2022 (2) TMI 1274 - AT - Income Tax

Revision u/s 263 - disallowing deduction u/s 80P(2)(a)(i) - whether the said interest earned on the said deposits was business profits and eligible for deduction u/s 80P(2)(a)(i)? - HELD THAT - The provisions of section 80P(2)(d) of the Income Tax Act, 1961, clearly provide deduction on interest from investment with any other Co-operative Society only whereas the disputed interest income has not been earned from any Co-operative Society. In this connection, the Ld. Pr. CIT has rightly placed reliance on the judgment of the Hon ble Jurisdictional Punjab and Haryana High Court, in the case M/s Punjab State Co-operative Federation of Housing Building Societies Ltd., 2011 (5) TMI 219 - PUNJAB AND HARYANA HIGH COURT wherein the Hon ble High Court, following the judgment of Hon ble Supreme Court, in the case of The Totgars Co-operative Sale Society Ltd 2010 (2) TMI 3 - SUPREME COURT have held that interest received by the assessee from Commercial banks was not covered by Section 80P(2)(a)(i) of the Act and was taxable under section 56, being income from other sources. The assessment order in not adding such interest to the total income, can be construed as prejudicial to the interest of revenue because such interest income is charged to Tax as income from other sources in the context of the assessee due to the non-availability of deduction u/s.80P(2)(d) on such amount. We, therefore, hold that the Ld. Pr.CIT was justified in revising the assessment order. The impugned order is upheld.

Summary

Issues Involved:
1. Validity of invoking provisions of Section 263 of the Income Tax Act, 1961.
2. Disallowance of deduction under Section 80P(2)(a)(i) on interest earned from banks.

Issue-wise Detailed Analysis:

1. Validity of Invoking Provisions of Section 263:
The Assessee contended that the Commissioner of Income Tax (CIT) erred in law and facts by invoking Section 263, arguing that the original assessment order under Section 143(3) was neither erroneous nor prejudicial to the interest of revenue. The Assessee emphasized that the order was passed after detailed consideration and application of mind by the Assessing Officer (AO). The CIT, however, noted discrepancies in the assessment order, particularly the failure to disallow the deduction claimed under Section 80P(2)(a)(i) for interest earned from banks, which was not examined by the AO during the assessment proceedings.

The Tribunal upheld the CIT’s invocation of Section 263, stating that the AO's failure to examine the issue of interest income from banks rendered the assessment order erroneous and prejudicial to the interest of revenue. The Tribunal referred to the provisions of Section 80P(2)(d), which allow deductions only for interest earned from investments with co-operative societies, not commercial banks. The Tribunal also cited the explanation to Section 263(1), deeming such errors by the AO as prejudicial to the interest of revenue.

2. Disallowance of Deduction under Section 80P(2)(a)(i):
The Assessee argued that the interest earned from banks should be considered as business income and eligible for deduction under Section 80P(2)(a)(i), as the investments were made to ensure liquidity for the business. The CIT, however, disallowed the deduction, relying on the judgment of the Punjab & Haryana High Court in the case of CIT Vs. M/s Punjab State Cooperative Federation of Housing Building Societies Ltd., which held that interest from commercial banks is not covered under Section 80P(2)(a)(i) and is taxable under Section 56 as "Income from Other Sources."

The Tribunal agreed with the CIT’s disallowance, stating that the interest income from banks is not attributable to the business of providing credit facilities to members. The Tribunal emphasized that Section 80P(2)(a)(i) allows deductions for "profits and gains of business," which does not include interest from surplus funds invested in short-term deposits with commercial banks. The Tribunal upheld the CIT’s reliance on the Supreme Court’s decision in The Totgars Co-operative Sale Society Ltd. Vs ITO, which clarified that interest income from surplus funds invested in securities is taxable under Section 56 and not eligible for deduction under Section 80P(2)(a)(i).

Conclusion:
The Tribunal upheld the CIT’s order under Section 263, confirming that the original assessment order was erroneous and prejudicial to the interest of revenue due to the incorrect allowance of deduction under Section 80P(2)(a)(i) for interest earned from banks. The Tribunal concluded that the interest income from banks should be taxed as "Income from Other Sources" under Section 56, and not as business profits eligible for deduction under Section 80P(2)(a)(i). The assessment order was set aside for fresh consideration by the AO in light of these findings.