2025 (9) TMI 1303 - AT - Income Tax

Revision set aside; matter returned for fresh adjudication due to improper admission under Rule 46A; verify interest under s.5(6)

Palm Court M Premises Co Operative Society Ltd., Versus ITO Ward 30 (2) (5), Mumbai

ITAT, Mumbai set aside the revision and restored the matter to the AO for fresh adjudication, holding that the CIT(A) improperly admitted additional ... Revision u/s 263 - deduction u/s 80P(2)(d) from the interest earned from investment made with the co-operative societies - HELD THAT:- In the instant case before the AO no detail in respect of banks from whom interest was earned, was provided. AO was of the view that interest was earned from the Axis Bank which being not a co-operative society, he disallowed the deduction of the claim u/s 80P(2)(d). But before the CIT(A), the assessee has provided a chart of the interest earned from co-operatives and nonco-operative banks. But the Ld. CIT(A) did not follow the procedure provided under Rule 46A of the Income-tax Rules, 1962 for admitting the documentary evidence as additional evidence. Assessee asked to provide computation of the income to substantiate whether the interest income earned by the assessee is declared as ‘business income’ or ‘income from other sources’. The said information was not readily available with the Ld. counsel for the assessee and expressed inability in submitting. We feel it appropriate to restore this issue back to the file of the Assessing Officer for deciding on following issues (i) the AO to verify the quantum of the interest earned from co-operative societies or cooperative bank carrying out business or banking as defined u/s 5(6) of the Banking Regulation Act, (ii) the AO to verify whether the interest income shown by the assessee has been shown as ‘business income’ or ‘income from other sources’ in the return of income filed for the year under consideration. Appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether a co-operative housing society is entitled to deduction under section 80P(2)(d) of the Income-tax Act in respect of interest income earned from deposits/investments made with co-operative societies or co-operative banks carrying on banking business as defined under section 5(6) of the Banking Regulation Act. 2. Whether interest income claimed as deduction under section 80P(2)(d) can be allowed where the Assessing Officer's record initially indicated interest from a non-co-operative bank and the assessee subsequently furnishes a break-up of interest earned from co-operative and non-co-operative entities before the CIT(A), including the admissibility of such documentary evidence under Rule 46A of the Income-tax Rules. 3. Whether the characterisation of interest income in the return (business income v. income from other sources) affects entitlement to deduction under section 80P(2)(d). ISSUE-WISE DETAILED ANALYSIS - Entitlement to deduction under section 80P(2)(d) Legal framework: Section 80P(2)(d) provides deduction to certain co-operative societies in respect of income arising from transactions with members and, by judicial interpretation, includes certain categories of interest income where the counterparty is a co-operative society or a co-operative bank carrying on banking business as per section 5(6) of the Banking Regulation Act. Precedent treatment: The Tribunal below and the Court relied on the Supreme Court decision in Totgars (as applied by the CIT(A)). A coordinate-bench decision in the assessee's own earlier year had held that interest on investments with co-operative societies is eligible for section 80P(2)(d) deduction. Interpretation and reasoning: The Tribunal noted that the Assessing Officer's denial was premised on an assumption that interest was earned from a non-co-operative bank (Axis Bank). The assessee later submitted a break-up chart identifying interest from co-operative banks/societies. The Tribunal emphasised that entitlement under section 80P(2)(d) depends on the source of the interest (i.e., whether the payer is a co-operative society/co-operative bank carrying on banking business). The Tribunal therefore directed verification of the quantum of interest attributable to such co-operative entities and application of the statutory test (including the Banking Regulation Act definition) by the Assessing Officer. Ratio vs. Obiter: Ratio - entitlement under section 80P(2)(d) hinges on origin of interest from qualifying co-operative entities; the matter requires fact-finding on source and characterization of income. Obiter - reference to earlier coordinate-bench decision and Totgars supports the legal proposition but the Tribunal did not conclusively decide entitlement on the record before it. Conclusion: The issue of allowance under section 80P(2)(d) is remitted for fresh adjudication: the Assessing Officer is to verify whether interest income arises from co-operative societies/co-operative banks carrying on banking business (section 5(6) test) and then apply section 80P(2)(d) accordingly. ISSUE-WISE DETAILED ANALYSIS - Admissibility of post-assessment documentary evidence and application of Rule 46A Legal framework: Rule 46A of the Income-tax Rules governs the admissibility of documentary evidence not filed during assessment proceedings and prescribes circumstances and safeguards for admitting additional evidence on appeal. Precedent treatment: The CIT(A) invoked the Supreme Court authority (Totgars) but is noted to have rejected the deduction claim; the assessee relied on a coordinate-bench order in an earlier year admitting similar evidence. Interpretation and reasoning: The Tribunal observed that the assessee furnished a chart before the CIT(A) breaking up interest from co-operative and non-co-operative sources after the Assessing Officer had treated interest as from a non-co-operative bank. The Tribunal found that the CIT(A) did not follow the procedure under Rule 46A for admitting such documentary evidence as additional evidence and, given the assessee's inability at the hearing to immediately produce detailed computations, considered it appropriate in the interest of substantial justice to remit the factual examination to the Assessing Officer rather than finally excluding the evidence. The Tribunal thereby implicitly recognized the possibility of admitting such material subject to Rule 46A compliance and verification. Ratio vs. Obiter: Ratio - additional documentary evidence affecting entitlement under section 80P(2)(d) must be considered in accordance with Rule 46A and relevant principles of admissibility; where prima facie material is produced on appeal, remand for verification is appropriate. Obiter - comments on the assessee's earlier inability to furnish computations at hearing and the coordinate-bench precedent are instructive but not determinative. Conclusion: The Tribunal remitted the matter for the Assessing Officer to verify the documentary claims and determine admissibility and effect of the additional evidence in accordance with Rule 46A and applicable law. ISSUE-WISE DETAILED ANALYSIS - Characterisation of interest income (business income v. income from other sources) Legal framework: Tax treatment and deductions can differ depending on whether interest is shown as business income or income from other sources; correct classification in the return and its verification are material to allowance under specific provisions like section 80P(2)(d). Precedent treatment: No distinct precedent was applied to reclassify income in the present order; the Tribunal required factual verification by the Assessing Officer. Interpretation and reasoning: The Tribunal directed the Assessing Officer to verify whether the interest income claimed was declared as 'business income' or 'income from other sources' in the return, since entitlement to deduction under section 80P(2)(d) may be influenced by such classification and related tax treatment. The Tribunal did not itself re-characterise the income but treated the issue as a material factual and legal question to be decided afresh after verification. Ratio vs. Obiter: Ratio - characterization of interest income in the return is a relevant fact for granting deduction under section 80P(2)(d) and must be verified by the Assessing Officer. Obiter - no definitive rule as to which characterization automatically entitles or disentitles deduction was laid down. Conclusion: The question of characterization is remitted to the Assessing Officer for determination; the Tribunal did not decide the classification issue on merits. OVERALL CONCLUSION AND ORDERING PROPOSITION The Tribunal, applying the legal framework and precedents, did not finally adjudicate entitlement to deduction under section 80P(2)(d) on the existing record but remitted the matter to the Assessing Officer for fact-finding and verification on: (i) the quantum of interest earned from qualifying co-operative societies/co-operative banks carrying on banking business as per section 5(6) of the Banking Regulation Act, and (ii) the classification of the interest income in the return (business income v. income from other sources), with due consideration to admissibility of additional documentary evidence under Rule 46A. The appeal is allowed for statistical purposes to enable such fresh adjudication.