2025 (4) TMI 1440 - AT - Income Tax

Deduction u/s 80P - addition of interest received by the assessee from fixed deposits - HELD THAT - We find that the present issue is squarely covered by the various judicial precedents. In the decision of Gunja Samabay Krishi Unnayan Samity Ltd. 2023 (1) TMI 783 - CALCUTTA HIGH COURT held that interest earned by the cooperative society on surplus funds deposited in bank and Govt. securities is qualified for deduction u/s 80P(2)(a)(i) of the Act. Similarly in the case of Yendagandhi Large Sized Co-operative Society Ltd. 2023 (12) TMI 61 - ITAT VISAKHAPATNAM allowed the deduction for interest income from deposits with the cooperative society and nationalised banks. Thus we direct the AO to delete the disallowance u/s 80P of the Act and therefore the deduction u/s 80P claimed is allowed. Addition on account of overdue interest provisions made by the assessee - HELD THAT - The provisions for overdue interest was not an issue raised in the limited scrutiny assessment. Therefore the ld. CIT(A) erred in confirming this addition without proper justification and the addition is hereby deleted since the limited scrutiny had done in the case of the assessee was only related to the specific issues and the AO cannot go beyond the scope of limited scrutiny on an issue which was never for limited scrutiny assessment. Moreover provision was made relating to overdue interest as amount in question had not been recovered for a continuous period of six years. Additions on miscellaneous income and rental income - HELD THAT - CIT(A) cannot make an addition on an issue which is not raised in the original assessment order without giving the assessee an opportunity to respond. In the present issue without giving notice to the assessee the alleged addition was made by the ld. CIT(A) suo moto which is not in accordance with law. Consequently the additions on miscellaneous income and rental income are hereby deleted.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these consolidated appeals are:

(a) Whether the interest income earned by the assessee from fixed deposits with cooperative banks and other institutions qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961, and whether the Assessing Officer and the CIT(A) were justified in denying such deduction.

(b) Whether the addition of provision for overdue interest amounting to Rs. 3,03,486/- made by the Assessing Officer and confirmed by the CIT(A) is valid, particularly considering the limited scope of scrutiny assessment and the nature of the provision.

(c) Whether the addition of miscellaneous income of Rs. 2,48,383/- and rental income of Rs. 750/- by the CIT(A), which were not added by the Assessing Officer and were not issues in the appeal before the CIT(A), is legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Deduction under Section 80P(2)(a)(i) for Interest Income from Fixed Deposits and Cooperative Banks

Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) of the Income Tax Act provides deduction in respect of income earned by cooperative societies engaged in providing credit facilities to its members. The legal question revolves around the eligibility of interest income earned from surplus funds deposited in fixed deposits with cooperative banks and other financial institutions for such deduction.

Judicial precedents cited include the decision of the Hon'ble Calcutta High Court in PCIT vs. Gunja Samabay Krishi Unnayan Samity Ltd., which held that interest earned on surplus funds deposited in banks and government securities qualifies for deduction under section 80P(2)(a)(i). Additionally, the Coordinate Kolkata Bench of the Tribunal in Haldia Port Employees Cooperative Credit Society Ltd. and the Visakhapatnam Bench in ITO vs. Yendagandhi Large Sized Co-operative Society Ltd. have supported this interpretation.

Court's Interpretation and Reasoning: The Tribunal examined the financial details of the assessee, noting interest income from fixed deposits and loans to members totaling Rs. 1,44,93,182/-, alongside other incomes. The Assessing Officer disallowed the deduction under section 80P, treating the interest income as not eligible. The CIT(A) upheld this disallowance.

Upon review, the Tribunal found the issue squarely covered by binding judicial precedents favoring the assessee's claim. It held that interest income earned by the cooperative society on surplus funds invested in bank deposits and government securities is eligible for deduction under section 80P(2)(a)(i). The Tribunal directed the Assessing Officer to delete the disallowance of Rs. 57,03,533/- and allow the claimed deduction.

Key Evidence and Findings: The financial statements and income details of the assessee, the nature of income sources, and the judicial rulings were pivotal. The Tribunal emphasized the consistent judicial view that such interest income is within the ambit of section 80P(2)(a)(i).

Application of Law to Facts: The Tribunal applied the legal principle established in the cited precedents to the facts of the case, concluding that the interest income from fixed deposits and cooperative banks qualifies for deduction, and the disallowance by the Assessing Officer and CIT(A) was erroneous.

Treatment of Competing Arguments: The Departmental Representative supported the denial of deduction, relying on the Assessing Officer's and CIT(A)'s orders. The Tribunal, however, gave precedence to judicial authority and the assessee's submissions, overruling the Department's stance.

Conclusion: The deduction under section 80P(2)(a)(i) for interest income earned by the cooperative society from fixed deposits and cooperative banks is allowed, and the disallowance is set aside.

Issue (b): Addition of Provision for Overdue Interest

Relevant Legal Framework and Precedents: The scrutiny assessment was limited in scope, confined to specific issues: bonus or commission to employees, investments/advances/loans, and deduction under Chapter VI-A. The Assessing Officer made an addition of Rs. 3,03,486/- on account of provision for overdue interest, treating it as income.

Court's Interpretation and Reasoning: The Tribunal noted that the issue of provision for overdue interest was not part of the limited scrutiny assessment. The Assessing Officer, without converting the limited scrutiny to a full assessment, went beyond the scope by making this addition. The provision was made by the assessee after determining that the amount had not been recovered for six continuous years and was debited in the profit and loss account.

Key Evidence and Findings: The limited scrutiny notice and the scope of issues raised, the accounting treatment of overdue interest provision by the assessee, and absence of any prior notice or issue raised on this point.

Application of Law to Facts: The Tribunal applied the principle that an Assessing Officer cannot extend scrutiny beyond the issues specified in a limited scrutiny assessment without proper procedure. It also recognized the legitimate accounting treatment of overdue interest provision by the assessee.

Treatment of Competing Arguments: The assessee argued the addition was beyond the scope and hence bad in law. The Department did not provide substantial justification for extending the scrutiny scope. The Tribunal sided with the assessee.

Conclusion: The addition of Rs. 3,03,486/- on account of provision for overdue interest is deleted as it was beyond the scope of limited scrutiny and rightly debited by the assessee.

Issue (c): Addition of Miscellaneous Income and Rental Income by CIT(A)

Relevant Legal Framework and Precedents: The Assessing Officer did not make any addition of Rs. 2,49,133/- comprising miscellaneous income and rental income of Rs. 750/-. The CIT(A) made the additions suo moto without prior notice to the assessee.

Court's Interpretation and Reasoning: The Tribunal emphasized the principles of natural justice, requiring that the assessee be given an opportunity to respond before any addition is made. Since the issue was neither raised in the assessment order nor in the appeal before the CIT(A), making additions without notice was improper.

Key Evidence and Findings: The absence of any prior notice or opportunity to the assessee on these additions.

Application of Law to Facts: The Tribunal applied the principle of audi alteram partem (right to be heard) and found the CIT(A)'s action contrary to law.

Treatment of Competing Arguments: The assessee contended the additions were made without notice and hence invalid. The Department did not justify the additions or the procedural lapse. The Tribunal agreed with the assessee.

Conclusion: The additions of Rs. 2,49,133/- on miscellaneous income and rental income of Rs. 750/- are deleted.

3. SIGNIFICANT HOLDINGS

"Interest earned by the cooperative society on surplus funds deposited in bank and Government securities is qualified for deduction under section 80P(2)(a)(i) of the Income Tax Act."

"An Assessing Officer cannot go beyond the scope of limited scrutiny assessment without converting it into a complete scrutiny and without proper notice to the assessee."

"The principles of natural justice require that no addition can be made without giving the assessee an opportunity of being heard; additions made suo moto by the appellate authority without notice are not sustainable."

The Tribunal conclusively allowed the deduction under section 80P(2)(a)(i) for interest income, deleted the addition relating to provision for overdue interest on the ground of limited scrutiny scope, and deleted the additions of miscellaneous and rental income made without notice.

These findings were applied mutatis mutandis to all the consolidated appeals, resulting in the allowance of all appeals filed by the assessee.