2022 (8) TMI 1132 - AT - Income Tax

Revision u/s 263 by CIT - CIT(A) noticed that the assessee-society had made cash deposits with specified bank notes (SBNs) during the demonetisation period in its bank account - According to the PCIT AO did not make necessary enquiries about the source / genuineness of the cash deposits. Secondly assessee had credited in the profit and loss account an amount towards interest and dividends on investments from bank - PCIT was of the view that the said amount should be taxed as income under the head other sources u/s 56 of the I.T.Act, and therefore, deduction u/s 80P(2)(a)(i) and 80P((2)(d) of the I.T.Act is not allowable HELD THAT - AO had allowed the deduction u/s 80P(2)a)(i) in respect of interest income received on account of investments made by the assessee with certain Co-operative Banks. This action of the A.O. is contrary to the dictum laid down in the case of Pr.CIT Anr. v. Totagars Co-operative Sale Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT . Further, as regards the cash deposits is concerned, there is no discussion with reference to the genuineness of the source of cash deposits in the assessment order completed u/s 143(3) of the I.T.Act. Therefore, for the aforesaid reasons, we uphold the order passed by the PCIT u/s 263 of the I.T.Act. Limited submission of the learned AR as regards the claim of deduction u/s 80P(2)(a)(i) is that investments are made out of statutory compulsions under the Karnataka Co-operative Societies Act and Rules. Hence, the receipt of interest income has nexus with business of the assessee. In this context, the learned AR had relied on the order of the Bangalore Bench of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd.. 2021 (8) TMI 706 - ITAT BANGALORE and Uppinangady Co-operative Agricultural Society Limited 2021 (12) TMI 563 - ITAT BANGALORE We find merit in the alternative submission of the learned AR that if interest income is earned out of investments made with Central Co-operative Banks and is in statutory compliance with the Karnataka Co-operative Societies Act and Rules, such investments have business nexus and should be considered as income derived from business of providing credit facilities to the members. This alternate contention of the assessee need to be examined by the A.O. while giving effect to the order of the PCIT passed u/s 263 of the I.T.Act. PCIT in impugned order had made certain observations that the assessee had failed to furnish satisfactory explanation regarding the source of cash deposits in the banks and the SBNs received. This observation of the PCIT will not result in a fair opportunity of hearing to the assessee while giving effect to the order of the PCIT. Hence, we delete the said observation. The A.O. shall examine the creditworthiness of the creditors and the genuineness of the transactions in respect of the cash deposits made during the demonetisation period. Accordingly, we uphold the order of the PCIT passed u/s 263 of the I.T.Act with aforesaid modification - Appeal of assessee dismissed.

Summary

Issues:
1. Validity of PCIT's order u/s 263 of the I.T. Act
2. Treatment of cash deposits during demonetization period
3. Taxation of interest income under the head "Other Sources"
4. Allowability of deduction u/s 80P(2)(a)(i) and u/s 80P(2)(d) of the I.T. Act

Analysis:
1. The appeal challenged the Principal Commissioner of Income Tax's (PCIT) order under section 263 of the I.T. Act for the assessment year 2017-2018. The appellant contended that the PCIT's order was against the law and facts of the case, arguing that the Assessing Officer (A.O.) had conducted proper inquiries before passing the original assessment order under section 143(3) of the I.T. Act.

2. The PCIT found the cash deposits made during demonetization and the treatment of interest income as contentious issues. The PCIT directed the A.O. to examine the source of cash deposits and the claim of deduction under section 80P of the I.T. Act. The PCIT cited legal precedents to support the tax treatment of interest income under the head "Other Sources" and disallowance of deductions under sections 80P(2)(a)(i) and 80P(2)(d) of the I.T. Act.

3. The Tribunal upheld the PCIT's order under section 263, noting that the A.O.'s allowance of deduction under section 80P(2)(a)(i) for interest income was contrary to legal precedents. The Tribunal also highlighted the lack of discussion on the genuineness of the source of cash deposits in the original assessment order, supporting the PCIT's decision.

4. The Tribunal acknowledged the appellant's argument that interest income derived from investments made in compliance with statutory requirements should be considered as income from the business of providing credit facilities. The Tribunal directed the A.O. to re-examine this aspect in line with the PCIT's order. Additionally, the Tribunal modified certain observations made by the PCIT regarding the source of cash deposits to ensure a fair opportunity for the appellant during further proceedings.

In conclusion, the Tribunal dismissed the appeal, upholding the PCIT's order under section 263 of the I.T. Act with modifications to address specific issues related to cash deposits, interest income taxation, and deductions under section 80P of the I.T. Act.