Cooperative society's interest income from bank deposits qualifies for section 80P deduction despite revenue challenge

The ITAT PUNE-AT allowed the assessee's appeal against the PCIT's revision order u/s 263 regarding deduction u/s 80P on interest income. The PCIT contended that the AO erroneously allowed the deduction without proper inquiry into whether the interest income qualified as business income, and argued that cooperative banks cannot be treated as cooperative societies for s.80P(2)(d) purposes. The Tribunal relied on the coordinate bench decision in Talegaon Nagari Sahakari Patsanstha Limited, which held that interest income earned by cooperative societies on deposits with cooperative and scheduled banks qualifies for deduction under s.80P(2)(a)(i) and 80P(2)(d). The Tribunal found that while the AO's order may be prejudicial to revenue, it was not erroneous since the AO took a plausible view after considering the assessee's reply. Since both twin conditions for s.263 jurisdiction were not fulfilled, the PCIT's revision order was set aside.

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ISSUES:

• Whether the Assessing Officer's order allowing deduction under section 80P(2)(a) of the Income Tax Act, 1961 without specific inquiry into whether the interest income earned is from core business or residual income taxable under 'Income from Other Sources' is erroneous and prejudicial to revenue.
• Whether interest income earned by a co-operative society from investments in co-operative banks qualifies for deduction under section 80P(2)(d) of the Act.
• Whether a co-operative bank qualifies as a co-operative society for the purpose of deduction under section 80P(2)(d) of the Act.
• Whether the jurisdiction under section 263 of the Income Tax Act can be invoked where the Assessing Officer has taken a plausible view after making inquiries and considering submissions.

RULINGS / HOLDINGS:

• On the first issue, the Assessing Officer had conducted inquiries and obtained detailed submissions before allowing deduction under section 80P(2)(a), thus the order is not "erroneous" though it may be "prejudicial to the interest of revenue."
• Regarding deduction under section 80P(2)(d), the Tribunal held that interest income earned by a co-operative society on deposits with co-operative banks qualifies for deduction under sections 80P(2)(a)(i) and 80P(2)(d), following a coordinate Bench decision.
• The Tribunal rejected the view that a co-operative bank cannot be treated as a co-operative society for section 80P(2)(d) purposes, noting that co-operative banks are registered under cooperative societies legislation and thus fall within the definition of "co-operative society" under section 2(19) of the Act.
• The jurisdiction under section 263 cannot be invoked merely because the order may be prejudicial to revenue; both conditions of error and prejudice must be satisfied. Since the Assessing Officer took a plausible view after inquiry, the revisionary jurisdiction was improperly exercised.

RATIONALE:

• The Court applied the statutory framework of section 80P of the Income Tax Act, 1961, which provides deductions to co-operative societies on income derived from core business activities such as banking or providing credit facilities to members.
• It relied on the Supreme Court judgment holding that interest income earned from investing surplus funds is "Income from Other Sources" and not business income eligible for deduction under section 80P(2)(a), but distinguished that the Assessing Officer had made specific inquiries and taken a plausible view.
• The Tribunal referred to the definition of "co-operative society" under section 2(19) of the Act and relevant High Court decisions to interpret co-operative banks as co-operative societies for section 80P(2)(d) deduction eligibility.
• The Tribunal emphasized the twin conditions for invoking section 263 jurisdiction: the order must be both erroneous and prejudicial to revenue; absence of error precludes revision even if prejudicial.
• The Tribunal noted that the Assessing Officer issued notices, sought detailed information, and considered submissions before allowing deductions, thereby negating the claim of non-inquiry as per Explanation 2 to section 263.

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