkumar Arban Cooperative Society Limited reported in (2024) 168 taxmann. Com 314 (Gujarat) wherein this Court held as under:
Page 9 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined "28. 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.
29. 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 Page 10 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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.
30. 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.
31. The Hon'ble Apex Court in case of Page 11 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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
(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;
(c) "banking company" means any company which transacts the business of banking in India.
Explanation.--Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;"
32. After considering the above interpretation of various provisions and Page 12 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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 co- operative 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 co- operative bank. This question would need not detain us for long as the Kerala High Court in A.P. Varghese had Page 13 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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 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 Page 14 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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 Co- operative 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 Page 15 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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 Co-
operative 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 Page 16 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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 co- operative societies, the whole of such income is eligible for 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 Page 17 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined 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 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."
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33. 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.
34. In view of the foregoing reasons we answer the question in favour of the assessee and against the Revenue. Tax Appeals are being devoid of any merit accordingly dismissed. No order as to costs."
12. In view of the above dictum of law as well as the provisions of the Act which are considered in the said judgment, no question of law much-less any substantial Page 19 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025 NEUTRAL CITATION C/TAXAP/803/2024 ORDER DATED: 24/12/2024 undefined question of law arises from the impugned order of the Tribunal. Tax Appeal being devoid of any merit is accordingly dismissed. No order as to costs.
(BHARGAV D. KARIA, J) (D.N.RAY,J) RAGHUNATH R NAIR Page 20 of 20 Uploaded by RAGHUNATH R NAIR(HC00196) on Fri Jan 10 2025 Downloaded on : Fri Jan 10 22:11:23 IST 2025