TaxTMI 
TaxTMI 
TaxTMI 
2026 (3) TMI 316
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 3. That the PCIT has erred in the facts and circumstances of the case by passing the impugned Order ignoring the fact that one of the reasons for initiating the Complete Scrutiny by the learned-Assessing Officer was 'Deduction from Total Income under Chapter VI-A' and the latter has thoroughly examined all the necessary information and documents while passing the Assessment Order under section 143(3) of the Act and therefore, the Assessment Order is neither erroneous nor prejudicial to the interests of the revenue. 4. That the PCIT has erred in the facts and circumstances of the case by passing the impugned Order without considering all the submissions made by the Appellant thereby violating the principles of natural justice. 5. That the PCIT has erred in the facts and circumstances of the case by passing the impugned Order without following the judicial precedence on this matter. 6. That the PCIT has erred in the facts and circumstances of the case by passing the impugned Order without following the principles laid down by the Honourable Supreme Court in the case of V-Con Integrated Solutions Private Limited in Special Leave Petition (Civil) D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest of revenue on the issue of interest income earned from various banks and co- operative banks allowed as deduction u/s 80P of the Act. The ld. Principal Commissioner noticed that the assessee society had earned interest income from Co-operative Banks/ Commercial Banks amounting to Rs. 65,88,141/- which according to him did not constitute business income and therefore the same needed to be taxed under the head "Income from other Sources" u/s 56 of the Act. Hence, the said amount would be ineligible for deduction u/s 80P(2)(a)(i) of the Act, which the AO had failed to examine and considered the same in the total income under the head income from other sources in view of the decision of the Hon'ble Supreme Court in the case of Totagars Co-operative Sale Society Limited vs. Income Tax Officer reported in 322 ITR 283 (SC) which held that utilization of surplus fund/ investments are taxable under the head "income from other sources" and therefore not eligible for deduction under section 80P(2)(a)(i) of the Act. 3.3 Further, the ld. Principal Commissioner also of the opinion that since the income earned was interest on FDs/ Reserve fund/Liquidity assets with co-operative Banks/Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. The assessee placed reliance on the judgments of the Hon'ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. [2015] 55 taxmann.com 447 as well as in the case of Lalitamba Pattina Souharda Sahakari Niyamita [2019] 307 CTR 770 and accordingly submitted that these interest income are attributable to the profits and gains of the business of providing credit facilities to its members only & the AO had taken one of the plausible view in allowing deduction u/s 80P(2)(a)(i) of the Act; without prejudice, the assessee submitted that the assessee would also be eligible for deduction u/s 80P(2)(d) of the Act by placing reliance on the judgment of the Jurisdictional High Court in the case of the Totgars' Co-operative Sales Society Limited [2017] 392 ITR 74. 3.5 The ld. PCIT after perusal of the submission of the assessee did not accept the reply of the assessee in view of the decision of Hon'ble Supreme Court in the case of Totagars Co-operative Sale Society Limited vs. ITO (2010) 188 Taxman 282 as well as the decision of the Hon'ble Karnataka High Court in the case of Principal Commissioner of Income Tax, Hubli vs. Totagars Co- operative Sale So....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and held to be erroneous and prejudicial interest to the revenue especially when the AO has taken one of the plausible view. Lastly, the ld. A.R. of the assessee submitted that in the pretext of revision proceedings, the ld. PCIT cannot direct the AO to tax the interest income under income from other sources especially when AO being Quasi-judicial authority after proper examination had taken an opinion which is also in accordance with the decision of the Jurisdictional High Court which are binding upon the AO. 6. The ld. CIT D.R. Sri Shivanand H Kalakeri on other hand heavily supported the order of the ld. PCIT, Hubli and vehemently submitted that the Order of the AO was erroneous in so far as it is prejudicial to the interest of revenue as the interest income earned from Co-operative/Commercial banks should have been taxed as Income from 'Other Sources' under the provisions of section 56 of the Act. The ld. DR also heavily relied upon the judgments of the Supreme Court in the case of Totagars Co-operative Sale Society Limited vs. ITO (Supra), Citizen Co-operative Society Ltd. (397 ITR 1) as well as Kerala State Co-operative Agricultural and Rural Development Bank Ltd. in Civil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2025 issued by the ld. PCIT stating the reasons for invoking the Revision Proceedings u/s 263 of the Act which are reproduced below for ease of reference & convenience- 7.4 On going through the above show cause notice for hearing in respect of revision proceedings u/s. 263 of the Act, the reasons cited by the ld. PCIT primarily is that the assessee had received certain interest income on investment in banks which are required to be added to the income of the assessee u/s. 56 of the Act as held by the Hon'ble Supreme Court in the case of Totagars Co- operative sale Society Limited vs. Income Tax Officer (322 ITR 283) and in view of the above, the assessment proceedings u/s. 143(3) r.w.s 144B of the Act dated 02/09/2022 is found to be erroneous in so far as it is prejudicial to the interest of revenue within the meaning of section 263 of the Act, as such the AO has failed to examine and verify the above issue and failed to tax the income from other sources. Thus, we are of the considered opinion that the ld. PCIT had principally exercised his jurisdiction u/s. 263 of the Act merely because he is of the opinion that interest income on investment in commercial banks co-operative ban....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ommissioner under section 144A; (ii)an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer [or the Transfer Pricing Officer, as the case may be,] conferred on, or assigned to, him under the orders or directions issued by the Board or by the [Principal Chief Commissioner or] Chief Commissioner or [Principal Director General or] Director General or ]Principal Commissioner or] Commissioner authorized by the Board in this behalf under section 120; [(iii) an order under section 92CA by the Transfer Pricing Officer;] (b) "record" [shall include and shall be deemed always to have included] all records relating to any preceding under this Act available at the time of examination by the [Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or] Commissioner; (c) Where any order referred to in this sub-section and passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,]had been the subject matter of any appeal [filed on or before or after the 1st day of June, 1988], the powers of the * [Principal Commissioner or]Commissioner un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of the revenue, the ld. PCIT may after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. This provision was the subject matter of interpretation by the Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC), where the Supreme Court has held as under:- "A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to section 263(1) of the Act. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the ground that the order passed is erroneous. The ld. PCIT gets jurisdiction only if such erroneous order is also prejudicial to the interest of the Revenue. Prejudicial to the Revenue means, lawful revenue due to the State has not been realized or cannot be realized. In other words, by the order of the Assessing Authority if the lawful revenue to the Government has not been realized or cannot be realized, as the said order is prejudicial to the interest, of the Revenue and also erroneous, the ld. PCIT gets jurisdiction to interfere with the said order under section 263. Therefore, for attracting section 263, the condition precedent is (a) the order of Assessing Officer sought to be revised is erroneous and (b) it is prejudicial to the interest of the Revenue. If one of them is absent, i.e., if the order of the Income tax officer is erroneous but is not prejudicial to the Revenue, recourse cannot be had to section 263(1) of the Act. The satisfaction of both the conditions stipulated in the section is sine qua non for the Commissioner to exercise his jurisdiction under section 263 of the Act. 7.9 Further, the term 'erroneous' has not been defined under the Act. The Apex Court in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....C) (2010) 320 ITR 674 had remarkably extracted the parameters and principles laid down by the Courts which govern the exercise power by the Commissioner under the provisions of section 263 of the Act:- (i) The power is supervisory in nature, whereby the Commissioner can call for and examine the assessment records. (ii) The Commissioner can revise the assessment order if the twin conditions provided in the Act are fulfilled, that is, that the assessment order is not only erroneous but is also prejudicial to the interest of the revenue. The fulfilment of both the conditions is an essential prerequisite. [See Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC)]. (iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereo-typed, inasmuch as, the Assessing Officer, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with 'undue haste'. [See Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi)]. (iv) The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....turn of income on 25/12/2020 by declaring total income of Rs. NIL after claiming deduction u/s. 80P(2)(a)(i) of the Act amounting to Rs. 32,69,917/-. When we grabbed a look at the assessment order passed by the AO, we noticed that the AO after due verification & examining the details along with the documentary evidence/ written submission/ explanation etc. did not draw any adverse inference in respect of the issues for which the case was selected for Scrutiny under CASS. Further, the AO while passing the assessment Order had categorically observed that the assessee society uploaded its written submission with relevant documents and after considering all the written submissions, the assessment is being completed accepting the returned income. Undisputedly, the one of the issues for which the case of the assessee was selected for scrutiny was "Deduction from Total Income under Chapter VI-A". 7.12 Further on going through the notice u/s 142(1) of the Act dated 16/11/2021 issued along with the annexure (placed at 123- 124 of PB), we noticed that the AO had sent list of detailed questionnaire in respect of the issues for which the case was selected for complete Scrutiny. The AO had c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to show how & why the enquiry conducted by the AO was not in accordance with law, the invocation of jurisdiction by the ld. PCIT is unsustainable. The Assessing Officer while passing an order of assessment performed quasi Judicial function, applies his mind judiciously based on the facts & circumstances of the case for the purpose of protecting the interest of revenue. In the present case the AO after calling for the details/ explanation/evidence & after making proper enquiries or verification came to the conclusion that no adverse inference is drawn with respect to the issues selected for complete scrutiny. However, the ld. PCIT holds that the assessing officer had not conducted necessary inquiries or verification and not made the additions of interest income under the head "income from other sources" as per the decision of the Apex court & Jurisdictional High Court & thereby invoked clause (a) of the Explanation-2 of section 263 of the Act. No doubt clause (a) of the above explanation deems the order to be erroneous and prejudicial to the interest of the revenue in case order is passed without making enquiries or verification which should have been made in the opinion of the Prin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....#39;, 332 ITR 167, it has been held by Delhi High Court that Assessing Officer in the order of assessment is not required to give detailed reasoning in respect of each and every item of deduction and therefore, the question whether there has been an application of mind before allowing expenditure has to be examined from the record of the case. The question of lack of enquiry / inadequate enquiry is also required to be kept in mind and mere inadequacy of the enquiry would not confer jurisdiction on the Commissioner of Income Tax under Section 263 of the Act. In the instant case, the Commissioner of Income Tax has held that the enquiry conducted by the Assessing Officer is inadequate and has assumed the revisional jurisdiction. The assessee has filed all the details before the Assessing Officer and Assessing Officer has accepted the contention of the assessee that no expenditure is attributable to the exempt income during the relevant Assessment Year. Thus, while recording the aforesaid finding, the Assessing Officer has taken one of the plausible views in allowing the claim of the assessee and therefore, the Commissioner of Income Tax could not have set aside the order of assessment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oneous merely because the Commissioner does not feel satisfied with the conclusions reached. 7.17 The following are the judgments of the Jurisdictional High Court in favour of the assessee which held that interest received by Co-operative Society from Co-operative Banks/Commercial Banks are attributable to the business of the assessee and accordingly allowed the deduction u/s 80P(2)(a)(i) of the Act- 1) Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer Ward-V, Tumkur reported in [2015] 230 Taxman 309 2) Lalitamba Pattina Souhardasahakari Niyamita v. The ITO in ITA No.100004 of 2018 dated 19/02/2018 3) Guttigedarara Credit Co-operative Society Ltd. v. Income-tax Officer, Ward 2(2), Mysore(2015) 377 ITR 464 7.18 However on the other hand there are certain judgments of the same Jurisdictional High Court which held that the interest received from Co-operative Bank/Commercial Bank are liable to tax u/s 56 of the Act under the head " Income from other Sources" & these interest are even not liable for deduction even u/s 80P(2)(d) of the Act. These judgments are detailed below- 1) Pr. CIT v. Totagars Co-operative Sale Society ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the ld. PCIT on the decision of Hon'ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. V. Income Tax Officer (Supra) is completely distinguishable on the facts of the present case. In holding so, we draw our support & guidance from the decision of the Hon'ble High Court of Karnataka in the case of Guttigedarara Credit Co-operative Society Ltd. v. Income-tax Officer, Ward 2(2), Mysore reported in (2015) 377 ITR 464 which held as under- "9. The word 'attributable' used in the said Section is of great importance. The Apex Court had an occasion to consider the meaning of the word 'attributable' as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (at page 93) as under:- 'As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor- General relied, it will be pertinent to observe that the legislature has deliberately used the expressio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- operative Sale Society's case (supra), on which reliance is placed, the Supreme Court was dealing with a case where the assessee/Co-operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee-Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as 11 times. Unfortunately, even after 11 amendments, the clouds of confusion have not been cleared and the doubt still looms large in the minds of the Revenue, which resulted into passing of the order by the Assessing Officer, allowing the deduction under section 80HHC of the Act as claimed by the assessee, which according to him was lawfully permitted. In this regard see (i) Malabar Industrial Company v. CIT [2000] 243 ITR 83 (SC). (ii) CIT v. Max India Ltd. [2007] 295 ITR 282 (SC). 18. In view of the aforesaid settled legal position, we are of the considered opinion that the Commissioner of Income-tax committed a grave error in invoking the jurisdiction conferred on him under section 263 of the Act. Thus the said question (1) is answered in favour of the assessee and against the Revenue." 7.22 Again the Hon'ble High Court of Karnataka in the case of Commissioner of Income Tax v. Aztec Software Technology Ltd reported in (2020) 428 ITR 245 had again reiterated the same & held as under- "7. The aforesaid provision was considered by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT 243 ITR 43 SC and it was held that the phrase 'preju....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. The relevant Para are reproduced as under:- "2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income- tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law " 7.24 In view of the above discussion & respectfully following the decisions of the Hon'ble jurisdict....