2022 (1) TMI 153 - AT - Income Tax

Revision u/s 263 by CIT - AO allowed the deduction u/s 80P(2)(a)(i) in respect of interest income from the Co-operative Bank and as such, the order was not erroneous for the purpose of section 263 - HELD THAT - On perusal of the assessment order passed u/s 143(3) of the I.T.Act dated 30.11.2016, it is clear that there is no discussion by the A.O. and deduction u/s 80P of the I.T.Act has been granted without much inquiry. The assessment order completed without making necessary inquiry rendered the assessment erroneous and prejudicial to the interest of revenue. Therefore, the CIT has correctly invoked the provisions of section 263 of the I.T.Act and we uphold the same. As regards whether the assessee is entitled to deduction u/s 80P(2)(a)(i) and 80P(2)(d) of the I.T.Act, the recent order of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd 2021 (8) TMI 706 - ITAT BANGALORE after considering the judicial pronouncements on the issue held that interest income earned out of investments made from surplus funds would be taxable under the head income from other sources and would not be eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. It was further held by the Tribunal insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, only those interest received from investments with co-operative societies alone would be entitled to deduction. As contended that majority of the interest income is earned out of investments made with Central Co-operative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co-operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction. Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. 2021 (1) TMI 488 - SUPREME COURT had settled various issues for claiming deduction u/s 80P(2)(a)(i) Thus the matter needs to be examined afresh by the A.O. de hors the observations of the CIT. The A.O. is directed to follow the dictum laid down by the Hon ble Apex Court in framing the fresh assessment. It is ordered accordingly.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Validity of the CIT's order under section 263 of the I.T. Act.
3. Entitlement of the assessee to deductions under sections 80P(2)(a)(i) and 80P(2)(d) of the I.T. Act.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed the appeal with a delay of 73 days. The Tribunal examined the reasons provided in the affidavit by the assessee's CEO and found sufficient cause for the delay. Consequently, the delay was condoned, allowing the appeal to be heard on its merits.

2. Validity of the CIT's Order under Section 263 of the I.T. Act:
The CIT issued a show-cause notice under section 263, proposing to revise the assessment order dated 30.11.2016, arguing that the A.O. granted deductions under section 80P(2) without proper inquiry, rendering the assessment erroneous and prejudicial to the revenue's interest. The CIT identified specific issues for re-examination, including the nature of the banks where deposits were made, the obligation to invest surplus funds, and the classification of interest income. The Tribunal upheld the CIT's invocation of section 263, noting the lack of detailed inquiry by the A.O. in the original assessment.

3. Entitlement to Deductions under Sections 80P(2)(a)(i) and 80P(2)(d):
The Tribunal referred to judicial precedents, particularly the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr., which clarified that:
- Section 80P is a benevolent provision and should be interpreted liberally.
- Co-operative societies providing credit facilities to members are entitled to deductions under section 80P(2)(a)(i), even if they extend loans to non-members, provided the profits from non-member transactions are excluded.
- Interest income from investments with other co-operative societies qualifies for deduction under section 80P(2)(d).
- Section 80P(4) applies only to co-operative banks, not to co-operative societies.

The Tribunal noted that the A.O. must re-examine the matter, considering the statutory obligations under the Karnataka Co-operative Societies Act requiring specific investments, which could classify the interest income as business income eligible for deduction. The Tribunal directed the A.O. to reassess the case, adhering to the Supreme Court's guidelines.

Conclusion:
The appeal was allowed for statistical purposes, with instructions for the A.O. to conduct a fresh assessment in line with the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr., ensuring compliance with statutory investment requirements and proper classification of interest income.