2026 (2) TMI 1043 - AT - Income Tax

Revisional power under Section 263: interest on state-provided revolving funds held as income from other sources, not 80P deduction.

Revisional jurisdiction under section 263 was justified where the Assessing Officer did not examine the source and character of revolving funds provided ... Revision u/s 263 - interest earned on short-term fixed deposits of funds provided by the State Government (revolving fund) does not qualify for deduction u/s 80P(2)(a)(iii) & (iv) and is taxable as 'income from other sources' thus rendering the assessment order erroneous and prejudicial to the interests of Revenue HELD THAT:- Assessee federation is not denying the fact that the funds has been used as a working capital for operation of purchase. Once, the whole purchase process has been completed, the assessee has to pay back the funds to the Gujarat Government. During the year, the assessee has made FDR for short term period in respect of ideal fund which remained un-used and earned interest on the same. Thus, this fund was allocated by the State Government to the federation which is termed as a revolving fund to the assessee. The said fund was remaining ideal, it cannot be treated the fund from the members of the society but it is the fund from the Government which is a matter of fact. This aspect was never examined by the AO at any point of time, while issuing notices u/s. 142(1) dated 08-11-2019 and 25-11-2025. Assessee has categorically admitted that these revolving funds are from farmers (which are not members per se), state government of Gujarat. Beside this, the assessee society has not kept the said fund in any other society which is a member of the assessee society but has kept it in a commercial banks and has earned the interest therefore this has to be treated as income from other sources. This aspect was earlier not verified by the AO at the time of assessment proceedings. Thus, this is a loss for the Revenue and the assessment order passed by the AO is prejudice to the interest of Revenue. Appeal of the assessee is dismissed. Issues: Whether the Pr. CIT rightly exercised revisional power under section 263 of the Income-tax Act, 1961 by holding that interest earned on short-term fixed deposits of funds provided by the State Government (revolving fund) does not qualify for deduction under section 80P(2)(a)(iii) & (iv) and is taxable as income from other sources, thereby rendering the assessment order erroneous and prejudicial to the interests of Revenue.Analysis: The assessee is a state-level cooperative federation which received a revolving fund from the State Government for purchase operations; the fund remained temporarily idle and was placed in fixed deposits earning interest. The issue turns on the legal characterisation of the funds (government revolving fund versus members' contributions) and whether the interest is incidental to the cooperative's core activities so as to qualify for deduction under the statutory provisions for cooperative societies. The revisional jurisdiction under section 263 permits intervention where the assessment order is found to be erroneous and prejudicial to Revenue; such intervention is appropriate where material factual aspects (source and character of the funds and treatment of interest) were not examined by the Assessing Officer. The tribunal examined the record, including the admitted fact that the funds originated from the State Government and were kept in commercial banks, and noted absence of AO scrutiny on this aspect during assessment proceedings. Precedents cited by the assessee were distinguished on facts where the AO had examined similar issues; the tribunal found those authorities inapplicable to the present factual matrix. Having regard to the factual finding that the funds were government-provided revolving funds and the interest arose from placement in commercial banks rather than contributions of members or activities of marketing agricultural produce, the interest was held to fall within the scope of income from other sources and not eligible for deduction under section 80P(2)(a)(iii) & (iv).Conclusion: The revisional action under section 263 is justified and the Pr. CIT's direction to set aside the assessment for fresh consideration is upheld; the appeal is dismissed against the assessee.