Gujarat High Court Validates Cooperative Society Deductions and Additional Depreciation Claims on Dairy Equipment

The taxation of cooperative societies and the intricacies surrounding capital allowances for manufacturing entities frequently lead to complex litigation between the revenue authorities and taxpayers. In a comprehensive judicial pronouncement, the Gujarat High Court has addressed several pivotal controversies in the case of PCIT Vs Sabarkantha District Co. Op. Milk Producers Union Ltd. The judgment, delivered on 28/07/2026 in R/Tax Appeal No. 695 of 2025, provides crucial clarity on the admissibility of deductions for inter-cooperative investments, the classification of specific dairy equipment as plant and machinery, and the statutory right to carry forward unabsorbed additional depreciation.

This detailed analysis explores the factual background, the legal arguments presented, and the High Court's rationale in dismissing the Revenue's appeals, thereby upholding the favorable orders passed by the lower appellate forums for Assessment Years 2016-17 and 2018-19.

Factual Matrix of the Dispute

The assessee in the present legal dispute is a Cooperative Society primarily involved in the procurement of milk and associated dairy operations. The genesis of the litigation traces back to the income tax return filed by the assessee for the Assessment Year (A.Y.) 2016-17. As per the records, the assessee submitted its electronic return of income on 30.11.2016, wherein it declared a total income amounting to Rs. 11,05,58,640/-.

The tax department subsequently selected the assessee's case for complete scrutiny under the Computer Assisted Scrutiny Selection (CASS) parameters. Consequently, a statutory notice under Section 143(2) of the Income Tax Act 1961 was issued on 17.7.2016. During the course of the assessment proceedings, the Assessing Officer (AO) scrutinized various claims made by the assessee and proposed multiple disallowances, which formed the core of the ensuing legal battle.

The Assessing Officer's Contentions

The AO's scrutiny resulted in three primary areas of disallowance:

  1. Denial of Cooperative Deduction: The AO objected to the deduction claimed by the assessee on interest and dividend income under Section 80P(2)(d) of the Income Tax Act 1961. The revenue's primary contention was that the assessee failed to conclusively demonstrate through documentary evidence that the investments generating this income were funded entirely by its own surplus funds rather than borrowed capital.
  2. Rejection of Additional Depreciation on Previous Year Additions: The assessee had claimed additional depreciation amounting to Rs. 8,31,15,592/-. This claim pertained to new machinery that had been installed in the preceding financial year. The AO disallowed this claim, questioning the applicability of the carry-forward provisions for the year under consideration.
  3. Classification of Dairy Equipment: Furthermore, the AO disallowed another tranche of additional depreciation amounting to Rs. 1,07,64,866/-. This specific claim was made in respect of milk cans and specialized equipment utilized for artificial insemination and laboratory testing. The AO's rationale was that these items functioned merely as storage or collection vessels and did not satisfy the statutory definition of "plant and machinery" actively engaged in the manufacturing or production process.