2025 (6) TMI 1760 - AT - Income Tax

Revision u/s 263 - Deduction u/s. 80P(2)(a)(i) - interest income from investments made with Pune District Central Cooperative Bank Ltd. (PDCC) - AO taking the basis of total Revenue to the interest on investment calculated the percentage at 6.7% and after applying the same on the deduction claimed by the assessee u/s. 80P disallowed amount and concluded the assessment HELD THAT - We find that AO had conducted a detailed enquiry on the issue of deduction claimed u/s. 80P by the assessee. Ld. PCIT has only referred to the claim u/s. 80P(2)(d) - AO has examined the issue exhaustively and took one of the permissible views by allowing the proportionate expenses. PCIT has also raised question on the method of calculating the proportionate disallowance but this method followed by ld. AO is also one of the correct method for calculating such disallowance. Even otherwise practically it is not possible to examine each and every indirect expenditure incurred by the assessee during the year to calculate the expenses actually incurred for earning the interest income from investments with Cooperative Banks. We also note that this Tribunal has consistently held that even the interest earned from Cooperative Banks is also eligible for deduction u/s. 80P(2)(d). Thus we find that AO has conducted detailed enquiry on all the issues referred by ld. PCIT in the show cause notice issued u/s. 263 and after proper application of mind has taken one of the view legally permissible and concluded the assessment. We therefore find that the assessment order dated for A.Y. 2021-22 is neither erroneous nor prejudicial to the interest of Revenue. Impugned finding given by PCIT is set-aside and the order u/s. 263 is hereby quashed and the assessment order is restored to its original place. Grounds of appeal raised by the assessee are allowed.

Summary

The core legal questions considered in this appeal pertain primarily to the scope and exercise of revisional powers under Section 263 of the Income-tax Act, 1961, and the eligibility of deduction claimed under Section 80P(2)(a)(i)/80P(2)(d) of the Act for interest income earned from investments made with Cooperative Banks. Specifically, the issues are:

1. Whether the Principal Commissioner of Income Tax (PCIT) had jurisdiction to invoke Section 263 to revise the assessment order, given that the issue was highly debatable and various judicial precedents favored the assessee's claim.

2. Whether the PCIT was justified in setting aside the assessment order to the file of the Assessing Officer (AO) for fresh adjudication rather than passing a final order under Section 263.

3. Whether the AO erred in allowing a proportionate deduction for expenses incurred in earning interest income from Cooperative Banks, and whether the deduction claimed under Section 80P(2)(d) of the Act for such interest income is permissible.

4. The applicability and interpretation of Section 263 of the Act, especially the tests for invoking revisional powers and the limits of such powers when the AO has taken one of the plausible views.

Issue-wise Detailed Analysis

1. Jurisdiction and Exercise of Revisional Powers under Section 263

The legal framework for this issue is Section 263 of the Income-tax Act, 1961, which empowers the Commissioner to call for and examine the record of any proceeding and revise the order if it is "erroneous in so far as it is prejudicial to the interests of the revenue." The section mandates that before passing such an order, the assessee must be given an opportunity of being heard.

The Court analyzed the four stages under Section 263: (i) administrative power to call and examine records; (ii) formation of opinion that the AO's order is erroneous and prejudicial; (iii) issuance of show cause notice to the assessee; and (iv) passing of an order after hearing the assessee, which may include modifying, enhancing, or setting aside the assessment.

Judicial precedents, notably the Supreme Court decision in Malabar Industrial Co. Ltd. vs. CIT, were relied upon to clarify that Section 263 cannot be invoked to correct every error or mistake. It applies only when the AO's order is erroneous and prejudicial, which includes incorrect assumptions of fact or law, orders passed without application of mind, or orders passed without observing principles of natural justice. Importantly, if the AO has taken one of the possible views permissible in law, even if the Commissioner disagrees, Section 263 cannot be invoked.

Applying these principles, the Tribunal found that the AO had conducted a detailed enquiry into the claim under Section 80P(2)(d), confronted the assessee with the issue, and took a plausible view by allowing proportionate expenses. The PCIT's assumption of jurisdiction was therefore held to be incorrect as the issue was highly debatable and the AO's order was not erroneous in law or prejudicial to revenue.

2. Legality of Setting Aside the Assessment Order to the AO for Fresh Assessment

The PCIT had set aside the assessment order to the AO for fresh adjudication on limited issues, rather than passing a final order under Section 263. The assessee contended that such action was not sustainable in law.

The Tribunal observed that under Section 263, the Commissioner has the power to cancel the assessment and direct a fresh assessment. However, the power must be exercised judiciously and only when the original order is erroneous and prejudicial. Since the Tribunal found no error in the AO's order, the PCIT's direction to re-assess was unwarranted. The setting aside of the order without final adjudication was therefore held to be unjustified.

3. Deduction under Section 80P(2)(d) for Interest Income from Cooperative Banks and Allowance of Proportionate Expenditure

Section 80P(2)(d) provides deduction for income by way of interest or dividend derived by a Cooperative Society from its investments with any other Cooperative Society. The AO disallowed the deduction claimed on interest income from investments with Cooperative Banks, holding it outside the scope of Section 80P. The AO, however, allowed proportionate expenses on a reasonable basis (6.7%) related to earning such interest income.

The PCIT challenged the AO's approach, contending that the AO should have verified actual expenditure incurred rather than allowing proportionate expenses. The assessee argued that the AO's method was reasonable and consistent with the practical difficulties in segregating indirect expenses.

The Tribunal noted that the AO's approach was one of the permissible methods for determining expenses attributable to interest income and that the AO had conducted a detailed enquiry. Furthermore, the Tribunal referred to its recent precedents holding that interest income earned from Cooperative Banks is eligible for deduction under Section 80P(2)(d), as Cooperative Banks are essentially Cooperative Societies licensed to operate as banks.

Specifically, the Tribunal cited a recent decision wherein it was held that interest income from Fixed Deposits with Cooperative Banks qualifies for deduction under Section 80P(2)(d), overruling the AO's disallowance. This consistent view was applied to the instant case, reinforcing the assessee's entitlement to deduction.

4. Treatment of Competing Arguments and Conclusions

The PCIT's reliance on the purported erroneous nature of the AO's order and the alleged prejudicial effect on revenue was countered by the Tribunal's finding that the AO had applied his mind and taken a legally sustainable view. The Tribunal emphasized that mere disagreement with the AO's view does not justify revision under Section 263.

The assessee's reliance on judicial precedents and the Tribunal's own consistent rulings was accepted as establishing that the issue was highly debatable and the AO's order was not erroneous.

Consequently, the Tribunal quashed the revision order passed under Section 263 and restored the assessment order dated 02.12.2022.

Significant Holdings

"There can be no doubt that the provision [Section 263] cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. ... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law."

Core principles established include:

• The revisional power under Section 263 is limited to orders that are erroneous and prejudicial to revenue; mere differences of opinion are insufficient.
• Where the AO has taken one of the plausible views permissible in law after detailed enquiry, the Commissioner cannot invoke Section 263 to revise the order.
• Interest income earned by a Cooperative Society from investments in Cooperative Banks is eligible for deduction under Section 80P(2)(d) of the Act.
• Proportionate allowance of expenses incurred in earning such interest income by the AO is a permissible method and not erroneous.
• The Commissioner's power under Section 263 to set aside an assessment order must be exercised judiciously and not as a routine measure.

Final determinations on each issue are:

• The PCIT's assumption of jurisdiction under Section 263 was illegal and without jurisdiction as the issue was highly debatable and the AO's order was not erroneous.
• The setting aside of the assessment order for fresh adjudication was not sustainable in law.
• The AO's allowance of proportionate expenses and rejection of deduction for interest income from Cooperative Banks was a plausible and legally permissible view.
• The assessee is entitled to claim deduction under Section 80P(2)(d) for interest income from Cooperative Banks, consistent with Tribunal precedents.
• The revision order under Section 263 is quashed, and the original assessment order is restored.