Gujarat High Court
The Principal Commissioner Of Income ... vs Rajkot Lodhika Sahakari Kharid Vechan ... on 17 June, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/154/2025 ORDER DATED: 17/06/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 154 of 2025
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THE PRINCIPAL COMMISSIONER OF INCOME TAX 1
Versus
RAJKOT LODHIKA SAHAKARI KHARID VECHAN SANGH LTD.
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Appearance:
KARAN G SANGHANI(7945) for the Appellant(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
Date : 17/06/2025
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE PRANAV TRIVEDI)
1. Heard learned advocate Mr. Karan Sanghani for the appellant.
2. This Tax Appeal is filed under section 260A of the Income Tax Act,1961 [for short 'the Act'] by the appellant-Revenue proposing following substantial questions of law arising out of the Judgment and Order dated 05.09.2024 passed by the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot [for short 'the Tribunal'] in ITA No. 131/RJT/2023 for Page 1 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined assessment Year 2018-19:
"[A] Whether in the facts of the case as well as law, the Income Tax Appellate Tribunal was justified in quashing the order u/s 263 of the Income Tax Act of Ld. PCIT especially when the Assessment Order passed by the Assessing Officer is prejudicial and erroneous to the interest of revenue?"
[B] "Whether on the facts of the case as well as law, the Income Tax Appellate Tribunal was justified in quashing the order u/s 263 of the Income Tax Act of Ld. PCIT without appreciating that section 80P(2)(d) does not contain the work "Bank" and its scope is limited to only "Cooperative Societies"?"
[C] "Whether on the facts of the case as well as law, the Income Tax Appellate Tribunal was justified in quashing the order u/s 263 of the Page 2 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined Income Tax Act of Ld. PCIT when Hon'ble Jurisdictional High Court in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. vs. Assistant Commissioner of Income-tax, [2022] 140 taxmann.com 602 (Gujarat) had held that the interest derived from surplus funds invested by assessee in nature of FDRs in Co- operative Banks and Nationalized Bank, other than Co-operative Societies will certainly not fall in category to be entitled to claim deductions under section 80P(2)(a)(i) and section 80P(2)(d) of the I.T. Act?"
3. The brief facts leading to the filing of the present Appeal are as under:
3.1 The respondent assessee is a registered Cooperative Society and engaged in business of supply of fertilizer, seeds, equipments, etc. to its members.
Assessee filed its return of income for Page 3 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined Assessment Year 2018-19 on 30.7.2018 declaring total income at Rs. NIL claiming deduction under Section 80P of the Income Tax of Rs.14,62,68,953/- The return was process under Section 143(1)(a) of the Act by CPC on 8.2.2019 determining taxable income at Rs.7,00,71,870/-.
3.2. Thereafter, the case was selected for limited scrutiny by CASS to verify the issues namely (i) Expenses incurred for earning exempt income (ii) Deduction from total income under chapter VIA and (iii) Investment/ Advances/ Loan of the Society.
The Assessing Officer passed order under Section 143(3) read with Section 143(3A) and 143(3B) of the Act on 2.2.2021, inter alia, assessing total income of the assessee at Rs.7,72,10,305/- by making Page 4 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined disallowance of deduction of Rs.
71,38,435/-claimed under Section 80P of the Act on interest received from PGVCL and interest received on refund.
3.3 Subsequent to the Assessment order, Internal Audit Party raised an audit objection that Assessing Officer has incorrectly allowed deduction under Section 80P(2)(d) of the Act on bank interest and dividend received from Rajkot District Co-operative Bank.
Therefore, the remedial action under Section 263 of the Act was proposed.
Subsequent thereto, Principal Commissioner of Income Tax-1, Rajkot passed order under Section 263 of the Act on 24.3.2023 holding that the Assessment Officer's order was erroneous and prejudicial, as Page 5 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined Section 80P(2)(d) of the Act allows deductions only for interest earned from other cooperative societies and not cooperative banks.
3.4 Being aggrieved by the order under Section 263 of the Act dated 24.3.2023, the assessee preferred an appeal before the Tribunal. The Tribunal allowed the appeal filed by the assessee and quashed the order under Section 263 of the Act by relying upon the decision of Coordinate Bench of the Appellate Tribunal in the case of Shree Avadh Nagarik Sahkari Mandali Ltd. This decision of the Tribunal has led to the filing of the present Tax Appeal by the Revenue.
4. It was pointed out by learned advocate Mr. Karan Sanghani for the appellant that the main Page 6 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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., in Tax Appeal No. 221 of 2022.
It was held as under:
"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 Page 7 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 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 Page 8 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 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 Page 9 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 the Case laws, the Hon'ble Apex Court has analyzed the provisions as Page 10 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 categorically stated Page 11 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 Page 12 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined profits and gains of business that 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".Page 13 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025
NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined
iii) Thirdly, the gross total income must include income that is referred 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 Page 14 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 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 Page 15 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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 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-
Page 16 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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."
5. 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) 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 Page 17 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025 NEUTRAL CITATION C/TAXAP/154/2025 ORDER DATED: 17/06/2025 undefined 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.
6. In view of the foregoing reasons, we answer the question in favour of the assessee and against the Revenue. Tax Appeal being devoid of any merit is accordingly dismissed.
No order as to costs.
(BHARGAV D. KARIA, J) (PRANAV TRIVEDI,J) SAJ GEORGE Page 18 of 18 Uploaded by SAJ GEORGE(HC01069) on Thu Jun 26 2025 Downloaded on : Sat Jun 28 00:45:04 IST 2025