2022 (1) TMI 1090 - AT - Income Tax

Tribunal ruling on interest income deductions under Income Tax Act

The Tribunal partially allowed the appeal, affirming the Assessing Officer's decision on the deduction of interest income from the Surat District ... Revision u/s 263 by CIT - interest earned on short term deposit not immediately required in the business of assessee is assessable under the head “income from other sources” and no deduction under section 80P(2)(a)(i) - HELD THAT:- During the hearing of submission, assessee fairly conceded that the interest earned on such deposit with DGVCL may not be eligible for deduction under section 80P(2)(d) of the Act. Therefore, the order of ld PCIT is upheld to that extent. Other interest earned on deposit with Surat District Co-operative bank we find that deduction claimed qua this interest income is eligible for deduction under section 80P(2)(d) of the Act in view of the decision of this Bench in Bardoli Vibhag Gram Vikas Co.Op. Credit Society Ltd. [2021 (5) TMI 446 - ITAT SURAT] We find that the assessment order qua the deduction under section 80(9)(2)(d) of the Act on account of interest earned from Surat Co-operative bank is not erroneous. Since the order is not erroneous, though, it may be prejudicial to the interest of the Revenue. Thus, the twin condition as provided in section 263 of the act is not fulfilled qua the income component of interest income earned on deposit with Surat Cooperative Bank; therefore, the order passed by the ld PCIT is set-aside to that extent. In the result, the grounds of appeal raised by the assessee are partly allowed on the primary submissions of the ld AR for the assessee. Appeal of the assessee is partly allowed. Issues Involved:1. Legality of the revisionary order under Section 263 of the Income Tax Act.2. Eligibility of the assessee to claim deduction under Section 80P(2)(d) of the Income Tax Act on interest income from a cooperative bank.3. Validity of the revisionary order under Section 263 when the assessment order is under appeal before the Commissioner of Income Tax (Appeals).Issue-wise Detailed Analysis:1. Legality of the Revisionary Order under Section 263 of the Income Tax Act:The Principal Commissioner of Income Tax (PCIT) exercised his power under Section 263 of the Income Tax Act to revise the assessment order passed by the Assessing Officer (AO). The PCIT issued a show cause notice to the assessee, stating that the assessment order was erroneous and prejudicial to the interest of the revenue. The PCIT identified that the assessee had claimed deductions on interest income from deposits with Surat District Cooperative Bank and Dakshin Gujarat Vij Company Limited (DGVCL), which he believed were not eligible for deduction under Section 80P(2)(d). The PCIT held that the Cooperative Bank and Cooperative Society are distinct entities, and thus, interest earned from deposits with a Cooperative Bank should be disallowed.2. Eligibility of the Assessee to Claim Deduction under Section 80P(2)(d) on Interest Income from a Cooperative Bank:The Tribunal noted that the issue of eligibility for deduction under Section 80P(2)(d) was covered by the decision in Bardoli Vibhag Gram Vikas Co-operative Credit Society Ltd. vs PCIT, where it was held that Cooperative Banks are primarily cooperative societies and interest earned from deposits with cooperative banks is eligible for deduction under Section 80P(2)(d). The Tribunal also referenced the jurisdictional High Court's decision in Surat Vankar Sahakari Sangh Ltd. vs PCIT, which supported the view that interest earned from cooperative banks qualifies for deduction. Therefore, the Tribunal concluded that the AO's decision to allow the deduction was reasonable and legally sustainable, and thus, the assessment order was not erroneous.3. Validity of the Revisionary Order under Section 263 When the Assessment Order is Under Appeal:The assessee argued that the revisionary order under Section 263 could not be passed as the assessment order was already under appeal before the Commissioner of Income Tax (Appeals). The Tribunal did not specifically address this argument in detail, but it focused on the broader issue of whether the assessment order was erroneous and prejudicial to the revenue.Conclusion:The Tribunal held that the assessment order was not erroneous regarding the deduction of interest income from the Surat District Cooperative Bank. However, the Tribunal upheld the PCIT's order to the extent that the interest income from DGVCL was not eligible for deduction under Section 80P(2)(d). Consequently, the appeal was partly allowed, affirming the AO's decision on the cooperative bank interest but supporting the PCIT's view on the DGVCL interest.Final Order:The Tribunal set aside the PCIT's order concerning the interest income from the Surat Cooperative Bank and upheld the order regarding the interest income from DGVCL. The appeal was partly allowed, and the order was announced on 17 January 2022.