2011 (12) TMI 241 - HC - Income Tax

Validity of re-opening of Assessment u/s 147/148 Society admittedly being banking company - limitation and deductibility of the interest income u/s 80P(2) Held that - The limitation of 4 years provided in Section 147 is extendable upto 6 years and even more if the case falls within the parameters of Section 149(1)(b) or first proviso to Section 151. Apparently assessing authority have obtained sanction from the Commissioner u/s 151 and amount of interest is more than Rs. 1 lac as provided u/s 149(1)(b). Thus it is left open to the assessee to the contend and establish before the learned assessing authority that for the given reasons such notice is time barred or not. Deduction u/s 80P(2) would not be available to the assessee if such interest income is taxable u/s 56 as income from other sources as held in case of The Totgars Co-operative Sale Society Ltd vs ITO (2010 - TMI - 35322 - Supreme Court). The petitioner has not even placed any evidence on record showing its governance by RBI under Banking Regulations Act to show that it is exclusively a banking business society. Therefore it is a question still open and yet to be adjudicated upon by the assessing authority in present proceedings u/s 147/148. Assessee is left free to establish its case before the assessing authority. - Decided against the assessee.

Summary

Issues Involved:
1. Limitation of reassessment notice under Section 147/148 of the Income Tax Act.
2. Deductibility of interest income under Section 80P(2)(a)(i) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Limitation of Reassessment Notice:

The petitioner contended that the reassessment notice dated 18.3.2011 for the assessment year 2004-2005 was barred by the four-year limitation period prescribed under Section 147 of the Income Tax Act. The respondent countered that the limitation of four years would not apply as the assessing authority had obtained the approval of the Commissioner of Income Tax for issuing the notice, in accordance with Section 151 of the Act. According to the first proviso of Section 151, the bar of limitation of four years is lifted if such approval is granted by the Chief Commissioner or the Commissioner. Additionally, Section 149(1)(b) provides a six-year limitation if the income chargeable to tax which has escaped assessment amounts to one lakh rupees or more for that year.

The court held that it would be premature to pronounce the notice as time-barred. The limitation of four years provided in Section 147 is extendable up to six years under Section 149(1)(b) if the escaped income exceeds one lakh rupees. The assessing authority had obtained the necessary sanction from the Commissioner, making the notice potentially valid under the first proviso to Section 151. Therefore, the issue of limitation was left open for the assessee to contest before the assessing authority.

2. Deductibility of Interest Income:

The petitioner argued that as a cooperative society engaged in banking activities, its total income was deductible under Section 80P(2)(a)(i) of the Act. The impugned reassessment notice aimed to tax the interest income of Rs. 11,99,228/- earned from fixed deposits, which the petitioner claimed was deductible. The petitioner contended that the assessing authority misapplied the Supreme Court decision in Totgars' Co-operative Sale Society Ltd. v. ITO, which held that interest income from surplus funds not required for business purposes was taxable as 'income from other sources' under Section 56, and not as 'income from business or profession' under Section 28.

The respondent argued that even a cooperative society engaged in banking business could be subjected to tax on interest income from investments, as held by the Supreme Court in Totgars' case. The court noted that the questions of limitation and deductibility of interest income under Section 80P(2) were mixed questions of fact and law, yet to be adjudicated by the assessing authority. The court emphasized that merely because the petitioner was engaged in banking activities did not preclude the assessing authority from issuing the notice and examining the nature of the interest income. The petitioner had not provided evidence showing its exclusive governance by the RBI under the Banking Regulations Act.

The court referred to the Supreme Court's decision in Totgars' case, which clarified that interest income from surplus funds not required for business purposes was taxable as 'income from other sources' and not deductible under Section 80P(2)(a)(i). The court concluded that the factual foundation for claiming the deduction was yet to be established before the assessing authority.

Conclusion:

The court dismissed the writ petition, leaving the petitioner free to establish its case before the assessing authority. The court held that it was premature to pronounce on the issues of limitation and deductibility of interest income at this stage. The petitioner could contest the validity of the reassessment notice and the taxability of the interest income before the assessing authority. No order as to costs was made.