2025 (2) TMI 1209 - AT - Income Tax

Penalty u/s 271(1)(c) OR u/s 271A - concealed income - assessee has earned interest on FDRs - assessee claimed deduction under Section 80P(2) of the declared income - according to the AO this deduction cannot be allowed in view of the fact that the assessee has not filed return of income u/s 139(1) HELD THAT - As noted from the argument of assessee that the assessee being cooperative and thrift society limited and its income earned from fixed deposits made with banks including cooperative banks is exempt u/s 80P(2)(i) notwithstanding it was also giving loans to its members not relating to agriculture. If the Banking Regulation Act 1949 is now to be seen what is clear from Section 3 read with Section 56 is that a primary cooperative bank cannot be a primary agricultural credit society as such cooperative bank must be engaged in the business of banking as defined by Section 5(b) of the Banking Regulation Act 1949 which means the accepting for the purpose of lending or investment of deposits of money from the public. Likewise u/s 22(1)(b) of the Banking Regulation Act 1949 as applicable to cooperative societies no cooperative society shall carry on banking business in India unless it is a cooperative bank and holds a licence issued in that behalf by the RBI. As opposed to this a primary agricultural credit society is a cooperative society the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. In the present case the assessee has earned interest on FDRs maintained with Delhi State Cooperative Bank Netaji Subash Marg Darya Ganj Delhi as is evident from the assessment order for assessment year 2017-18. In case the deposits are kept with FDRs with Delhi State Cooperative Bank Darya Ganj branch and it means that the assessee has kept FDRs with a cooperative bank the assessee is eligible for deduction. However the addition is not challenged by the assessee. Hence the addition cannot be questioned at this stage but once deduction is allowable to the assessee in case the assessee kept FDRs and earned interest on FDRs maintained with cooperative bank penalty u/s 271(1)(c) or u/s 271A cannot be levied. We delete the penalty - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether the levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 for assessment year 2012-13 and under Section 271A for assessment year 2017-18 is justified in view of the assessee's failure to file return of income and subsequent addition of income by the Assessing Officer.
• Whether the deduction under Section 80P(2)(i) of the Income-tax Act is allowable to the assessee, a cooperative thrift and credit society, on interest income earned from fixed deposits maintained with a cooperative bank.
• Whether the assessee's non-filing of return under Section 139(1) affects the entitlement to claim deduction under Section 80P(2)(i) and consequently the levy of penalty for concealment or under-reporting of income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of penalty under Section 271(1)(c) and Section 271A for non-filing of return and concealment of income

Relevant legal framework and precedents: Section 271(1)(c) empowers the Assessing Officer to levy penalty for concealment of income or furnishing inaccurate particulars of income. Section 271A pertains to penalty for failure to furnish return of income. The Assessing Officer initiated penalty proceedings under these provisions for the respective years. The assessee's failure to file return was the trigger for the penalty proceedings.

Court's interpretation and reasoning: The Tribunal noted that the penalty was levied on the basis of the Assessing Officer's addition of income and the assessee's non-filing of return. However, the Tribunal emphasized that the penalty cannot be sustained if the addition itself is not disputed or if the deduction claimed is allowable under law, thereby negating the element of concealment or under-reporting.

Key evidence and findings: The Assessing Officer found interest income earned on fixed deposits with banks, admitted by the assessee, and disallowed deduction under Section 80P(2)(i) due to non-filing of return. The penalty was levied on the income added. The assessee did not challenge the addition but contested the penalty on the ground of entitlement to deduction.

Application of law to facts: The Tribunal observed that the penalty is contingent upon concealment or under-reporting of income. Since the assessee admitted the income and the deduction under Section 80P(2)(i) was allowable, the penalty could not be sustained.

Treatment of competing arguments: The Revenue argued that non-filing of return and disallowance of deduction justified penalty. The assessee contended that income was not concealed and deduction was allowable, hence no penalty. The Tribunal accepted the assessee's contention based on legal provisions and precedents.

Conclusions: The penalty levied under Section 271(1)(c) and Section 271A was deleted as the assessee's conduct did not amount to concealment or under-reporting once the deduction was found allowable.

Issue 2: Allowability of deduction under Section 80P(2)(i) to a cooperative thrift and credit society on interest income from fixed deposits with cooperative banks

Relevant legal framework and precedents: Section 80P(2)(i) provides exemption to cooperative societies on income earned from specified activities including interest income from cooperative banks. The Supreme Court decisions in Kerala State Co-operative Agricultural & Rural Development Bank Ltd. and Mavilayi Service Co-operative Bank Ltd. were relied upon to interpret the scope of the exemption and the nature of cooperative societies eligible.

Court's interpretation and reasoning: The Tribunal examined the nature of the assessee as a cooperative thrift and credit society and the source of interest income, i.e., fixed deposits with Delhi State Cooperative Bank. It noted that cooperative banks licensed under the Banking Regulation Act, 1949, are entitled to the exemption under Section 80P(2)(i). The Court clarified that primary agricultural credit societies differ from cooperative banks in their objects and regulatory framework.

Key evidence and findings: The assessee's interest income was earned from fixed deposits maintained with a cooperative bank recognized under the Banking Regulation Act. The assessee's status as a cooperative thrift and credit society was undisputed.

Application of law to facts: Applying the principles from the Supreme Court rulings, the Tribunal held that the assessee was entitled to the deduction under Section 80P(2)(i) on the interest income earned from fixed deposits with the cooperative bank.

Treatment of competing arguments: The Revenue challenged the deduction on the ground that the assessee had not filed return and thus was not entitled to claim the exemption. The assessee argued the exemption was statutory and not contingent on filing of return. The Tribunal favored the assessee's interpretation based on legal provisions and judicial precedents.

Conclusions: The deduction under Section 80P(2)(i) was allowable to the assessee on interest income earned from fixed deposits with the cooperative bank.

Issue 3: Impact of non-filing of return under Section 139(1) on entitlement to deduction and levy of penalty

Relevant legal framework: Section 139(1) mandates filing of return of income. Non-filing may attract penalty under Section 271A. However, entitlement to deduction under Section 80P(2)(i) is governed by substantive provisions of the Act.

Court's interpretation and reasoning: The Tribunal observed that while non-filing of return is an offence attracting penalty, it does not ipso facto disentitle the assessee from claiming statutory deductions. The deduction's allowability depends on the nature of income and the assessee's status, not on procedural compliance alone.

Key evidence and findings: The assessee did not file return but admitted income and claimed deduction. The Assessing Officer disallowed deduction due to non-filing and levied penalty. The assessee contested penalty and disallowance.

Application of law to facts: The Tribunal held that the deduction under Section 80P(2)(i) is allowable notwithstanding non-filing of return. Consequently, penalty for concealment or under-reporting could not be sustained solely on non-filing.

Treatment of competing arguments: Revenue's argument that non-filing justified disallowance and penalty was rejected. Assessee's contention of entitlement to deduction despite procedural lapse was accepted.

Conclusions: Non-filing of return did not disentitle the assessee to claim deduction under Section 80P(2)(i), and penalty could not be levied for concealment or under-reporting on that basis.

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"Once deduction is allowable to the assessee in case the assessee kept FDRs and earned interest on FDRs maintained with cooperative bank, penalty under Section 271(1)(c) or under Section 271A cannot be levied."

This principle establishes that the levy of penalty for concealment or under-reporting is not sustainable where the income is admitted and the deduction claimed is permissible under the Act, even if the return of income was not filed.

The Tribunal also reaffirmed the distinction between cooperative banks and primary agricultural credit societies as per the Banking Regulation Act, 1949 and Supreme Court precedents, clarifying the scope of exemption under Section 80P(2)(i).

Final determinations on each issue were:

• Penalty under Section 271(1)(c) and Section 271A was deleted for both assessment years.
• The deduction under Section 80P(2)(i) on interest income earned from fixed deposits with a cooperative bank was held allowable.
• Non-filing of return under Section 139(1) did not affect the assessee's entitlement to the deduction nor justify penalty for concealment or under-reporting.