PCIT Vs Kutch District Co-Operative Milk Producer Union Ltd (Gujarat High Court)
Summary : The Gujarat High Court upheld the allowance of a ₹5,87,74,816 deduction under Section 80P(2)(d) of the Income Tax Act, 1961, to Kutch District Co-operative Milk Producer Union Ltd. for AY 2020–21. The union, which procures and distributes milk and milk products, filed its return on 13 February 2021 declaring income of ₹1,70,25,430. On 25 September 2022, the Assessing Officer completed the assessment under Section 143(3) read with Section 144B at ₹7,58,00,246 after disallowing the deduction. The CIT(A) dismissed the union’s appeal on 9 January 2025, but the ITAT Rajkot allowed it on 8 May 2025 in ITA No. 114/RJT/2025, following Shri Avadh Nagarik Sahkari Mandali Ltd.
In its Section 260A appeal, the Revenue argued that the Tribunal had overlooked Katlary Karyana Merchant Sahkari Sarafi Mandali Ltd., which the Revenue read as denying the deduction for co-operative bank interest. The union relied on PCIT-1 v. Ashwinkumar Arban Co Operative Society Ltd., in which the Gujarat High Court held that interest from investments with a co-operative bank registered as a co-operative society qualifies under Section 80P(2)(d). That decision explained that the Finance Act, 2015 amendment to Section 194A(3)(v) governs tax deduction at source and leaves the bank’s status as a co-operative society intact. It also distinguished the restriction on a co-operative bank’s own deduction under Section 80P(4) from an investing co-operative society’s claim on the interest it earns.
The High Court treated the issue as settled by Ashwinkumar Arban. It answered both questions of law in favour of the union and against the Revenue and disposed of the appeal, leaving the Tribunal’s relief intact. The discussion of Section 263 appears in the quoted precedent. The present appeal arose from the disallowance in the assessment order.
Cases Discussed
- Kutch District Co-operative Milk Producer Union Ltd. v. Income Tax Department, National e-Assessment Centre, Delhi — ITA No. 114/RJT/2025 (with ITA No. 113/RJT/2025), AY 2020–21, 8 May 2025 (ITAT Rajkot). The order under appeal allowed the union’s deduction by following Avadh Nagarik.
- PCIT-1 v. Ashwinkumar Arban Co Operative Society Ltd. — [2024] 168 taxmann.com 314, R/Tax Appeal No. 538 of 2024 and connected appeals, 24 September 2024 (Gujarat High Court). The High Court followed this decision on interest from investments with a co-operative bank registered as a co-operative society.
- Shri Avadh Nagarik Sahkari Mandali Ltd. v. PCIT-1, Rajkot — ITA No. 126/RJT/2023, AY 2018–19, 31 July 2024 (ITAT Rajkot). The Tribunal followed this decision in allowing the deduction.
- Kerala State Co-operative Agricultural and Rural Development Bank Ltd. v. Assessing Officer — 2023 INSC 830, (2023) 458 ITR 384, 14 September 2023 (Supreme Court of India). The quoted decision examines the scope of Section 80P(4) by reference to the statutory definition of a co-operative bank.
- Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. v. ACIT — [2022] 140 taxmann.com 602, (2022) 215 DTR 125, 4 January 2022 (Gujarat High Court). The Revenue relied on this decision to challenge the allowance. Ashwinkumar Arban discussed it in addressing the distinction between investments with co-operative societies and those with other banks.
- Mavilayi Service Co-operative Bank Ltd. v. CIT — (2021) 431 ITR 1, 12 January 2021 (Supreme Court of India). The quoted Supreme Court reasoning draws on this decision’s interpretation of Section 80P and the scope of the exclusion for co-operative banks.
- Citizen Co-operative Society Ltd. v. ACIT — (2017) 397 ITR 1, 8 August 2017 (Supreme Court of India). Cited in the reproduced passage on the deduction of profits and gains attributable to eligible activities.
- PCIT, Hubballi v. Totagars Co-operative Sale Society — (2017) 395 ITR 611, [2017] 83 taxmann.com 140 (Karnataka High Court). The Revenue cited this authority in Ashwinkumar Arban. The Gujarat High Court declined to read the TDS amendment as changing a co-operative bank’s status as a co-operative society.
- State Bank of India v. CIT — (2016) 389 ITR 578, 25 April 2016 (Gujarat High Court). Discussed in Ashwinkumar Arban for the distinction between investments with a co-operative society and investments with other banks.
- Totgars’ Co-operative Sale Society Ltd. v. ITO — (2010) 322 ITR 283 (Supreme Court of India). Cited by the Revenue in the reproduced precedent. The Supreme Court decision concerned the treatment of interest under Section 80P(2)(a)(i).
- A.P. Varghese v. Kerala State Co-operative Bank Ltd. — AIR 2008 Ker 91 (Kerala High Court). The reproduced passage refers to this ruling when identifying the Kerala State Co-operative Bank as a 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 of India). The reproduced passage cites the decision for the categories of co-operative banks recognised under Section 56 of the Banking Regulation Act, 1949.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Maunil G. Yajnik for the appellants and learned advocate Mr. Manish J. Shah for the respondent.
2. This Tax Appeal is filed by the Revenue under section 260A of the Income Tax Act, 1961 (For short “the Act”) against the judgment and order dated 08.05.2025 passed by the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot (For short “the Tribunal”) in ITA No. 114/RJT/2025 for Assessment Year 2020-2021 raising following substantial questions of law:
“1) Whether in the fact and circumstances of the case as well as in law, the ITAT erred in allowing the appeal of the assessee following its own decision in the case of Shri Avadh Nagarik Sahkari Mandali Ltd. ignoring the decision of the Hon’ble High court of Gujarat, in Katlary Karyana Merchant Sahkari Sarafi Mandali Ltd. (2022) 140 taxmann 602 (Guj) wherein the High court has directly held that interest from cooperative banks is not eligible for deduction u/s. 80P(2)(d), as a cooperative bank is not the same as a cooperative society?
2) Whether in the facts and circumstances of the case as well as in law, the Hon’ble ITAT erred in allowing the appeal of the assessee and deleting the addition made on account of disallowance u/s. 80P(2)(d) of the Act amounting to Rs. 5,87,74,816/-?
3. Brief facts of the case are that the respondent assessee is engaged in the business of procurement and distribution of milk and its products. The respondent assessee e-filed the return of income for the assessment year under consideration on 13.02.2021 declaring a total income of Rs.1,70,25,430/-.
4. The assessment was completed under section 143(3) read with section 144B of the Act on 25.09.2022 determining the total taxable income at Rs. 7,58,00,246/- after making an addition of Rs.5,87,74,816/-.
5. The assessee preferred an appeal against the assessment order before the CIT(Appeals). CIT(Appeals) vide order dated 09.01.2025 dismissed the appeal preferred by the assessee.
6. Being aggrieved, the assessee preferred an appeal before the Tribunal. The Tribunal by impugned judgment and order dated 08.05.2025 allowed the appeal filed by the assessee.
7. Being aggrieved by the impugned judgment, the Revenue is in appeal before this Court.
8. Learned Advocate Mr.Manish Shah submitted that identical issue arose in case of Principal Commissioner of Income Tax-1, Ahmedabad v. Ashwinkumar Arban Co Operative Society Ltd. wherein vide order dated 24.09.2024 passed in Tax Appeal No.538 of 2024 and allied matters, this Court dismissed the tax appeal filed by the Revenue by answering the questions of law in favour of the assessee and against the Revenue 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.”
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.
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.”
9.The Tribunal in facts of the case followed the judgment of Division Bench of the Tribunal in case of Shri Avadh Nagarik Sahkari Mandli Ltd. v. PCIT-1, Rajkot passed in ITA No. 126/RJT/2023 vide order dated 31.07.2024 wherein the issue relating to deduction under section 80P(2)(d) of the Act, in respect of interest received from the Co-operative Society/Co-operative Bank has been adjudicated in favour of the assessee and it was held that the assessee can claim the deduction under section 80P(2)(d) of the Act.
10. In view of above findings arrived at by the Tribunal and considering the above dictum of law, the issue involved in the present tax appeal is no more res integra in view of decision of this Court in case of Ashwinkumar Arban Co Operative Society Ltd.(supra) and therefore, the questions of law are answered in favour of the assessee and against the Revenue.
11. Tax Appeal stands disposed of accordingly.
