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TMI Blog2025 (2) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... acility 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), a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of the Income Tax has grievously erred in assuming that the Ld.AO has passed the assessment order u/s 143(3) rws. 143(3A) & 143(3B) of the Act without verification of facts and without application of mind and correct law. 7. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming that the Learned Assessing Officer had passed the erroneous order. 8. On the facts and circumstances of the case as well as law on the subject, the entire proceedings are bad-in-law and invalid as assessment order for the same year was framed, wherein due inquiry was made. 9. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in setting aside the assessment order u/s 143(3) rws 143(3A) & 143(3B) of the Act without pointing out as to how the order is erroneous and prejudicial to interest of revenue. 10. It is therefore prayed that the above proposed proceedings may please be revoked as learned Members of the Tribunal may deem it proper. 11.Appellant craves liberty to add, alter or delete any ground(s) ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,545/- from Valsad District Central Cooperative Bank. He also found that assessee had claimed interest expenditure of Rs. 2,41,38,304/- by paying interest towards loans taken from co-operative banks against overdraft on fixed deposits. The assessee had shown net interest income of Rs. 1,50,80,241/- by netting the differential amount of interest (Rs.3,92,18,510 - Rs. 2,41,38,304). As per section 57(iii) of the Act, income from other sources shall be computed after deducting expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. He relied on the decision of ITAT Ahmedabad in case of The Govt. Servants Co-op Credit Society Ltd, Vadodara vs. ITO in ITA No.108/Ahd/2017 dated 31.01.2019 for AY 2018-19 and ITA No.1869/Ahd/2017 for AY 2014-15 dated 31.07.2019 where it was held that interest earned on surplus funds deposited with Nationalized Bank and Co-Operative Bank are income from other sources u/s 56 of the Act. Since the interest expenditure related to overdraft loans against fixed deposits was not directly incurred for earning the interest income, the Ld. PCIT observed that the interest expense was not allowable under section 57 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O had failed to make the necessary inquiries or verification required under the law, and had passed the order without applying the correct legal provisions. The Ld. PCIT relied upon decision of Hon'ble Supreme Court in case of CIT vs. Dr. V.P. Gopinath, 248 ITR 449 (SC) where it was held that interest on loan taken by assessee from bank on security of fixed deposits (FD) could not be deducted from interest income on FD placed with the bank. Hence, clause(d) of Explanation 2 of Section 263 of the Act is applicable in case of assessee. Considering escapement of income of Rs. 2,41,38,304/- resulting in lawful loss of tax of Rs. 83,50,323/-, the order of AO was also prejudicial to the interests of revenue. 4.2 Regarding contention of assessee that impugned issue was subject matter of appeal before CIT(A), the Ld. PCIT at para-11 of the order u/s 263 stated that the issue under consideration was neither under consideration before CIT(A) nor decided by CIT(A). The issue before CIT(A) was allowability of deduction u/s 80P(2) and not netting of interest income u/s 56 r.w.s. 57 of the Act. He derived support from the decisions of Hon'ble Supreme Court in case of CIT vs. Shri Arbuda Mills L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.CIT-DR has strongly relied on the order passed by Ld.PCIT. He has stated that Ld.PCIT has called for the records and duly examined it. He has also referred to provisions of section 263 of the Act and stated that the present case is covered by the scope and ambit of Section 263 of the Act because the AO has not made any inquiry which should have been made to come to a proper conclusion. The order passed by the Ld. PCIT is very detailed and well-reasoned and the Ld.PCIT has rightly relied on various decisions of Hon'ble Supreme Court, jurisdictional High Court and ITAT Ahmedabad to hold that the order of AO was both erroneous and prejudicial to the interests of revenue u/s 263 of the Act. 6.1 Regarding argument of Ld. AR that the impugned issue was a subject matter of appeal before CIT(A), the Ld. CIT-DR submitted that the Ld. PCIT acted within his jurisdiction in initiating revision under section 263, as the AO's failure to disallow the interest expenditure without proper inquiry was prejudicial to the interests of the revenue. The argument that the appeal was allowed by the CIT(A) is not relevant and valid, as the issue decided by the CIT(A) pertains to section 80P of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anks is taxable u/s 56. This was further validated by the Supreme Court's ruling in Totgars Co-operative Sale Society Ltd.(2010) which emphasized the importance of applying provisions uniformly, irrespective of the type of society. The Ld. CIT-DR also relied on the decision of ITAT Mumbai Benches in case of Chandrakant R Agrawal (supra) where the ITAT ruled that the deduction of interest expenditure against interest income was not permissible u/s 57(iii), reinforcing the position that only expenses directly related to earning the interest income are deductible. He also submitted that the assessee could not establish a direct connection between the interest expenditure and the interest income earned from Valsad District Central Cooperative Bank. The AO's failure to verify this nexus contributed to an erroneous assessment, which was properly rectified by the Ld. PCIT u/s 263. The Ld. CIT-DR finally submitted that based on the legal provisions and judicial precedents, the Ld. PCIT correctly identified the errors in the AO's order and invoked the revisionary powers u/s 263 of the Act. The AO's failure to apply the provisions of section 56 and 57 and the incorrect allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 Valsad Dist. Central C.op. FD Bank interest 19,458.166.00 8 Valsad Dist. Central Co-op SB Bank interest - Amalsad 116,817.00 9 Valsad Dist./ Central Co-op. Special Savings interest 4,928.00 10 NSC interest 46,129.00 11 Tractor Admin charge from farmer members 20,165.00 12 Surat People's Co-op Bank SB interest 13,144.00 13 IDBI Bank Ltd. - SB interest 5,094.00 14 Valsad Dist. Central Co.op. SB Bank interest - Gandevi 1,523.00 15 Indusind Bank Ltd. -SB interest 86,473.00 16 Surat People's Co-op Bank FD interest 4,370,758.00 17 HDFC Bank Ltd. - Bilimora SB interest 1,897.00 18 Interest from members at Branches 325,286.18 19 Interest from Gujarat State Bardoli Federation Ltd. (Net) (7,440.42) 20 Interest from Ultreatech Company deposit 12,000.00 21 Interest from Member - Tractor 30.00 22 Interest on deposit with companies 29,659.74 23 Dividend income 5,702.035.00 TOTAL 39,218,545.37 7.1 The Ld. PCIT stated that such interest income should be treated as "Income from other sources" u/s 56 and deduction u/s 57 of the Act permits expenses incurred wholly and exclusively for the purpose of earning such income. Since interest expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so fa as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,- (a) The order is passed without making inquiries or verification which should ha been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) The order has not been passed in accordance with a decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 7.3 The Hon'ble Apex Court in cases of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) and CIT vs. Greenworld Corporation, 314 ITR 81 (SC) held that the jurisdiction u/s 263 can be exercised only when both the following conditions are satisfied i.e., (i) the order of the Assessing Officer should be erroneous and (ii) it should be prejudicial to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the society". The Hon'ble Delhi High Court in case of Mantola Co-operative Thrift and Credit Society Ltd. vs. CIT (229 Taxman 68) held that interest earned by assessee-co-operative society, engaged in providing credit facilities to its members, on deposits of surplus funds in FD is to be taxed as "Income from other sources". Therefore, it is clear that the income earned by the assessee-society on FDs, SB interests etc., were liable to be assessed as "Income from other sources" u/s 56 of the Act. Hence, the AO should have considered the interest income u/s 56 of the Act. Once, the income is assessed u/s 56 of the Act, the deductions would be available only u/s 57 of the Act. Section 57(iii) requires that expenditure must be laid out or extended wholly and exclusively for the purpose of making or earning such income. The Hon'ble Supreme Court in case of Dr. V.P. Gopinathan (supra) held that interest on loan taken by the assessee from bank on security of FD could not be deducted from its income by way of interest on FD placed by him in the bank. Therefore, the assessee was required to offer gross interest income and not the net interest income. However, the AO has accepted the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordance 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. The Hon'ble Supreme Court in case of Totgar's Cooperative Sale Society Ltd. (supra) held that the income in respect of which deduction is sought by a co-operative society u/s 80P(2) of the Act must constitute the operational income and not the other income which accrues to the society. The interest income from investment of surplus funds in short term deposit and securities is to be taxed as "Income from other sources" u/s 56 of the Act. Interest income of such society from amounts retained by it cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) or Section 80P(2)(a)(iii) of the Act. The Hon'ble Supreme Court in case of Mavilayi Services Co-operative Bank Ltd. (supra) held that once the assessee is entitled to avail of the ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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