2015 (4) TMI 94 - AT - Income Tax

Revision u/s 263 - AO has overlooked the provisions of s. 80P(2)(d) and has also failed to conduct any enquiry in respect to interest received by Assessee from SBI and thus there was no application of mind by the AO and thus AO has erred in treating interest received from SBI as deductible u/s 80P(2) of the Act which has resulted in loss to Revenue - Held that - Here it will be relevant to note that Section 80P(2)(d) provides that interest and dividend received by a cooperative society from investments with other cooperative society is exempt from tax. It is also an undisputed fact that SBI is not a cooperative society and therefore the interest received from SBI cannot be considered to be exempt u/s 80P(2)(d) of the Act. In the present case, the interest income earned on extending credit facilities by the Assessee to its members will be business income as there exists nexus between the income and the business of the society, which is extending credit facility to its members but it cannot be said that there is such nexus between the interests earned on deposits made with the SBI. It may be true that deposits are made in banks so that the funds are not kept idle but we are of the view that the motive for making deposits with SBI cannot change the character of interest income earned on deposit made from SBI to be one arising from business of providing credit facility to its member We are not in agreement with the submission of the Ld AR for the reason that though we find that AO had raised a query with respect to claim with respect to deduction u/s 80P but neither there was any query of the AO, with respect to the claim of deduction 80P(2)(d) and therefore no submission of the Assessee, with respect to interest earned from SBI and therefore it cannot be said that there was application of mind by the AO on that issue and for which we also find support by the decision in the case of Gee Vee Enterprises vs. Addl CIT & ORS (1974 (10) TMI 29 - DELHI High Court) wherein observed that the 1TO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word erroneous in s. 263 emerges out of this context. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word erroneous in s. 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. Thus order of the AO which was revised by the CIT in his order u/s 263 was erroneous and therefore exercise of jurisdiction u/s 263 by ld. CIT was justified. - Decided against Assessee.

Summary

Issues Involved:
1. Delay in filing the appeal for A.Y. 2010-11.
2. Legitimacy of the CIT's order under Section 263 of the Income Tax Act.
3. Eligibility of interest income from SBI for deduction under Section 80P of the Income Tax Act.

Detailed Analysis:

1. Delay in Filing the Appeal for A.Y. 2010-11:
The appeal for A.Y. 2010-11 was filed late by 4 days. The delay was attributed to a nationwide strike of employees, supported by a sworn affidavit from the Secretary of the Society. Considering the reasons and the affidavit, the tribunal found reasonable cause for the delay and condoned it, admitting the appeal for hearing.

2. Legitimacy of the CIT's Order under Section 263:
The CIT invoked Section 263, revising the AO's order for A.Y. 2009-10, which had accepted the Assessee's return declaring total income as Nil after claiming a deduction under Section 80P. The CIT noticed that the Assessee had earned interest from SBI, which was not eligible for deduction under Section 80P(2)(d) as SBI is not a cooperative society. The CIT held that the AO's order was erroneous and prejudicial to the interests of the Revenue due to a lack of proper enquiry and application of mind regarding the interest income from SBI. The CIT thus directed the AO to make a fresh assessment.

The Assessee argued that the CIT's invocation of Section 263 was unjustified as the conditions for its application were not satisfied. The Assessee contended that the AO had already raised queries and received satisfactory replies regarding the deduction under Section 80P during the assessment proceedings. However, the tribunal found that the AO had not specifically enquired into the interest income from SBI, thus supporting the CIT's decision to revise the order under Section 263.

3. Eligibility of Interest Income from SBI for Deduction under Section 80P:
The Assessee, a cooperative society formed by SBI employees, argued that the interest earned from SBI deposits should be deductible under Section 80P as the deposits were made to avoid keeping funds idle. The Assessee claimed that the deposits were part of its business activities of providing credit facilities to its members.

However, the tribunal noted that Section 80P(2)(a)(i) exempts income from business activities directly related to providing credit facilities to members, and Section 80P(2)(d) exempts interest from investments in other cooperative societies, not banks like SBI. The tribunal referred to the Supreme Court's decision in Totgars CCS Ltd., which held that interest income from surplus funds invested in banks is taxable under "income from other sources" and not as business income. Consequently, the tribunal concluded that the interest income from SBI could not be considered for deduction under Section 80P.

Conclusion:
The tribunal upheld the CIT's order under Section 263 for both A.Y. 2009-10 and A.Y. 2010-11, finding the AO's original assessment to be erroneous and prejudicial to the interests of the Revenue. The appeals by the Assessee were dismissed, affirming that the interest income from SBI was not eligible for deduction under Section 80P.