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2025 (2) TMI 166 - AT - Income TaxRevision u/s 263 - interest and dividend income earned from bank was income from other sources which was not eligible for deduction u/s 80P(2)(d) - HELD THAT - There is no dispute that assessee is a Primary Agriculture Credit Society which is evident from the Certificate issued by District Registrar of Co-Operative Society Navsari. Hence assessee is not affected by Section 80P(4) of the Act. However that itself would not entitle assessee to claim benefit of deduction u/s 80P(2)(a)(i) of the Act on the interest income which is clearly assessable as Income from other sources u/s 56 of the Act. As per section 80P of the Act where in case of a co-operative society gross total income includes income in sub-section(2) of Section 80P there shall be deduction in accordance with provisions of sub-section(2) of Section 80P. Sub-section-(2) includes cooperative society engaged in (i) carrying on business of banking or providing credit facility to its members clause (i) (ii) the marketing of agricultural produce grown by its members clause (iii) etc. The deduction would be the whole of the amount of profits and gains of business attributable to anyone or more of such activities. Assessee would be entitled for the deduction on the profits and gains of business attributable to any one or more activities. We have already given the details of interest received and paid earlier. The assessee has received interest income from 22 different sources. It is not clear whether interests earned as mentioned in the table in para-6 are out of the profits and gains of the business attributable to any one or more activities mentioned in the subsection(2) of Section 80P of the Act. No clear nexus between interest income and interest paid has been established. Therefore the direction given by the Ld.PCIT is modified accordingly. In other words order of the Ld.PCIT to set aside the order is upheld but the AO should consider the nexus of interest paid with the interest income and if the interest income is part of the business profit attributable to one of the activities mentioned in clause-(i) to (vii) of Section 80P(2)(a) allow the interest paid in respect of such business profit. After excluding such interest paid the remaining interest expenditure should be disallowed. This ground of assessee s appeal is partly allowed.
ISSUES PRESENTED and CONSIDERED
The primary issues considered in this judgment were:
ISSUE-WISE DETAILED ANALYSIS 1. Jurisdiction under Section 263 of the Income Tax Act Relevant legal framework and precedents: Section 263 of the Income Tax Act allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The Supreme Court in Malabar Industrial Co. Ltd. vs. CIT established that both conditions must be satisfied for invoking Section 263. Court's interpretation and reasoning: The Tribunal noted that the AO failed to make necessary inquiries regarding the netting of interest income and the applicability of Sections 56 and 57. The PCIT found the AO's order erroneous and prejudicial to revenue interests due to the failure to disallow interest expenditure. Key evidence and findings: The AO did not disallow the interest expenditure of Rs. 2,41,38,304/-, leading to a short levy of tax amounting to Rs. 83,50,323/-. The PCIT noted that the AO did not conduct adequate inquiries. Application of law to facts: The Tribunal upheld the PCIT's invocation of Section 263, as the AO's failure to apply the correct provisions of Sections 56 and 57 rendered the assessment order erroneous and prejudicial to revenue interests. Treatment of competing arguments: The assessee argued against the reliance on ITAT decisions, but the Tribunal noted that these decisions were supported by jurisdictional High Court and Supreme Court rulings. Conclusions: The Tribunal concluded that the PCIT was justified in invoking Section 263, as the AO's order was both erroneous and prejudicial to the interests of the revenue. 2. Treatment of Interest Income and Expenditure Relevant legal framework and precedents: Sections 56 and 57 of the Act govern the treatment of income from other sources and the allowable deductions. The Supreme Court in Totgar's Cooperative Sale Society Ltd. vs. ITO held that interest income from surplus funds is taxable as "Income from other sources." Court's interpretation and reasoning: The Tribunal agreed with the PCIT's view that the interest income should be treated as "Income from other sources," and the interest expenditure was not incurred wholly and exclusively for earning such income, thus not allowable under Section 57. Key evidence and findings: The assessee's interest income from cooperative banks was not directly linked to the interest expenditure, which was related to loans against fixed deposits. Application of law to facts: The Tribunal found that the AO erred in allowing net interest income without disallowing the interest expenditure, contrary to the legal provisions. Treatment of competing arguments: The assessee's reliance on being a Primary Agricultural Co-operative Society was not sufficient to claim deductions under Section 80P for interest income taxable under Section 56. Conclusions: The Tribunal upheld the PCIT's decision that interest income should be taxed under Section 56, and the interest expenditure was not deductible under Section 57. 3. Deduction under Section 80P(2)(d) of the Act Relevant legal framework and precedents: Section 80P provides deductions for cooperative societies, but the Supreme Court in Totgar's Cooperative Sale Society Ltd. clarified that operational income is eligible, not other income. Court's interpretation and reasoning: The Tribunal noted that the interest income was not operational income and thus not eligible for deduction under Section 80P(2)(d). Key evidence and findings: The interest income was derived from surplus funds and not from the society's primary activities. Application of law to facts: The Tribunal found no clear nexus between interest income and the society's operational activities, disallowing the deduction under Section 80P. Treatment of competing arguments: The assessee's argument based on its status as a Primary Agricultural Co-operative Society was insufficient to claim the deduction. Conclusions: The Tribunal ruled that the assessee was not entitled to the deduction under Section 80P(2)(d) for interest income assessed under Section 56. SIGNIFICANT HOLDINGS Core principles established: The Tribunal reinforced the principle that interest income from surplus funds is taxable as "Income from other sources," and deductions under Section 57 are only permissible if the expenditure is wholly and exclusively incurred to earn that income. Additionally, deductions under Section 80P are limited to operational income. Final determinations on each issue: The Tribunal upheld the PCIT's invocation of Section 263, determined that the interest income should be taxed under Section 56, and disallowed the deduction under Section 80P(2)(d) for the interest income.
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