2025 (6) TMI 2042 - AT - Income Tax

Reopening of assessment u/s 147 - denying the deduction claimed u/s. 80P of the Act by stating that the assessee is a scheduled bank in assessing - AR submitted that the assessee / cross objector is governed by the provisions of The Regional Rural Bank Act 1976 and hence the attempt to treat the assessee /cross objector as a co-operative bank for the purpose of denying deduction u/s. 80P of the Act was wrong - only contention of the Revenue is based on the circular issued by CBDT to treat the co-operative societies as co-operative bank HELD THAT - AO while re-opening the assessment had failed to appreciate that for the very same issue relating to claim of deduction u/s. 80P of the Act the assessee was subjected and succeeded before the Tribunal for earlier assessment years which orders of the Tribunal was very much available at the time of initiating the present re-assessment proceedings thereby negating the presumption of escapement of income in the hands of the assessee for the purpose of assuming jurisdiction u/s. 147 of the Act. Therefore re-opening the case of the assessee for the very same issue which is decided in favour of the assessee is wrong and does not stand the test of law and therefore deserves to be quashed in the interest of justice. Deduction u/s. 80P - We note that the Assessee is a Regional Rural Bank governed by the Regional Rural Bank Act 1976. As per Section 22 of the RRB Act explicitly states that an RRB shall be deemed to be a co-operative society for the purposes of the Income-tax Act 1961. Further Section 32 of the RRB Act contains a non-obstante clause making the RRB Act prevail over any inconsistent provisions of other laws. Therefore the argument of the Revenue based on CBDT circulars is thus contrary to the overriding effect of the RRB Act. We also find that in PCIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. 2019 (8) TMI 1131 - RAJASTHAN HIGH COURT has affirmed that RRBs continue to be treated as co-operative societies under the Income-tax Act by virtue of Section 22 of the RRB Act. In the latest decision of the Tribunal for the assessment year 2014-15 has allowed the deduction u/s. 80P(2)(a)(i) - Thus we do not find any infirmity in the order of the ld.CIT(A) in allowing the assessee s claim under Section 80P(2)(a)(i) of the Act. Thus the related grounds raised by the Revenue are dismissed. Interest arises out of refund of tax whether form part of the business income of the assessee - This issue is squarely covered by the decision of Punjab State Co-op Bank Ltd. 2010 (2) TMI 185 - PUNJAB HARYANA HIGH COURT which has been held that such interest is compensatory in nature and partakes the character of the principal. Thus interest on income tax refund is to be treated as income from business and hence eligible for deduction under Section 80P(2)(a)(i) of the Act. Thus the ground of cross-objection raised by the assessee is allowed. Recompute the interest u/s. 244A taking the date of remittance of TDS as the starting point till the date of credit of refund. Hence this issue is remanded back to the AO for limited verification and correct computation as per law.

The core legal questions considered in this case are:

1. Whether the assessee, a Regional Rural Bank (RRB) registered under the Regional Rural Bank Act, 1976, is to be treated as a co-operative society or a corporate entity for the purpose of claiming deduction under Section 80P(2)(a)(i) of the Income-tax Act.

2. Whether the reopening of the assessment under Section 147 of the Income-tax Act was valid and justified, considering the alleged escapement of income.

3. Whether interest income earned on income tax refund qualifies as income from business and is eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act.

4. The correctness of the computation of interest under Section 244A of the Income-tax Act related to the refund amount.

Issue 1: Status of the Assessee for Deduction under Section 80P(2)(a)(i)

Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) of the Income-tax Act provides deduction to co-operative societies engaged in the business of banking or providing credit facilities to its members. The Regional Rural Bank Act, 1976, particularly Section 22, states that for the purposes of the Income-tax Act, a Regional Rural Bank shall be deemed to be a co-operative society. Section 32 of the RRB Act contains a non-obstante clause, overriding any inconsistent provisions of other laws. The Finance Act, 2006 introduced sub-section (4) to Section 80P, restricting deduction to certain co-operative banks and excluding others. CBDT circulars have clarified that Regional Rural Banks are corporate entities and not co-operative societies, thus not eligible for deduction under Section 80P from assessment year 2007-08 onward.

Several decisions of the Tribunal in the assessee's own case for earlier assessment years (2007-08 to 2014-15) have held that the RRB is to be treated as a co-operative society for claiming deduction under Section 80P(2)(a)(i). The Rajasthan High Court in PCIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. affirmed that RRBs continue to be deemed co-operative societies under the Income-tax Act by virtue of Section 22 of the RRB Act.

Court's Interpretation and Reasoning: The Court emphasized the overriding effect of the RRB Act over other laws, including the CBDT circulars. It held that the provisions of the RRB Act, specifically Section 22, explicitly deem RRBs to be co-operative societies for Income-tax purposes. The non-obstante clause in Section 32 further strengthens this position by overriding inconsistent provisions in other statutes. The Court relied heavily on the consistent precedents of the Tribunal in the assessee's own case and the Rajasthan High Court ruling to support this interpretation.

Key Evidence and Findings: The assessee's registration under the RRB Act, the statutory provisions of Sections 22 and 32 of the RRB Act, and the prior Tribunal and High Court decisions were pivotal. The CBDT circulars and amendments to Section 80P were considered but found to be overridden by the RRB Act.

Application of Law to Facts: The Court applied the statutory deeming provision of Section 22 of the RRB Act, which treats the assessee as a co-operative society for Income-tax purposes, thereby entitling it to claim deduction under Section 80P(2)(a)(i). The CBDT circulars and amendments could not override this statutory provision.

Treatment of Competing Arguments: The Revenue's reliance on CBDT circulars and the amendment to Section 80P was rejected on the ground that these do not override the express provisions of the RRB Act. The Court found the Revenue's argument that the assessee is a corporate entity governed by the Banking Regulation Act unpersuasive in light of the statutory deeming provisions.

Conclusion: The assessee is to be treated as a co-operative society under the Income-tax Act for the purpose of claiming deduction under Section 80P(2)(a)(i). The Revenue's appeal on this issue was dismissed.

Issue 2: Validity of Reassessment Proceedings under Section 147

Relevant Legal Framework and Precedents: Section 147 of the Income-tax Act permits reopening of assessment if the Assessing Officer has reason to believe that income has escaped assessment. The reopening must be based on fresh and tangible material, not merely a change of opinion. The Madras High Court in M/s. Tenzing Match Works held that reopening based solely on the return filed by the assessee without fresh material is impermissible and amounts to change of opinion.

Court's Interpretation and Reasoning: The Court observed that the reassessment was initiated based on the return of income filed by the assessee, particularly the claim of deduction under Section 80P. Since this information was not fresh or tangible but already disclosed in the return, the reopening amounted to a change of opinion, which is not permissible under law. Further, the Tribunal had earlier decided the same issue in favour of the assessee in prior years, which was known to the Assessing Officer at the time of reopening, negating any presumption of escapement of income.

Key Evidence and Findings: The reassessment notice and order, the return of income filed by the assessee, and the prior Tribunal orders on the same issue were critical. The absence of any new material justifying reopening was noted.

Application of Law to Facts: The Court applied the principle that reopening under Section 147 requires fresh tangible evidence. Since the reopening was based on the return itself and prior decisions favourable to the assessee, the reopening was invalid.

Treatment of Competing Arguments: The Revenue's contention that reopening was valid was rejected for lack of fresh material. The Court did not adjudicate this issue finally as the Revenue's appeal was dismissed on merits.

Conclusion: The reassessment proceedings were invalid due to lack of fresh and tangible material; however, since the Revenue's appeal was dismissed on merits, this issue was left open.

Issue 3: Interest Income on Income Tax Refund and Eligibility for Deduction under Section 80P

Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) allows deduction for income derived from the business of banking. The Punjab & Haryana High Court in CIT v. Punjab State Co-op Bank Ltd. held that interest on refund of income-tax paid in excess is compensatory in nature and partakes the character of the principal amount, thus qualifying as income from business.

Court's Interpretation and Reasoning: The Court accepted the view that interest on income tax refund is compensatory and directly connected to the business income. Therefore, it should be treated as income from the principal business activity and eligible for deduction under Section 80P.

Key Evidence and Findings: The nature of the interest income and the judicial precedent from the Punjab & Haryana High Court were key.

Application of Law to Facts: The interest earned on the refund was held to be income from the business of banking and accordingly eligible for deduction under Section 80P(2)(a)(i).

Treatment of Competing Arguments: The Revenue's argument that such interest income is not attributable to business income was rejected.

Conclusion: Interest income on income tax refund qualifies as business income and is eligible for deduction under Section 80P(2)(a)(i). The assessee's cross objection on this ground was allowed.

Issue 4: Computation of Interest under Section 244A

Relevant Legal Framework: Section 244A provides for payment of interest on refunds from the date of payment of tax or TDS till the date of refund.

Court's Interpretation and Reasoning: The Court directed the Assessing Officer to recompute interest under Section 244A from the date of remittance of TDS till the date of credit of refund, ensuring correct and just computation.

Conclusion: The matter was remanded to the Assessing Officer for recomputation of interest under Section 244A as per the directions.

Significant Holdings:

"As per Section 22 of the RRB Act explicitly states that an RRB shall be deemed to be a co-operative society for the purposes of the Income-tax Act, 1961. Further, Section 32 of the RRB Act contains a non-obstante clause, making the RRB Act prevail over any inconsistent provisions of other laws."

"The reopening is based upon the return of income filed by the assessee at the first instance. There is no allegation against the assessee that there was a failure on the part of the assessee to make a true disclosure nor the Assessing Officer had relied on any tangible material which has come to his knowledge after the filing of the return and intimation under section 143(1), justifying the reopening. Therefore to reopen an assessment based on the return filed by the assessee will clearly be a case of change of opinion and consequently bad in law."

"Interest on refund of income-tax paid in excess was not attributable to the income derived from the business of banking within the meaning of section 80P(2)(a)(i) of the Act. Once the income-tax paid was derived from the business income then interest income would partake of the character of the principal amount because the interest paid to the assessee-respondent is compensation on account of deprivation of the use of money."

The Court dismissed the Revenue's appeal and allowed the assessee's cross objection partly, confirming that the assessee is entitled to deduction under Section 80P(2)(a)(i) as a co-operative society, that the reassessment was invalid for lack of fresh material, that interest on income tax refund qualifies for deduction, and directing recomputation of interest under Section 244A.

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