PCIT Vs Gujarat State Co-Op. Housing Finance Corporation Ltd. (Gujarat High Court)
Summary: The Gujarat High Court dismissed the Revenue’s appeal against the Ahmedabad ITAT’s order dated 5 December 2024 in ITA No. 925/Ahd/2023 for AY 2017–18. The dispute concerned the assessee’s entitlement to deduction under section 80P(2)(d) on interest earned from investments with co-operative banks. The assessee had filed its return on 19 August 2017 declaring nil total income after claiming Chapter VI-A deductions of ₹10,78,90,829. The Assessing Officer disallowed the section 80P(2)(d) claim by relying on section 80P(4). The CIT(A) allowed the assessee’s appeal, and the Tribunal dismissed the Revenue’s appeal by following PCIT v. Ashwinkumar Arban Co-operative Society Ltd., [2024] 168 taxmann.com 314 (Guj.).
The High Court followed its settled position that a co-operative bank is itself a co-operative society for the investing society’s claim under section 80P(2)(d). The reasoning reproduced in the order distinguished the exclusion of a co-operative bank’s own deduction under section 80P(4) from another co-operative society’s entitlement to deduction on interest received from that bank. It also explained that the amendment to section 194A(3)(v) concerned tax deduction at source and did not remove co-operative banks from the definition of co-operative societies. The reproduced authorities further discussed the statutory meaning of a co-operative bank and the relevance of banking licences under the Banking Regulation Act, 1949.
The Court referred to its decisions in Ashwinkumar Arban Co-operative Society Ltd. and Principal Commissioner of Income Tax v. Shree Madhi Vibhag Khand Udyog Sahakari Mandli Ltd., [2025] 171 taxmann.com 22 (Guj.). Applying those authorities, it held that no question of law, much less any substantial question of law, arose from the Tribunal’s order. The Revenue’s tax appeal was accordingly dismissed as devoid of merit.
Cases Discussed
- Principal Commissioner of Income Tax v. Shree Madhi Vibhag Khand Udyog Sahakari Mandli Ltd., [2025] 171 taxmann.com 22 (Gujarat High Court) — Followed as an earlier decision dismissing the Revenue’s appeal on the same deduction issue.
- PCIT v. Ashwinkumar Arban Co-operative Society Ltd., [2024] 168 taxmann.com 314 (Gujarat High Court) — Followed; the reproduced reasoning recognises deduction for the investing co-operative society despite section 80P(4).
- Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB v. The Assessing Officer, Trivandrum and Others, Civil Appeal No. 10069 of 2016, decided on 14 September 2023 (Supreme Court) — Discussed in the reproduced reasoning on the meaning of a co-operative bank and the scope of section 80P(4).
- Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. v. ACIT, [2022] 140 taxmann.com 602 (Gujarat High Court) — Referred to in the reproduced Gujarat High Court reasoning concerning deduction on interest from co-operative bank investments.
- Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, Calicut, (2021) 7 SCC 90 (Supreme Court) — Discussed in the reproduced Supreme Court reasoning on the beneficial scope of section 80P and the limited exclusion under section 80P(4).
- Citizen Co-operative Society Ltd. v. Commissioner of Income Tax (Supreme Court), cited in the reproduced Kerala State Co-operative Agricultural and Rural Development Bank judgment — Referred to in the reproduced discussion of profits attributable to qualifying activities under section 80P.
- Principal Commissioner of Income Tax v. Totagars Co-operative Sale Society, ITA No. 100066/2016 and connected cases, decided on 16 June 2017 (Karnataka High Court) — The reproduced Gujarat High Court reasoning declines to accept its interpretation of the section 194A amendment and section 80P(4).
- State Bank of India v. Commissioner of Income Tax, (2016) 389 ITR 578 (Gujarat High Court) — Referred to in the reproduced reasoning concerning section 80P(2)(d).
- Totgar’s Co-operative Sale Society Ltd. v. Income Tax Officer, (2010) 322 ITR 283; (2010) 3 SCC 223 (Supreme Court) — Mentioned in the reproduced passage addressing the Revenue’s reliance on the Totgars authorities.
- A. P. Varghese v. The Kerala State Co-operative Bank Ltd., AIR 2008 Ker 91 (Kerala High Court) — Cited within the reproduced Supreme Court passage on the status of the Kerala State Co-operative Bank under the NABARD Act.
- Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. v. Maharashtra State Co-operative Bank Ltd., (2003) 11 SCC 66 (Supreme Court) — Discussed within the reproduced passage on the statutory categories of co-operative banks and banking licences.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1.Heard learned Senior Standing Counsel Mr. Dev D. Patel for the appellant- Revenue.
2.This appeal is filed under section 260 of the Income Tax Act, 1961 [for short ‘the Act’] by the appellant-Revenue arising out of the order dated 05.12.2024 passed by the Income Tax Appellate Tribunal, ‘D’ Bench, Ahmedabad [‘the Tribunal’ for short] in ITA No. 925/Ahd/2023 for A.Y. 2017-18 proposing following substantial question of law:
“Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in deleting the disallowance made u/s. 80P(2)(d) of the Income Tax Act, 1961 without duly considering the findings of the Assessing Officer that the interest income earned by the assessee was from investment in co-operative banks and Section 80P(2)(d) of the Act allows deduction ‘in respect of any income by way of interest or dividends by the co-operative society from its investment with any other co- operative society”
3.Brief facts of the case are as under:
3.1 The respondent-assessee filed return of income for the Assessment Year 2017-18 on 19.08.2017 declaring total income of Rs. Nil after claiming the deduction of Rs. 10,78,90,829/-under Chapter VI-A.
3.2 The Assessing Officer, after considering the reply of the assessee, passed the Assessment Order dated 28.12.2019 and disallowed the deduction under section 80P(2)(d) of the Act claimed by the assessee on the ground that the same would not be applicable in relation to any Co-operative Bank, Primary Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank as per section 80P(4) of the Act.
3.3 Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(Appeals) who, by order dated 26.09.2023, allowed the appeal of the assessee.
3.4 Being aggrieved by the order of the CIT(Appeals), the Revenue preferred an appeal before the Tribunal. The Tribunal, by the impugned common order for Assessment Years 2013-14, 2014-15 and 2017-18, dismissed the appeals of the Revenue by following the decision of this Court in case of PCIT vs. Ashwinkumar Arban Co-operative Society Ltd reported in [2024] 168 Taxmann.com 314 (Guj.).
4. This Court also following the aforesaid decision in case of Ashwinkumar Arban Co- operative Society Ltd (supra) has dismissed appeal of the Revenue in case of Principal Commissioner of Income Tax vs. Shree Madhi Vibhag Khand Udyog Sahakari Mandli Ltd reported in [2025] 171 Taxmann.com 22 (Guj.).
5. After considering the facts of the case in Shree Madhi Vibhag Khand Udyog Sahakari Mandli Ltd (supra) and Ashwinkumar Arban Co-operative Society Ltd (supra), this Court also held that no question of law would arise from the impugned orders of the Tribunal. The relevant portion of the decision in case of Ashwinkumar Arban Co- operative Society Ltd (supra) which covers the issue in favour of the assessee reads as under:
“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 favour of the assessee 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:
“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 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 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 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 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 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 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 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 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.”
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.”
6.In view of the above dictum of law as well as the provisions of the Act which are considered in the aforesaid decision, no question of law much less any substantial question of law arises from the impugned order of the Tribunal.
The Tax appeal, being devoid of any merit, is accordingly dismissed.
