2025 (7) TMI 1951 - AT - Income Tax

Co-operative society's interest from co-operative bank deposits and NPA provision deduction claims upheld; s.263 revision quashed

The dominant issue was whether revision under s.263 could be sustained on the ground that (i) interest earned by a co-operative society on deposits with a ... Revision u/s 263 - non eligibility of deduction u/s 80P on interest on the deposits made by a co-operative society with the co-operative Bank and NPA provision is not allowable u/s 37(1) - HELD THAT:- With regard to Interest earned from Cooperative banks is not allowable u/s 80P(2)(a)(i) of the IT Act, we find that under identical facts a coordinate bench of this Tribunal in the case of Swami Vivekanand Nagari Sahakari Patpedhi Maryadit [2025 (6) TMI 2087 - ITAT PUNE] held that respondent/Assessee cannot be said to be Co-operative Bank/Bank and, therefore, Section 80(P)(4)shall not be applicable and that the respondent/Assessee shall be entitled to exemption/benefit under section 80(P)(2) of the Income-tax Act. NPA provision is not allowable u/s 37(1) - We find that under similar facts in the case of Shri Dhokeshwar Gramin Bigarsheti Sahakari Patsanstha Maryadit [2024 (8) TMI 1661 - ITAT PUNE] has allowed the appeal of the assessee. Thus, we quash the proceedings u/s 263 of the IT Act and allow assessee appeal. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether revision under section 263 could be sustained on the premise that interest earned by a primary credit co-operative society from deposits/investments with co-operative banks is not eligible for deduction under section 80P, and should instead be taxed as 'Income from other sources'. (ii) Whether revision under section 263 could be sustained on the premise that provision made towards outstanding interest classified as NPA is not allowable under section 37(1), warranting disallowance; and whether such a direction would be 'prejudicial to the interests of the Revenue' when the resulting enhanced business income would remain deductible under section 80P. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Section 263 revision based on denial of section 80P deduction on interest from co-operative banks Legal framework (as addressed by the Court): The Tribunal examined the revisional requirement that the assessment order must be both 'erroneous' and 'prejudicial to the interests of the Revenue' for action under section 263. The controversy was framed around eligibility of interest income from co-operative banks for deduction under section 80P(2)(a)(i)/80P(2)(d), and the revisional authority's view that section 80P(4) disentitled such deduction. Interpretation and reasoning: The Tribunal held that, on the same issue and under identical facts, a coordinate bench had already concluded that proceedings under section 263 were not maintainable where the assessee claimed deduction under section 80P on interest from co-operative banks. The Tribunal treated that view as governing and applied it to the present facts, noting that the coordinate bench had relied on binding higher-court resolution of the section 80P controversy for co-operative credit societies. In consequence, the Tribunal accepted that the revisional premise (that such interest was outside section 80P and taxable under section 56) could not justify revision. Conclusion: The Tribunal quashed the revision initiated under section 263 on this ground and allowed the assessee's challenge relating to deduction under section 80P on interest earned from investments/deposits with co-operative banks. Issue (ii): Section 263 revision based on proposed disallowance of NPA provision under section 37(1) and 'prejudice' requirement Legal framework (as addressed by the Court): The Tribunal evaluated whether the revisional direction to verify and disallow the NPA-related provision under section 37(1) satisfied the twin conditions of section 263, particularly the requirement that the assessment order be 'prejudicial to the interests of the Revenue'. The Tribunal considered the consequence of any disallowance on the assessee's deductible profits under section 80P(2)(a)(i) and relied on the approach adopted in a prior coordinate bench decision applying the principle that Chapter VI-A deduction is to be allowed on enhanced eligible profits. Interpretation and reasoning: The Tribunal followed the coordinate bench reasoning that even if the NPA provision were disallowed, the effect would be to increase the assessee's business income; and since such increased business income remained eligible for deduction under section 80P(2)(a)(i), directing revision for this adjustment would result only in an academic/futile exercise. On that reasoning, the Tribunal held that the revisional direction did not demonstrate the necessary prejudice to the Revenue, because the net taxable income would not be increased in a manner beneficial to the Revenue once the corresponding deduction under section 80P is allowed on the enhanced profits. Conclusion: The Tribunal quashed the section 263 revision on the NPA-provision issue as well, holding that the revisional direction would not satisfy the 'prejudicial to the interests of the Revenue' requirement in the circumstances considered, and allowed the assessee's ground on this issue. Overall result: Since both foundations invoked for revision failed on the Tribunal's application of binding/coordinate bench determinations and the absence of revenue prejudice on the NPA-provision aspect, the Tribunal quashed the section 263 order in full and allowed the appeal.