Reopening assessment on interest from co-operative banks

Reopening assessment on interest from co-operative banks constitutes impermissible change of opinion and is unsustainable.

Issue

Whether reopening an assessment under Section 148 based on the same material examined during scrutiny to disallow Section 80P(2)(d) deduction constitutes an invalid change of opinion.
Whether interest income earned by a co-operative society from investments in co-operative banks is eligible for deduction under Section 80P(2)(d).

Facts

The assessee, a co-operative society, earned interest income from investments with co-operative banks and claimed deduction under Section 80P(2) in its nil return for AY 2014-15.
During initial scrutiny, the Assessing Officer (AO) passed an order making specific additions under Section 80P(2)(d) for interest from nationalized banks and Section 80P(2)(c) for miscellaneous/rental income, while allowing deduction for interest from co-operative banks.
The AO subsequently issued a reopening notice under Section 148 claiming that interest from co-operative banks was wrongly allowed under Section 80P(2)(d) as it was not derived from business operations.
The reopening was initiated using the exact same assessment records and material that were evaluated during the original scrutiny proceedings.

Decision

Change of Opinion (In favour of Assessee): The reopening notice was quashed as it was based on the same material already considered during original scrutiny, amounting to a mere change of opinion.
Merits of Section 80P(2)(d) (In favour of Assessee): Reopening was also set aside on merits, as interest earned from investments in co-operative banks (which are themselves co-operative societies) is legally eligible for deduction under Section 80P(2)(d).

Key Takeaways

Reopening Cannot Review Scrutiny Findings: Assessing Officers cannot revisit issues already considered and allowed during regular scrutiny assessments without new tangible material.
Co-operative Bank Interest Qualifies for 80P(2)(d): Interest income earned by a co-operative society from another co-operative bank qualifies for deduction under Section 80P(2)(d) since a co-operative bank inherently retains the legal status of a co-operative society.

HIGH COURT OF GUJARAT

Gujarat State Co. Op. Agricultural and Rural Development Bank Ltd.

Income-tax Officer

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NO. 13494 of 2020

AUGUST 3, 2026

Ms. Vaibhavi K. Parikh for the Petitioner. Maunil G. Yajnik for the Respondent.

JUDGMENT

A.S. Supehia, J.- In the present writ petition, the petitioner has assailed the notice dated 16/12/2019 issued under Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) seeking to reopen the assessment of the petitioner for the Assessment Year (for short ‘A.Y.’) 2014-15.

2. The petitioner is a co-operative Bank which filed its return of income for A.Y. 2014-15. During the year under consideration, the petitioner earned certain interest income which included “interest income earned from co-operative banks”. The petitioner filed return of income for the year under consideration on 17/11/2014 declaring total income at Rs. NIL after claiming exemption of Rs.28,91,29,255/- under Section 80P(2) of the Act.

2.1. The case of the petitioner for the year under consideration was selected for scrutiny assessment. The then Assessing Officer, vide show cause notice dated 21/11/2016, called upon the petitioner to show cause as to why “interest income” claimed exempt under Section 80P(2)(d) of the Act and “other income” (i.e. Misc. income and rental income) claimed exempt under Section 80P(2)(c) of the Act should not be exempted. The petitioner, vide letter dated 28/11/2016, furnished details including details pertaining to “Interest from Co-operative banks” as well as “Interest from Nationalized banks” along with justification for the claim under Section 80P(2)(c) of the Act in respect of interest income. The petitioner further, vide letter dated 28/11/2016, also furnished justification as to why no disallowance of exemption is called for under Section 80P(2)(c) of the Act.

2.2. The then Assessing Officer, after perusing the details so furnished from time to time, consciously chose not to disturb the claim of exemption under Section 80P(2)(d) of the Act qua “interest income earned from co-operative bank” while framing assessment under Section 143(3) of the Act vide order dated 02/12/2016. Instead, the assessment was framed by the then Assessing Officer after making following two additions only:

Rs.11,28,91,418/- being addition under Section 80P(2)(d) of the Act in respect of “interest income from nationalized banks” (i.e. other than co-operative banks);

Rs.32,61,000/- being addition under Section 80P(2)(c) of the Act in respect of “Misc. income and rental income”;

Resultantly, the assessed income of the petitioner was determined at Rs.11,61,52,425/-.

2.3. The petitioner challenged the assessment order before the Commissioner of Income Tax (Appeals) who, vide order dated 17/02/2018, dismissed the Appeal. At this stage, it is clarified that no further Appeal has been preferred by the petitioner against the appellate order dated 17/02/2018 passed by the First Appellate Authority.

2.4. Thereafter, the respondent issued the impugned notice dated 16/12/2019 under Section 148 of the Act seeking to reopen the case of the petitioner for the year under consideration.

2.5. The petitioner filed return of income in response to the impugned notice issued under Section 148 of the Act on 23/01/2020 and brought the said fact to the notice of the respondent vide letter dated 27/01/2020. The petitioner, vide the very same letter, also requested for a copy of “reasons for reopening” and a copy of “sanction obtained from the Pr. CCIT”. The petitioner, vide letter dated 07/02/2020, again requested the respondent herein to supply copy of reasons recorded for reopening.

2.6. The respondent supplied copy of reasons for reopening vide letter dated 07/02/2020. Perusal of reasons recorded for reopening reveals that the case of the petitioner has been reopened broadly the count that deduction of Rs.5,93,32,466/-claimed under Section 80P(2)(d) of the Act in respect of interest earned from various co-operative banks is not exempt. Briefly, the case of the respondent is that on verification of the case records, it was found that out of exemption of Rs.28,91,29,255/-claimed under Section 80P(2)(a)(i) of the Act, of which Rs.5,93,32,466/- represents interest income earned from various co-operative banks which was exempted by the then assessing officer while framing the assessment. Since such interest income was not arising out of business operations of the petitioner, the same was not required to be exempted under Section 80P(2)(d) of the Act. Accordingly, the respondent has reason to believe that income of Rs.5,93,32,466/- chargeable to tax has escaped assessment in the hands of the petitioner for the year under consideration. Hence, the case of the petitioner for the year under consideration has been reopened.

2.7. The petitioner, vide letter dated 18/02/2020, raised objections against reopening wherein various factual as well as legal submissions were made. However, the respondent, vide order dated 04/03/2020, disposed off such objections raised by the petitioner against reopening and, inter alia, held that the action of reopening is justified in the eye of law.

3. Learned advocate Ms. Vaibhavi K. Parikh at the outset, while placing reliance on the judgment of this Court in the case of Diamond Jubilee Co-Operative Bank Ltd. v. Union of India (Guj) has submitted that the reopening of the assessment is required to be quashed and set aside, since the deduction under Section 80P(2)(d) of the Act was available to the cooperative societies on income earned as interest or investment made with a co-operative Bank, which in turn was a co-operative society itself.

4. The second ground which has been urged before us is, that reopening is nothing but a change of opinion, as all the relevant material as demanded by the Assessing Officer was supplied during the scrutiny assessment and ultimately the assessment order under Section 143(3) of the Act has been passed. It is submitted that, no fresh material or tangible material has come into the possession of the Assessing Officer, which can invite reopening of the assessment.

5. Responding to the aforesaid submissions, learned Senior Standing Counsel Mr. Maunil Yajnik has submitted that, at this stage, the reopening of the assessment may not be interfered with, as the same is precisely done in view of the provision of Section 147 of the Act. It is submitted that, in the instant case, it was found that the petitioner has claimed a deduction of Rs.5,93,32,466/- being interest income earned from various cooperative Banks and hence, as per the provision of Section 80P(2) (d) of the Act, the said income cannot be said to be arising from business operation of the assessee and is not entitled to the same. Thus, it is urged that the writ petition may not be entertained.

6. We are inclined to set aside the impugned notice and the action of the reopening of the assessment for the year under consideration, only for the sole reason that, the reopening is nothing but a change of opinion by the Assessing Officer.

7. It is not in dispute that the petitioner filed the return of income on 17/11/2014 which was subjected to scrutiny assessment, and ultimately, after the Assessing Officer found the explanation tendered by the petitioner with regard to the exempt income on interest under Section 80P(2)(d) of the Act satisfactory, the scrutiny Assessment Order under Section 143(3) of the Act was passed on 02/12/2016. The Assessing Officer made the two additions; (I) Rs.11,28,91,418/- being an addition under Section 80P(2)(d) of the Act in respect of interest income from nationalized Banks, and (II) Rs.32,61,000/- being an addition under Section 80P(2)(c) of the Act in respect of miscellaneous income and rental income. Thus, in the scrutiny assessment, the Assessing Officer has already made the addition under Section 80P(2)(d) of the Act with regard to the interest from co-operative Banks. However, the reopening of the assessment by issuing the Notice under Section 148 of the Act on 23/01/2020 is also premised on the same material and the issue which has already been examined by the Assessing Officer in the scrutiny assessment. Hence, the reopening is nothing but a change of opinion. Moreover, we also find that the reopening is also required to be quashed and set aside on the ground of merits, in light of the decision of this Court in the case of Diamond Jubilee Co-Operative Bank Ltd. (supra), wherein, on an identical issue, after analysis of the provision of Section 80P of the Act and considering the settled legal precedent, this Court has held thus:

“5 Thus, as held by the Supreme Court in the case of Apex Cooperative Bank of Urban Bank of Maharashtra & Goa Ltd. v. The Maharashtra State Co-operative Bank Ltd & Ors. , reported in 2003 (11) SCC 66 for which the reliance is placed by the Coordinate Bench, and also in case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd v. Assessing Officer. , reported in [2023] , the present writ petition is allowed as the petitioner is not a Co-operative Bank but a Co-operative Society.

6 Hence, as per the settled legal precedent, deduction under Section 80P(2)(d) is available to Co-operative societies on income earned as interest on investment made with Cooperative Bank which in turn, is a Co-operative Society itself and as the observations recorded by the respondent are incorrect and thus contrary to the judgment of this Court.”

8. Thus the present writ petition succeeds. The impugned notice dated 16/12/2019 and the action of reopening for the assessment for A.Y. 2014-15 is hereby quashed and set aside.