Statutory investment interest and section 263 revision cannot stand where deposits are compelled by co-operative law and tied to business activity.

Interest earned on fixed deposits placed with a district central co-operative bank as a statutory investment was treated as having a business nexus with the assessee's credit activity, because the deposits were made under compulsion of the Karnataka Co-operative Societies Act, 1959 and the relevant rules to satisfy liquidity and reserve requirements. On that basis, the assessment allowing deduction under section 80P(2)(a)(i) was not erroneous or prejudicial merely because the revisional authority preferred a different view on tax treatment. The revisional jurisdiction under section 263 was therefore not available in these circumstances.

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Issues: Whether the Principal Commissioner could invoke revisional jurisdiction under section 263 of the Income-tax Act, 1961 in respect of the assessment allowing deduction under section 80P(2)(a)(i) on interest earned from fixed deposits kept with the district central co-operative bank as a statutory investment.

Analysis: The assessee's deposits were found to have been made under statutory compulsion under the Karnataka Co-operative Societies Act, 1959 and the relevant rules, and not as a voluntary deployment of surplus funds. The assessment record also showed a factual finding that the interest arose from investments required for compliance with the statutory liquidity and reserve requirements, so the receipt had a business nexus with the assessee's credit activity. In that situation, the assessment order could not be characterised as erroneous and prejudicial to the interests of the Revenue merely because the revisional authority took a different view on the tax treatment of the interest income. The revisional order therefore lacked the jurisdictional foundation required for section 263.

Conclusion: The revision under section 263 was not justified and the assessee succeeded on this issue.

Final Conclusion: The assessment allowing deduction on the impugned interest income was upheld, and the revisional order was quashed.

Ratio Decidendi: Where interest income arises from investments made under statutory compulsion and is integrally connected with the assessee's business activity, the assessment cannot be revised under section 263 merely because another view on allowability of deduction is possible.

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