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2021 (8) TMI 706 - AT - Income TaxRevision u/s 263 - Deduction u/s 80P(2)(a)(i) - interest income was received by the assessee on deposits with co-operative banks and therefore deduction on the aforesaid sum ought to not have been allowed to the assessee by the AO either under section 80P(2)(a)(i) or 80P(2)(d) - HELD THAT - As seen that the ratio laid down in the case of Totalgars Cooperative Sales Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT is that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society 2010 (2) TMI 3 - SUPREME COURT in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in cooperative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. CIT was therefore justified in exercising his powers of revision u/s.263 of the Act and directing the AO to tax interest income in question as it is neither of the nature specified in Sec.80P(2)(a)(i) or 80P(2)(d) of the Act. The argument that the view taken by the AO was a possible view and hence revision u/s.263 of the Act is bad is again not acceptable because, the view that ought to have been adopted was the later binding decision of the High Court in the case of Totagar co-opeartive sales society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT The argument that co-operative Banks are also co-operative societies is again without any basis in the light of the law explained in the case of Totagar co-opeartive sales society supra - We uphold the order of the CIT and dismiss the appeal of the assessee. Whether interest received from deposits with Mysore Chamarajanagar District Central Co-operative Bank made out of Reserve Fund in compliance with rule 23(2) of the Karnataka Co-operative Societies Rules, 1960 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the Income Tax Officer rightly allowed deduction thereof under section 80-P(2)(a)(i) of the Income Tax Act, 1961? - The issue raised by the Assessee in the aforesaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised alone to the AO for examination afresh. In other respects we confirm the order of the CIT.
Issues Involved:
1. Whether the interest income earned by the assessee from deposits with cooperative banks is eligible for deduction under section 80P(2)(a)(i) or 80P(2)(d) of the Income Tax Act, 1961. 2. Whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue. 3. Whether the CIT was justified in exercising revisionary powers under section 263 of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Deduction Eligibility under Section 80P(2)(a)(i) or 80P(2)(d): The assessee, a Co-operative Society, claimed deduction under section 80P(2)(a)(i) for interest income earned from deposits with Mysore and Chamarajnagar District Central Co-operative Bank. The Principal Commissioner of Income Tax (Pr.CIT) argued that the interest income from deposits with cooperative banks should not be allowed under section 80P(2)(a)(i) or 80P(2)(d) of the Act, citing the Karnataka High Court's decision in Pr.CIT Vs. Totagars Co-operative Sale Society, which held that such interest income is taxable under the head "income from other sources." The Tribunal noted that the Supreme Court in Totgars Co-operative Sale Society Ltd. Vs. ITO held that interest on surplus funds not required for business purposes is taxable under "income from other sources" and not eligible for deduction under section 80P(2)(a)(i). The Tribunal also referred to the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO, which allowed deduction under section 80P(2)(a)(i) for interest income from deposits in nationalized banks, stating that the interest income is attributable to the business of providing credit facilities to its members. 2. Erroneous and Prejudicial Order by AO: The Tribunal emphasized that an order contrary to a decision of the jurisdictional High Court is prejudicial to the interest of the Revenue. The Supreme Court in Malabar Industrial Co. Ltd. vs. CIT held that an order is erroneous and prejudicial if the AO fails to apply his mind or violates principles of natural justice. The Tribunal noted that the AO's order was contrary to the Karnataka High Court's decision in Totagars Co-operative Sale Society, making it erroneous and prejudicial to the Revenue. 3. Justification of CIT's Revisionary Powers under Section 263: The Tribunal upheld the CIT's exercise of revisionary powers under section 263, stating that the AO's decision was contrary to the jurisdictional High Court's ruling. The Tribunal rejected the assessee's argument that the AO's view was a possible view, noting that the AO's decision was not in line with the binding precedent. The Tribunal also dismissed the argument that cooperative banks are cooperative societies, referring to the Karnataka High Court's decision in Totagars Co-operative Sale Society, which clarified that cooperative banks are not eligible for deduction under section 80P(2)(d). Remand for Examination of Statutory Compulsions: The Tribunal noted that the assessee raised grounds regarding statutory compulsions to invest funds in a particular manner, which could affect the characterization of interest income. The Tribunal remanded these specific grounds to the AO for fresh examination, indicating that if the investments were statutorily required for running the business, the interest income might have a business nexus and be eligible for deduction under section 80P(2)(a)(i). Conclusion: The Tribunal partly allowed the assessee's appeal for statistical purposes, remanding the issue of statutory compulsions to the AO for further examination while upholding the CIT's order in other respects. The Tribunal's decision emphasized adherence to jurisdictional High Court rulings and the proper application of revisionary powers under section 263.
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