2025 (6) TMI 1757 - AT - Income Tax

Revision u/s 263 - eligibility of the assessee for claim of deduction under the provisions of section 80P(2)(a) or section 80P(2)(d) - As per CIT AO during the course of assessment proceedings has not asked any specific question to the effect as to whether the interest income in question is business income or not - HELD THAT - We find the AO during the course of assessment proceedings has examined the issue and has asked the queries to the assessee to which the assessee has responded. Coordinate Bench of the Tribunal in the case of Talegaon Nagari Sahakari Patsanstha Limited 2024 (6) TMI 1476 - ITAT PUNE has held that the interest income earned by a co-operative society on deposits made out of surplus funds with co-operative banks as well as scheduled banks qualify for deduction both under the provisions of section 80P(2)(a)(i) and 80P(2)(d). Since the AO in the instant case after considering the reply of the assessee has taken a plausible view therefore the same in our opinion cannot be considered as erroneous although it may be prejudicial to the interest of the Revenue. It is the settled proposition of law that for assuming the jurisdiction u/s 263 of the Act the twin conditions i.e. (i) the order of the AO is erroneous and (ii) the order is prejudicial to the interest of revenue must be fulfilled. In the instant case the order passed by the AO may be prejudicial to the interest of revenue but it cannot be said to be erroneous since the AO has taken a plausible view on this issue after calling for various details from the assessee to which the assessee has replied. Therefore in absence of fulfillment of the twin conditions the Ld. PCIT in our opinion is not justified in assuming the jurisdiction u/s 263 of the Act. We therefore set aside the order passed by the Ld. PCIT. The grounds raised by the assessee are accordingly allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal in this appeal are:

• Whether the Assessing Officer (AO) erred in allowing deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961, in respect of interest income earned by the assessee, a co-operative credit society, from investments with co-operative banks, without properly enquiring whether such income is related to the core business or is residual income taxable under the head "Income from Other Sources".
• Whether interest income earned from deposits with co-operative banks qualifies for deduction under section 80P(2)(d) of the Act, given the statutory exclusion of co-operative banks from the benefit of section 80P under section 80P(4).
• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking jurisdiction under section 263 of the Act to revise the assessment order passed by the AO, on the grounds that the AO's order was erroneous and prejudicial to the interest of revenue.
• Whether the AO conducted sufficient inquiry during assessment proceedings regarding the nature of interest income and the eligibility of deduction claimed under section 80P.
• Whether the twin conditions for assumption of jurisdiction under section 263 of the Act-(i) the order is erroneous, and (ii) the order is prejudicial to the interest of revenue-were satisfied in the present case.

Issue-wise Detailed Analysis

1. Eligibility of Deduction under Section 80P(2)(a)(i) for Interest Income

Legal Framework and Precedents: Section 80P(2)(a)(i) of the Income Tax Act provides deduction to a co-operative society engaged in the business of banking or providing credit facilities to its members, in respect of income derived from such business. The Supreme Court in Totgars Co-operative Sales Society Ltd. vs. ITO (2010) 322 ITR 283 held that interest income earned by investing surplus funds is not business income but falls under "Income from Other Sources" and is taxable under section 56. Therefore, such interest income does not qualify for deduction under section 80P(2)(a)(i).

Court's Interpretation and Reasoning: The PCIT observed that the AO had not made any specific inquiry to determine whether the interest income earned was related to the core business or was residual income. The PCIT relied on the Supreme Court judgment to hold that interest earned on surplus funds is "other income" and not eligible for deduction under section 80P(2)(a)(i). The PCIT emphasized that the deduction is meant only for operational income directly attributable to the core business of banking or credit facilities.

Key Evidence and Findings: The AO allowed the deduction without specific inquiry. The PCIT noted that the assessee had earned interest income of Rs. 62,76,965/- from investments with co-operative banks and claimed deduction under section 80P(2)(a)(i). The AO did not question the nature of this income as business or other income.

Application of Law to Facts: The PCIT concluded that the AO's order was erroneous and prejudicial to revenue as it allowed deduction without verifying the nature of income, contrary to binding Supreme Court precedent.

Treatment of Competing Arguments: The assessee argued that the interest income was part of its core business and eligible for deduction. The AO accepted this view. The PCIT disagreed, emphasizing the need for specific inquiry and adherence to Supreme Court precedent.

Conclusion: The PCIT held that the AO's order was erroneous for failing to examine the eligibility of deduction under section 80P(2)(a)(i) in light of the Supreme Court ruling.

2. Eligibility of Deduction under Section 80P(2)(d) for Interest Income from Co-operative Banks

Legal Framework and Precedents: Section 80P(2)(d) allows deduction for interest income earned by a co-operative society from investments in another co-operative society. Section 80P(4) excludes co-operative banks (except primary agricultural credit societies) from the benefits of section 80P. The Karnataka High Court in PCIT vs. Totgars Co-operative Sales Society Ltd. (2017) 395 ITR 611 held that interest income earned by a co-operative society on deposits with a co-operative bank is not eligible for deduction under section 80P(2)(d).

Court's Interpretation and Reasoning: The PCIT held that a co-operative bank cannot be treated as a co-operative society for the purpose of section 80P(2)(d) deduction. The plain language of the statute and judicial precedents were relied upon to support this interpretation. The PCIT further noted that the insertion of section 80P(4) excludes co-operative banks from the exemption, even if not explicitly amended in section 80P(2)(d).

Key Evidence and Findings: The assessee had claimed deduction under section 80P(2)(d) for interest income earned from deposits with co-operative banks. The AO did not examine this eligibility in detail.

Application of Law to Facts: The PCIT concluded that the deduction under section 80P(2)(d) was not allowable for interest income from co-operative banks, as these are excluded under section 80P(4).

Treatment of Competing Arguments: The assessee contended that co-operative banks are registered under co-operative societies law and thus qualify for deduction. The PCIT rejected this, relying on statutory language and judicial pronouncements.

Conclusion: The PCIT found the AO's order erroneous for allowing deduction under section 80P(2)(d) without examining the statutory exclusion of co-operative banks.

3. Validity of Jurisdiction Assumed under Section 263 of the Income Tax Act

Legal Framework and Precedents: Section 263 allows revision of an assessment order if it is erroneous and prejudicial to the interest of revenue. Explanation 2 to section 263 clarifies that an order passed without inquiries or verification which should have been made, or allowing relief without inquiry, or not in accordance with binding judicial decisions, shall be deemed erroneous and prejudicial.

Court's Interpretation and Reasoning: The PCIT invoked section 263 on the basis that the AO did not conduct necessary inquiries regarding the nature of interest income and allowed deductions contrary to binding precedents, making the order erroneous and prejudicial.

Key Evidence and Findings: The PCIT noted absence of specific queries by AO on the nature of income and failure to consider Supreme Court and High Court judgments.

Application of Law to Facts: The PCIT set aside the assessment order for reassessment on limited issues regarding eligibility of deduction under sections 80P(2)(a)(i) and 80P(2)(d).

Treatment of Competing Arguments: The assessee contended that the AO had made detailed inquiries and taken a plausible view, citing a coordinate bench decision holding that interest income from co-operative banks qualifies for deduction under both sections 80P(2)(a)(i) and 80P(2)(d). The assessee argued that the issue is debatable and thus not erroneous.

Conclusion: The Tribunal found that the AO had indeed made inquiries and considered submissions, and had taken a plausible view consistent with coordinate bench decisions. Therefore, the order could not be said to be erroneous, although it may be prejudicial to revenue. The twin conditions for invoking section 263 were not fulfilled.

4. Adequacy of Inquiry by the Assessing Officer

Legal Framework: The AO is duty bound to conduct inquiries to ascertain the nature of income and eligibility of deductions claimed.

Court's Interpretation and Reasoning: The PCIT initially held that AO did not make specific inquiries. However, the Tribunal examined the record and found that the AO had issued notices, sought explanations, and recorded detailed submissions from the assessee on the nature of the business and interest income.

Key Evidence and Findings: The assessee's replies to notices dated 29.06.2021, 16.11.2021, and 15.02.2022 were on record, explaining the business activity, nature of interest income, and reliance on judicial decisions. The AO had considered these submissions before passing the order.

Application of Law to Facts: The Tribunal held that the AO had conducted adequate inquiry and taken a plausible view after considering the evidence.

Treatment of Competing Arguments: The PCIT's contention of lack of inquiry was rejected on the basis of documentary evidence of AO's queries and assessee's replies.

Conclusion: The AO's inquiry was sufficient and the order cannot be deemed erroneous on this ground.

5. Fulfillment of Twin Conditions for Jurisdiction under Section 263

Legal Framework: Jurisdiction under section 263 can be assumed only if the AO's order is both erroneous and prejudicial to the interest of revenue.

Court's Interpretation and Reasoning: The Tribunal acknowledged that the AO's order might be prejudicial to revenue but held that it was not erroneous because the AO had taken a plausible view after due inquiry.

Key Evidence and Findings: The Tribunal relied on the coordinate bench decision in Talegaon Nagari Sahakari Patsanstha Limited vs. ITO, which favored the assessee's claim for deduction under both sections 80P(2)(a)(i) and 80P(2)(d) for interest income from co-operative banks.

Application of Law to Facts: The Tribunal concluded that since the AO's order was based on a plausible interpretation and adequate inquiry, it was not erroneous. Hence, jurisdiction under section 263 was not justified.

Treatment of Competing Arguments: The PCIT's reliance on Supreme Court and High Court decisions was noted, but the Tribunal emphasized the existence of conflicting coordinate bench decisions and the plausibility of AO's view.

Conclusion: The Tribunal set aside the PCIT's order assuming jurisdiction under section 263 and allowed the appeal of the assessee.

Significant Holdings

"The words 'the whole of the amount of profits and gains of business' emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee-Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest falls in the category of 'other Income' which has been rightly taxed by the Department under section 56 of the Act."

"A co-operative bank cannot be treated as co-operative society for the purpose of allowability of deduction u/s. 80P(2)(d) of the Act. The plain reading of Sec. 80P(2)(d) shows that interest income earned by a cooperative society will be eligible for deduction only from its investments with another cooperative society. The words used in section 80P(4) exclude co-operative banks from the benefit of this section."

"For assuming jurisdiction u/s 263 of the Act, the twin conditions i.e. (i) the order of the Assessing Officer is erroneous and (ii) the order is prejudicial to the interest of revenue must be fulfilled. In the instant case the order passed by the Assessing Officer may be prejudicial to the interest of revenue but it cannot be said to be erroneous since the Assessing Officer has taken a plausible view on this issue after calling for various details from the assessee to which the assessee has replied."

"An assessment order which has not been passed in accordance with a decision which is prejudicial to the assessee rendered by the Hon'ble Supreme Court will be deemed to be both erroneous and prejudicial to the interest of revenue."

"The AO was duty bound to determine by conducting specific enquiry whether the interest income earned by the assessee is related to its core business or is a residuary income which is required to be taxed under the head 'income from other sources'. Similarly, even under the provision of Sec.80P(2)(d) of the Act interest income earned by a co-operative society will be eligible for deduction only from its investment with another co-operative society."

Core Principles Established

• Deduction under section 80P(2)(a)(i) is available only for income derived from the core business of banking or providing credit facilities to members; interest on surplus funds invested elsewhere is not eligible.
• Interest income from investments in co-operative banks is not eligible for deduction under section 80P(2)(d) due to statutory exclusion under section 80P(4).
• Jurisdiction under section 263 can be exercised only if the AO's order is both erroneous and prejudicial to revenue; a plausible view taken by the AO after inquiry negates the erroneousness.
• The AO must conduct specific inquiries to determine the nature of income and eligibility of deductions claimed.
• Binding judicial precedents must be followed unless there is a plausible contrary view supported by coordinate bench decisions.

Final Determinations on Each Issue

The Tribunal held that the AO had conducted adequate inquiry and taken a plausible view allowing deduction under sections 80P(2)(a)(i) and 80P(2)(d) for interest income earned from co-operative banks. The PCIT's revision under section 263 was not justified as the AO's order was not erroneous, though it may be prejudicial to revenue. The Tribunal set aside the PCIT's order and allowed the assessee's appeal.