The court ruled that deductions under Section 80P(2)(d) of the Income Tax Act are applicable to interest earned from cooperative banks recognized as cooperative societies, negating the Principal Commissioner's revision order under Section 263.

JUDGMENT :

PRANAV TRIVEDI, J.

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 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 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 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 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 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 Coordi