TaxTMI 
TaxTMI 
2025 (2) TMI 166
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....nitiating the proceedings u/s 263 of the Act, 1961. 2. On the f acts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming jurisdiction/s 263 of the Act, 1961. 3. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has erred in violating the principles of natural justice by not the mentioning the grounds for initiating action u/s 263 of the Income Tax Act, 1961 in the show cause notice issued. As such the order passed u/s 263 is void ab-initio. The action of the Ld. CIT was wholly unreasonable, uncalled for the bad in law. 4. On the facts and circumstances of the case as well as law on the subject, that the order of u/s 263 is merely 'change in opinion'. The action of the Ld. Pr.CIT was wholly unreasonable, uncalled for and bad in law. 5. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming that the Learned Assessing Officer had required to be disallowed interest expenditure as per provision of se....
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.... of the Act. The assessee did not furnish any reply. The AO found that the deduction of Rs. 1,46,60,327/- includes "net interest/Dividend from investment in other co-operative bank and societies." AO found that assessee earned interest income out of surplus funds invested in Valsad District Co-Operative Bank and after adjusting the expenses, it claimed the net deduction of Rs. 58,33,332/- u/s 80P(2)(d) of the Act. It also claimed deduction of Rs. 72,000/- being dividend received from Valsad District Central Co-operative Bank. The AO discussed provisions of Section 80P(4) of the Act and relied upon decision of Hon'ble Karnataka High Court in case of PCIT vs. The Totagars Co-operative Sales Society (order dated 16.06.2017), where it was held that though a co-operative bank may have a corporative body or skeleton of a co-operative society, its business is entirely different and i.e., the banking business. He held interest and dividend income earned from bank was income from other sources, which was not eligible for deduction u/s 80P(2)(d) of the Act. Therefore, he disallowed the above deduction and assessed income at Rs. 59,05,332/- (58,33,332/- + 72,000). 4. Subsequently, Ld.PCIT ....
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....by the Department were based on facts different from assessee's case. The assessee argued that the reliance on ITAT judgments was unjustified, and that their status as a primary agricultural co-operative society is different. The Ld. PCIT, however, rejected this argument, stating that the provisions of section 56 and 57 apply equally to all types of taxpayers, irrespective of their status as a primary agricultural society or a credit co-operative society. The PCIT further pointed out that the interest paid on the loan against fixed deposits was not incurred for the specific purpose of earning interest income from Valsad District Central Co-operative Bank, thus disallowing the said deduction u/s 57 of the Act. The Ld. PCIT also addressed the issue with regard to assessee's argument about the reliance on ITAT rulings instead of jurisdictional High Court or Supreme Court decisions. The Ld. PCIT clarified that while the judgments referred to were from the ITAT, the said judgments had cited the relevant decisions from the jurisdictional High Court in case of State Bank of India vs. CIT(2016) 72 taxxmann.com 64 (Guj) and Hon'ble Supreme Court in case of Totgar's Cooperative Sale ....
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....Hon'ble jurisdictional High Court or Hon'ble Supreme Court. He submitted that assessee filed an appeal before CIT(A) against the impugned order of AO. The CIT(A) has subsequently decided the appeal in favour of the assessee. Similar issue was also decided in favour of the assessee in the appeal for AY 2020-21. The Ld.AR of the assessee submitted that facts of the case relied upon by the ITAT Ahmedabad in case of The Government Servants Credit Societies Ltd. (supra) are different from facts of the assessee. The assessee society is a Primary Agricultural Co-operative Society (PACS). He submitted that activities of the assessee are covered by both clauses (i) and (iii) of the sub-section(2) of Section 80P of the Act. The assessee is not covered under 80P(4) of the Act because it is not a co-operative bank. The Ld. AR has relied on the decision in case of The Mavilayi Service Co-operative Bank Ltd. & Ors. Vs. CIT & Anr. In Civil Appeal No. 8315 of 2019 dated 12.01.2021. The Ld. AR also filed copy of the certificate dated 05.03.2021 issued by the District Registrar, Co-operative Society, Navsari that the assessee/society has been registered as a "Primary Agriculture Credit Society" with....
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....ead "Income from other sources." 6.3. The Ld. CIT-DR for the Revenue submitted that the AO passed the assessment order without conducting adequate inquiries or verification of the facts. The Ld. PCIT rightly pointed out that the interest expenditure claimed by the assessee was not allowable under section 57, as there was no direct nexus with earning interest income. He further submitted that as per section 57(iii) of the Act, any expenditure must be wholly and exclusively incurred to earn income under the head "income from other sources" to qualify for deduction. The interest expenditure of Rs. 2,41,38,304/- was not incurred wholly and exclusively for the purpose of earning interest income from Valsad District Central Co-operative Bank. Hence, the expenditure could not be deducted as claimed by the assessee. 6.4. The Ld. CIT-DR for the Revenue submitted that the decision of ITAT Ahmedabad in case of Govt Servants Co-Op Credit Society Ltd (supra) is applicable where it was held that interest income earned on surplus funds deposited with Nationalized and Co-operative Banks is to be treated as "Income from other sources" u/s 56, and any interest expenditure incurred against such....
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....al Co-Operative Bank. These two items of interest and dividend income from Co-Operative Bank were disallowed u/s 80P(2) of the Act by the AO. He had not dealt with issue of netting of interest income in the assessment order. The Ld. PCIT called for the records and found that the assessee-society had received gross interest income of Rs. 3,35,16,510/- and has claimed interest expenditure of Rs. 2,41,38,304/- for loans taken from Co-operative Banks against overdraft on FDs. The details of interest received and interest paid as submitted by Ld. CIT-DR are as under: Details of interest paid Sr.No. Particulars Amount (in INR) 1 Interest on fixed deposits 8,867,160.00 2 Interest on saving deposits 4,883,128.45 3 Interest on loan against FD-Valsad Dist.Co-op.bank 24,306.00 4 Interest on compulsory deposits 9,763,609.85 5 R.D Naik interest 5,650.00 6 NCDC loan Interest 173,026.00 7 VAT Interest 69.00 8 Interest on OD against FD-Surt People's Co-op. Bank 221,355.00 TOTAL 24,138,304.30 Details of interest received Sr.No. Particulars Amount &nbs....
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....Hence, order of AO was both erroneous and prejudicial to the interests of revenue u/s 263 of the Act. 7.2 Let us now discuss the scope and ambit of Section 263 of the Act. A bare reading of the section reveals that the Ld.PCIT can call for and examine the record of any proceedings under the Act and if he considers that any order passed by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, he may after giving opportunity of hearing and after making or causing to be made such inquiry as he deems necessary, pass such order as the circumstances of the case justify. For ready reference, section 263 of the Act reproduced below: "263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is pr e j udicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necess....
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....re are two issues which require deliberation in this case. The first issue is whether the Ld.PCIT legally and validly invoked the provisions of Section 263 of the Act; the other issue is merit of the case as per provisions of Section 56 and 57 of the Act. 7.4 Let us first decide whether conditions for invoking the provisions of Section 263 are satisfied in the present case. As stated earlier, the case was selected for complete scrutiny and hence, the AO was within his power to examine all issues which are embedded in the return of income and other details available during assessment proceedings. He was also entitled to make further enquiry after receiving details from the assessee. We find that the AO himself at para-4 of the assessment order has noticed that the deduction claimed u/s 80P(2)(d) of the Act includes "net interest and dividend from investment in other Co-operative Banks and Societies". Therefore, it was clear that assessee had offered only net interest income from its investment in other banks/societies after claiming interests expenditure. As per various decisions of the Hon'ble Courts and ITATs, it is well established that interest would normally be assessed unde....
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....rder passed by the AO u/s 143(3) r.w.s. 143(3A) & 143(3B). 8. Having held that the Ld.PCIT rightly assumed jurisdiction u/s 263 of the Act, let us examine if the assessee was entitled to deduction u/s 80P(2)(d) of the Act in respect of the impugned amount. The Ld. AR has relied on the decision of in case of Mavilayi Services Co-operative Bank Ltd. (supra). The Hon'ble Supreme Court in the said case held as under: "...Clearly, therefore, once section 80P(4) is out of harm's way, all the assessee's in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted." The facts of the case are not similar to the above decision. The question of taxability of interest income and netting of interest income was not before Hon'ble Supreme Court. Be that as it may, there is no dispute that assessee is a "Primary Agriculture Credit Society" which is evident from the Certificate issued by Dist....