Section 80P(2)(d) Deduction on Cooperative Bank Interest Allowed: Gujarat HC

PCIT Vs Ashwinkumar Arban Co Operative Society Ltd. (Gujarat High Court)

The Gujarat High Court considered Revenue appeals challenging the ITAT’s decision quashing revision proceedings initiated under Section 263 of the Income-tax Act, 1961 in relation to deduction claimed under Section 80P(2)(d) on interest earned by cooperative societies from investments made with cooperative banks. The Revenue contended that, in view of Section 80P(4), cooperative banks were excluded from the benefit of Section 80P and, therefore, such interest was not eligible for deduction. The assessees argued that Section 80P(4) applies only to cooperative banks claiming deduction for themselves and does not disentitle a cooperative society from claiming deduction under Section 80P(2)(d) on interest received from investments with a cooperative bank, which is itself a cooperative society. The High Court observed that the controversy was no longer res integra in light of earlier decisions of the Court and the Supreme Court. It held that the exclusion contained in Section 80P(4) applies only to cooperative banks claiming deduction under Section 80P and does not affect the entitlement of a cooperative society to deduction under Section 80P(2)(d). The Court further held that a cooperative bank being a cooperative society does not cease to be so for the purposes of Section 80P(2)(d), and in the absence of any amendment to that provision, deduction cannot be denied. Consequently, the Court held that the PCIT was not justified in invoking revisional jurisdiction under Section 263, as the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The ITAT had rightly set aside the revision order, the substantial questions of law were answered in favour of the assessees, and the Revenue’s tax appeals were dismissed.

Recent Cases Discussed

• Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd., [2022] 140 taxmann.com 602 (Guj.).
• Principal Commissioner of Income Tax, Hubballi vs. Totgars Cooperative Sale Society, 395 ITR 611 (Karnataka).
• Principal Commissioner of Income Tax Surat-2 v. Shreeji Prints (P) Ltd., [2021] 130 taxmann.com 294 (SC).
• Commissioner of Income Tax vs. M/s. Paville Projects Pvt. Ltd., CA No. 6126 of 2021 (SC).

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. 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 Judgement and Order dated 14.12.2023 passed by the Income Tax Appellate Tribunal, Surat [for short ‘the Tribunal’] in ITA No. 653/SRT/2023 for assessment Year 2018-19:

“(i) Whether on facts and circumstances of the case and in law, the Hon’ble Tribunal has erred in quashing the order passed u/s. 263 of the Act by the PCIT without appreciating that the interest received by the assessee co-perative society amounting to Rs. 8,40,577/- from the Surat District Co-operative Bank Ltd is not eligible for deduction u/s. 80P(2)(d) of the Act as the said bank is not a cooperative society as laid down u/s. 80P(4) of the Act?

(ii) Whether on facts and circumstances of the case and in law, the Hon’ble Tribunal had erred in allowing the appeal of the assessee by overlooking the fact that the Hon’ble High Court of Karnataka in the case of Totgars Cooperative Sale Society (2017) 395 ITR 611 has held that the intention of legislature is clear that Co-operative banks are not specie of genus cooperative society, which would entitle to exemption or deduction under the Special Provisions of chapter VI­A 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. 2015­16 in R/SCA No. 20585/2019?

iii. Whether on facts and circumstances of the case and in law, the learned Tribunal has erred in law in relying upon the decision of  Hon’ble Jurisdictional High Court in the case of Surat Vankar Sahkari Sangh Ltd. vs. ACIT [2016] 72 taxamann.com 169 (Guj) which pertained to A.Y. 1991-92 to 1994-95 ignoring that section 80P(4) of the Act was inserted in the Finance Act 2006 w.e.f. 01.04.2007?

iv. Whether on the facts and circumstances of the case and in law, the order of the Hon’ble ITAT is not perverse in quashing the order passed u/s. 263 of the Act by the PCIT only relying upon the decision of Hon’ble Gujarat High Court in the case of Surat Vankar Sahkari Sangh Ltd vs. ACIT (2016) 72 taxmann.com 169 (Guj) and has not appreciated that the issue decided by the Hon’ble Gujarat High Court in this case was whether assessee cooperative societywas eligible for deduction u/s. 80P(2)(d) in respect of gross interest received from cooperative bank without adjusting interest paid to said bank and issue “whether interest earned from Cooperative bank was allowable u/s. 80P(2)(d) of the Act” was not before the Hon’ble High Court.?”

2. When this mater was heard on 02.07.2024, it was pointed out that Tax Appeal Nos. 419/2023 and Tax Appeal No. 221/2022 raising similar questions are also pending for adjudication and these matters are admitted by this Court.

3. It was also pointed out that the issue raised by the Revenue on applicability of section 80P(2)(d) of the Act is recurring issue and therefore, all the three appeals were ordered to be listed together.

4. Accordingly, today all the three appeals are listed for hearing.

5. Tax Appeal No. 221/2022 is admitted by order dated 25.04.2022 on the following substantial questions of law:

“(i) Whether on the 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 neither erroneous nor prejudicial to the interest of Revenue 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 made in any bank not being cooperative society, is not deductible under section 80P(2)(d) of the Act.

(ii) Whether on facts  and circumstances of the case in law, the learned Tribunal had erred in holding that the order of assessment passed by the AO should not be interfered with only because another view is possible without appreciating that the view taken by the AO was unsustainable in law in light of the provisions of section 80P(4) of the Act and reflects non-application of mind by the AO.

(iii) Whether on facts and circumstances of the case and in law, the Hon’ble Tribunal had 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 611, has held 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 findings 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.”

6. Tax Appeal No. 419/2023 is admitted on the following questions of law:

“(i)Whether in the facts of the case as well as law, the Inocme Tax Appellate Tribunal was justified in allowing the appeal of the assessee against the order u/s. 263 of the Income Tax act of Ld. PCIT contrary to Explanation 2 of section 263 of the Act?

ii. Whether in the facts of the case as well as law, the Income Tax Appellate Tribunal was justified in allowing the appeal of the assessee against the order u/s. 263 of the Income Tax Act of Ld. PCIT?

iii. Whether in the facts of the case as well as law, the Income Tax Appellate was justified in allowing the appeal of the assessee against the order u/s. 263 of the Income tax Act of Ld. PCIT contrary to the judgement of the Hon‘ble Supreme Court in the case of Principal Commissioner of Income tax Surat 2 v. Shreeji Prints (P)Ltd [2021] 130 taxmann.com 294 (SC) and also in the case of the Commissioner of Income Tax vs. M/s. Paville Projects Pvt Ltd. (CA No. 6126 of 2021 (SC)?”

7. With the consent of the learned advocates for the respective parties, these Tax Appeals are taken up for hearing and are being disposed of by this Common order as the issue with regard to interpretation and applicability of section 80P(2)(d) is involved in these appeals.

8. The Tribunal has passed the impugned orders in all the three Tax Appeals by holding that the action of Principal Commissioner of Income Tax [‘PCIT’ for short] invoking section 263 of the Act directing the Assessing Officer to tax the interest earned by the respondent-assessee on the investment made with the Co­operative Bank to be disallowed is not legal and Tribunal has allowed the appeals of the assessee holding that the action of passing the order by the Assessing Officer was not erroneous and prejudicial to the interest of the Revenue by allowing the deduction on interest earned from Cooperative Bank under section 80P(2)(d) of the Act.

9. As the main 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 concerned, the facts of each case are not narrated in detail.

10. Learned Senior Standing Counsel Mr. Karan Sanghani appearing for the appellant-Revenue submitted that as per section 80P(4) of the Act, the provisions of section 80P are not applicable in relation to any Cooperative Bank other than a Primary Agriculture Credit Society or a Primary Cooperative Agricultural and Rural Development Bank. Reliance was also placed on the explanation given below section 80P(4)of the Act which defines Cooperative Bank to mean that “Cooperative Bank” and “Primary Agriculture Credit Societies” shall have the same meanings respectively assigned to them in Part V of the Banking Regulation Act,1949.

11. It was therefore submitted that as the respondent-assessee has invested surplus funds with the Cooperative Bank, the interest on the same would not be liable for deduction under section 80P(2)(d) of the Act.

12. It was pointed out that sub-section (4) of section 80P of the Act was introduced w.e.f. 1^st April,2007 and reliance was placed on the memorandum explaining the amendment to submit that withdrawal of the tax benefits available to the Cooperative Bank is based upon the logic that the Cooperative Banks are functioning at par with the commercial banks which do not enjoy any tax benefit. It was therefore submitted that the provisions of section 80P of the Act therefore are not made applicable in relation to any Cooperative bank other than Primary Agriculture Credit Societyor Primary Cooperative Agricultural and Rural Development Bank. It was pointed out that new sub-clause (vii-a) to section 2 of the Act was also inserted to provide that the profit and gains of any business of banking (including providing credit facility) carried out by Cooperative Society with its member shall be included in definition of income. It was therefore submitted that when the income earned by the cooperative bank is not entitled to the exemption or deduction under the provisions of the Act, the interest income earned by the respondent-Society from the investment made of the surplus funds, would also be not entitled to the deduction under section 80P(2)(d) which does not include the Cooperative Bank.

13. It was further submitted that the Hon’ble Supreme Court in case of Totgars’ Cooperative Sale Society Ltd Vs Income Tax Officer, Karnataka reported in 322 ITR 283 (S.C) has held that in the facts of the case which are similar to the facts of the present case where the Cooperative Society had surplus funds invested in short term deposits with the banks and in Government Securities and on such investments, interests accrued to the assessee., and as the Assessee provided credit facilities to its members and also marketed agricultural produce of its members, the substantial question which was considered by the Hon’ble Apex Court was that whether such interest income would qualify for deduction as business income under section 80P(2)(a)(i) of the Act or not and in that context, the Hon’ble Apex Court held that such income would not be considered as an exempt income under section 80P(2)(a)(i) of the Act as the interest income would come in a category of income from other sources and such interest income would be taxable under section 52 of the Act. It was therefore, submitted that in view of the decision of the Hon’ble Supreme Court when the income is taxable under section 56 of the Act and in view of the provision of section 80P(4) of the Act, the respondent-assessee is not entitled to the deduction under section 80P(2)(d) of the Act and the PCIT has rightly invoked the revisional powers under section 263 of the Act as the Assessing Officer has allowed deduction of the interest earned by the respondent-assessee under section 80P(2) (d) of the Act which is erroneous and prejudicial to the interest of Revenue.

14. Reliance was also placed by decision of this Court in case of State Bank of India vs. Commissioner of Income Tax reported in 389 ITR 578 (Guj.) wherein, Division Bench of this Court while considering the issue as to the taxability of the interest income on the deposit placed with the State Bank of India by the Cooperative Bank would be exempt under section 80P(2) (a)(i) of the Act or not and in such facts, this Court followed the decision of the Totgars’ Cooperative Sale Society Ltd. (supra) and it is held that that interest earned from the investment made in any bank not being a Cooperative society is not deductible under section 80P(2)(d) of the Act. It was further submitted that this Court also has considered the provision of section 71 of the Cooperative Societies Act,1961 which permits society to invest or deposit its fund in the State Bank of India and this Court has come to the conclusion so far as the provisions of the Income Tax Act are concerned under section 80P(2)(d) thereof it is only the income by way of interest or dividend derived by the cooperative society from its investment with any other society which is required to be deducted while computing the total income of the assessee. It was therefore submitted that when the respondent-assessee has earned interest income from the surplus funds invested with the Cooperative Bank, the same would not be entitled to deduction under section 80P(2)(d) of the Act.

15. Learned advocate Mr. Sanghani heavily relied upon the decision of the Karnataka High Court in case of Principal Commissioner of Income tax, Hubballi vs. Totgars Cooperative Sale Society reported in 395 ITR 611 (Karnataka) wherein, similar issue as arising in this Tax Appeal was considered by the Karnataka High Court wherein it was held that the interest income earned on the investment of surplus funds invested with the cooperative bank would not be entitled to the deduction under section 80P(2)(d) of the Act as the business run by the Cooperative Bank is excluded from the beneficial provision of the exemption deduction under section 80P(2)(d) of the Act.

16. It was therefore submitted that the provision of section 80P(4) of the Act excludes the Cooperative Bank and there is no amendment in section 82P(2)(d) of the Act which would be sufficient to deny the claim of the respondent-assessee for deduction under the said section as the only exception is that of a Primary Agriculture Society and as respondent-assessee has invested the fund with a Cooperative Bank which is not Primary Agriculture Society the respondent-assessee is not entitled to the deduction under section 80P(2)(d) of the Act.

17. Learned advocate Mr. Sanghani also referred to and relied upon the decision of the Division Bench of this Court in case of Katlary Raiyana Merchant Sahkari Sarafi Mandali Ltd vs. Assistant Commissioner of Income Tax reported in [2022] 140 taxmann.com 602 (Guj) wherein this Court has considered the issue of applicability of section 80P(2)(a)(i) of the Act to the income earned by the assessee which was providing the credit facilities to its members and the assessee was claiming the deduction under section 80P(2)(d) of the Act from the interest received on the FDR from the Cooperative and Nationalized Bank which was inadmissible under section 80P of the Act.

18. It was submitted that this Court while considering the applicability of sections 80P(2)(a)(i) and 80P(2)(d) has also held that the interest income earned by the assessee has rightly been considered taxable and not entitled to the deduction under section 80P(2)(d) as the investment was made in nature of FDR other than Cooperative Societies  i.e.  otherCooperative Banks and Nationalized Bank. It was therefore submitted that the decision of the Katlary Raiyana Merchant Sahkari Sarafi Mandali Ltd (supra) was further modified by order dated 26.04.2024 wherein, in para 19, it was the words “other cooperative Banks” after the words other than Cooperative Bank” are modified to be read as “other banks”.

19. Learned advocate Mr. Sanghani referred and relied upon the decision of the Hon’ble Supreme Court in case of Secundrabad Club etc. v. CIT reported in 457 ITR 263 to submit that the concept of mutuality is ruptured in the facts of the case as held by the Hon’ble Supreme Court. It was submitted that the essential condition of mutuality i.e. identity between the contributor and participators has come to an end when the respondent-assessee has invested the funds with the Cooperative Bank as the relationship would be of a commercial relationship such as that between a customer and a Bank where a fixed deposit is made by the customer for the purpose of earning an interest income. It was therefore submitted that the respondent-assessee having interest earned on the deposited surplus funds with the Cooperative bank would not be entitled to the deduction under section 80P(2)(d) of the Act as the respondent-assessee has lost its control over such funds and interest generated on Fixed Deposit or investment made is a commercial activity thereby permitting the bank to utilize the fixed deposit amount for its banking business and derive profit on the said banking business by way of lending amount for a higher rate of interest while paying lower rate of interest on the fixed deposit made by the respondent-assessee.

20. It was therefore  submitted that identicality between the contributors to the common fund and participators in it which is a sine qua non for the application of principle of mutuality has got ruptured as held by the Hon’ble Supreme Court. It was therefore submitted that in the facts of the case, PCIT has rightly invoked the revisional power for directing the Assessing Officer to disallow the deduction claimed by the assesee under section 80P(2)(d) of the Act and the Tribunal has committed an error in reversing the findings of the PCIT for giving such direction relying upon decision of this Court.

21. On the other hand, learned Senior Advocate Mr. Tushar Hemani for the respondent-assessee submitted that the respondent-assessee has claimed the deduction of the interest earned on the investment made by it in view of the provisions of section 80P(2)(d) of the Act which provides that any income earned on the investment made by one cooperative society with other Cooperative Societies would be entitled to deduction of such income. It was submitted that the issue is no more res-integra in view of the decision of the Hon’ble Supreme Court in case of Kerala State Cooperative Agricultural and Rural Development Bank Ltd vs. Assessing Officer reported in 458 ITR 384 wherein, the Hon’ble Supreme Court after considering the various provisions of the Banking Regulation Act and the National Bank for Agriculture and Rural Development Act, 1981 (“NABARD ACT, 1981”, for short) has held that looking from any angle, a cooperative society which is not a State Cooperative Bank within the meaning of the NABARD Act, 1981 would not be cooperative bank within the meaning of section 56 of the Banking Regulation Act. It was further pointed out that the Hon’ble Supreme Court after considering the definition of section 86 of the Banking Regulation Act, 1949 has held that the income earned would be entitled to deduction/exemption under section 80P of the Act and the same could not be denied invoking section 80P(4) of the Act.

22. Reliance was also placed on the decision of this Court in case of State Bank of India (supra) as well as in case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (supra) as the same was subsequently modified to exclude the other cooperative banks from non-applicability of section 80P (2)(d) of the Act. It was therefore submitted that as the respondent-assessee has invested its surplus fund with the cooperative society which is carrying out the banking activity and is a cooperative bank would not dis-entitle the respondent-assessee from claiming deduction under section 80P(2)(d) of the Act. It was submitted that the provisions of section 80P(2)(a)(i) and section 80P(2)(d) are to be read together as section 80P applies to the cooperative societies whose entire income is entitled to deduction.

23. It was further submitted that the respondent-assessee has claimed the deduction under section 80P(2)(d) as per the provisions of the Act and reliance placed by the on behalf of the Revenue on section 80P(4) of the Act would not be applicable in the facts of the case as the respondent-assessee is not a cooperative bank. It was pointed out that provision of section 80P(4) of the Act would be applicable when the cooperative bank claims deduction under section 80P of the Act as the same is excluded from the purview of section 80P by virtue of insertion of sub-section (4) of section 80P of the Act w.e.f.. 01.04.2007.

24. It was further submitted that the respondent-assessee is also a member of the cooperative society which is a cooperative bank doing business as per the provisions of the Banking Regulation Act with its members only and therefore, the contention raised on behalf of the revenue that the principle of mutuality has ruptured would not arise in the facts of the case.

25. Learned advocate S.N. Divetia appearing for one of the respondent-assessee has adopted the arguments made by learned Senior Advocate Mr. Hemani and further explained in detail the applicability of section 80P of the Act to the cooperative society for granting the deduction. It was submitted that the provision of section 80P(2) are in four parts i.e. sub-clause (a) to (c), clause (d) and clause (e). It was submitted that clauses (a) to (c) are applicable to the income earned by the cooperative society in relation to the nature of activity carried out by it whereas, the sub-clause refers to any income which is earned from the investment made by the cooperative society with another cooperative society whereas, the clause of section 80P(2) of the Act refers to the rental income earned by the cooperative society by letting out the godown for the agriculture purpose to any person. It was therefore submitted that so far as clauses (d) and (e) of section 80P(2) of the Act are concerned, the same are directly related to the nature of income as provided in the said clauses.

26. It was further submitted that the applicability of section 80P(4) of the Act would arise only in case of cooperative bank as the such bank is liable to pay tax without having any deduction under section 80P of the Act. It was submitted that the basis for insertion of section 80P(4) in the Act w.e.f. 01.04.2007 is explained in the memorandum to the effect that the activities carried out by the cooperative bank are at par with the other commercial bank and therefore, the benefit of granting exemption under section 80P of the Act was withdrawn by the legislature.

27. It was therefore submitted that when the respondent-assessee has earned interest on the investment made with the cooperative society which was carrying out the banking business, the deduction under section 80P 2(d) of the Act cannot be denied.

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 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

a. “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;

b. “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 co­operative bank, central co-operative bank and primary co-operative bank which are covered under Section 56 (cci) read with (ccvii) read with the provisions Thus, it which are require a 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 co­operative 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 Co­operative 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 eligibilityfor  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.

v. 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 beregistered 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 co­operative 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 sub­section (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.

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.