2018 (4) TMI 1516 - AT - Income Tax

Deduction u/s 80P(2)(d) - interest on deposits made with the Bank - mutual cooperative society - assessee has filed the return of income after conducting the survey - income escaping assessment u/s 147 - Held that - In the instant case, the assessee has made deposits with the Karnataka Bank Limited, which is not member of the society and the same is not to be allowed as a deduction u/s 80P(2)(d) of the Act. Therefore, the entire interest income derived by the assessee from the Karnataka Bank Limited is taxable. This view is supported in M/s. The Totgars Cooperative Sale Society Limited case 2010 (2) TMI 3 - SUPREME COURT and M/s. BANGALORE CLUB 2013 (1) TMI 343 - SUPREME COURT The assessee in the paper book furnished in the returns of income but not furnished the actual amount of interest received by the assessee from the Karnataka Bank Limited. A.O also has not given any finding on the interest received by the assessee from the banks. Even though the interest received on mandatory deposits the same is taxable. The case should be remitted back to the file of the A.O. to examine the nature of receipts which are exempt on principle of mutuality basis and taxable receipts such as interest received from Karnataka Bank and any other receipts and determine the true and correct income as per law. Appeals filed by the assessee allowed for statistical purposes.

Summary

Issues:
1. Validity of reopening assessments under section 147 of the Income Tax Act.
2. Exemption of income on the principle of mutuality for a mutually aided co-operative society.
3. Taxability of interest income derived from sources outside the society.

Analysis:

1. Validity of Reopening Assessments: The case involved the reopening of assessments under section 147 of the Income Tax Act based on a survey conducted under section 133A. The Assessing Officer (AO) reopened the assessments by issuing notices under section 148, which the assessee contended were in response to the returns filed earlier. The AO completed the assessment accepting the returned income, without making any additions. The assessee, however, challenged the initiation of proceedings under section 147 before the Commissioner of Income Tax (Appeals) (CIT(A)), who dismissed the appeal. The Tribunal held that the CIT(A) erred in dismissing the assessee's contention without considering the grounds raised, emphasizing that appellate authorities are obligated to adjudicate on issues raised by the assessee.

2. Exemption on the Principle of Mutuality: The assessee, a mutual cooperative credit society, argued that its income was exempt from tax on the basis of mutuality principles, as all transactions were with members and income was interest-based. The Tribunal noted that the AO had accepted the returned income without any claim for exemption based on mutuality. However, the Tribunal held that the issue of exemption should have been considered, citing precedents emphasizing that the true and correct income should be determined, especially in cases where the returned income might not be entirely taxable.

3. Taxability of Interest Income: The Tribunal analyzed the nature of income derived by the assessee from different sources, particularly interest income from Karnataka Bank Limited. It was established that while income derived from members was exempt on the principle of mutuality, interest income from external sources like the bank was taxable. The Tribunal referred to relevant judicial precedents to support this position and directed the AO to re-examine the nature of receipts, distinguishing between exempt and taxable income, to determine the accurate income as per law. Consequently, the assessment was set aside for a fresh determination.

In conclusion, the Tribunal allowed all appeals filed by the assessee for statistical purposes, emphasizing the need for a comprehensive assessment considering the principles of mutuality and the taxability of income derived from different sources.