2023 (8) TMI 1434 - AT - Income Tax

AO's order upheld on section 80P(2)(d) deduction but erroneous on PF deposits and tax refund interest

ITAT Rajkot upheld Principal CIT's revision order u/s 263 regarding two issues while rejecting one. The tribunal found AO's order was not erroneous ... Revision u/s 263 - eligibility for claim of deduction u/s 80P(2)(d) - HELD THAT:- In so far as this issue with respect eligibility for deduction u/s 80P(2)(d) in our view, the order passed by the Assessing Officer is not erroneous and prejudicial to the interests of the revenue for the reason that firstly, the Assessing Officer had examined this issue during the course of assessment proceedings and secondly, various judicial precedents as highlighted above have also adjudicated on this issue in favour of the assessee including the jurisdictional Gujarat High Court and the jurisdictional Rajkot ITAT. Delay in deposit of PF - we observe that the Principal CIT has correctly observed that the Assessing Officer has not enquired into the evident delay in deposit of PF as is visible from the tax audit report. Though, the counsel for the assessee has submitted that this was owing to a mistake on part of the tax auditors, however, the Assessing Officer should have enquired into this apparent mistake which is coming from the tax audit report filed by the assessee, which clearly mentions that there has been a delay in deposit of PF on part of the assessee. Interest on income tax refunds - We observe that the AO has not enquired into this aspect at all. Though, the counsel for the assessee has submitted that the aforesaid amounts have been offered to tax by the assessee in its return of income, however, in our considered view, the AO should have enquired into this aspect during the course of assessment proceedings. Principal CIT has not erred in facts and in law in holding that the assessment order is erroneous and prejudicial to the interests of the Revenue with respect to the issue of late deposit of PF and enquiry into taxability of interest on tax refund. AO looking into the facts of the instant case, is directed to carry out the necessary enquiries and the assessee may also filed necessary documents in support of its aforesaid claim. Appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the order under the supervisory power to revise assessments is justified in relation to the tax treatment of interest income from a cooperative bank claimed as deduction under Section 80P(2)(d) - i.e., whether the assessment was erroneous and prejudicial for failing to disallow that claim. 2. Whether the assessment is erroneous and prejudicial for not enquiring into the apparent delayed deposit of employees' provident fund (PF) contributions as reflected in the tax audit report. 3. Whether the assessment is erroneous and prejudicial for not enquiring into and taxing interest received on income-tax refunds which was not reflected/adequately examined in the assessment proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility under Section 80P(2)(d) of interest from cooperative bank deposits Legal framework: Section 80P provides specified deductions to cooperative societies; subsection (2)(d) concerns interest received from co-operative societies/banks. Supervisory power to revise an assessment is exercisable only if the original order is erroneous as to law or facts and is prejudicial to revenue. Precedent treatment: Jurisdictional decisions referenced (High Court and Tribunal) have held that interest earned by a co-operative society on deposits with a co-operative bank is eligible for deduction under Section 80P(2)(d); distinctions drawn between interest attributable to lending to members (Section 80P(2)(a)(i)) and interest on deposits with cooperative banks (80P(2)(d)). Interpretation and reasoning: The Assessing Officer expressly enquired into 80P eligibility during assessment and the assessee filed written submissions in response; the AO, after considering submissions, allowed the claim. The Tribunal places weight on the fact that the AO addressed the issue on record and that relevant judicial precedents support the legal view adopted by the AO. Because the AO's view was a legally plausible view and was reached after enquiry, the revisional authority's conclusion that the AO erred is unjustified. Ratio vs. Obiter: The holding that the AO's decision to allow deduction under Section 80P(2)(d) was not erroneous and prejudicial (because the issue had been examined and supported by binding/precedential authorities) constitutes ratio in relation to validity of the s.263 exercise on this ground. Conclusion: The supervisory revision insofar as it sought to set aside the assessment for failure to tax the interest from the cooperative bank under Section 80P(2)(d) is not sustainable; the AO's order on this issue is neither erroneous nor prejudicial to revenue. The revisional order on this point is to be quashed. Issue 2 - Failure to enquire into apparent delayed deposit of PF contributions Legal framework: Employer's obligation to deposit employees' PF contributions within statutory/due dates under labour/statutory law and relevance to computation of taxable income; the Assessing Officer has a duty to examine material (including tax audit reports) that may indicate non-compliance affecting tax liability; s.263 may be invoked where an assessment is erroneous and prejudicial because the AO failed to make necessary enquiries. Precedent treatment: Not specifically overruled or distinguished here; established administrative principle that the AO must inquire into material facts evident on record (e.g., tax audit report) when those facts could affect tax liability. Interpretation and reasoning: The tax audit report filed with the return contained an entry indicating delay in PF deposit. The AO did not make any enquiries into this apparent delay despite the audit report being part of the records. The assessee's counsel attributed the discrepancy to an auditor's mistake and produced a challan for payment within the due date, but that fact should have been verified by the AO during assessment proceedings. The Tribunal finds that omission to enquire amounts to a material lapse making the assessment erroneous and prejudicial in respect of this issue. Ratio vs. Obiter: The direction that the AO should enquire into the PF deposit timeline and verify supporting documents is ratio with respect to the validity of the revisional exercise on this ground. Conclusion: The Principal CIT was justified in holding the assessment to be erroneous and prejudicial insofar as the AO failed to enquire into the PF deposit delay. The matter is remitted to the AO for requisite enquiry and for acceptance/verification of evidence (challan or other proof) to determine tax consequences. Issue 3 - Failure to enquire into taxability of interest on income-tax refunds Legal framework: Interest on income-tax refunds is taxable as income (typically under 'income from other sources'); an Assessing Officer must examine returns and records to ensure all taxable receipts are assessed; s.263 is available where the AO has failed to examine material facts leading to an erroneous and prejudicial order. Precedent treatment: Not separately treated by earlier authorities in the judgment; follows established principle that interest on refunds, if not offered to tax or not properly examined, should be enquired into by the AO. Interpretation and reasoning: The Principal CIT observed that interest on refunds pertaining to earlier assessment years was received during the relevant year and was not adequately examined in the assessment record. The assessee's counsel contended the amounts were offered to tax, but the AO did not make enquiries to verify whether these receipts had been disclosed and taxed. Given the absence of AO's enquiry into the taxability of the refund interest in the assessment proceedings, the revisional authority's conclusion that the assessment was erroneous and prejudicial on this count is sustained. Ratio vs. Obiter: The holding that the AO should have enquired into the taxability of interest on refunds and that failure to do so rendered the assessment erroneous and prejudicial is ratio in relation to the validity of s.263 on this point. Conclusion: The Principal CIT rightly set aside the assessment insofar as it failed to examine and determine the tax treatment of interest on income-tax refunds. The matter is remitted to the AO to verify whether such interest was offered to tax and, if not, to assess it after giving the assessee an opportunity to produce relevant documents. Disposition The appeal is partly allowed: the revisional order under the supervisory jurisdiction is quashed in respect of the 80P(2)(d) deduction issue (AO's view sustained), and upheld in respect of the two other matters (PF deposit delay and taxability of interest on refunds), with directions to the Assessing Officer to carry out requisite enquiries and permit the assessee to produce supporting material.